Many online subscription businesses offer tiered products. And one of those tiered products is often available at the low low price of free. This type of model, that mixes free and paid offerings, is known as "freemium", a term coined by Fred Wilson of Union Square Ventures
How should a company decide whether to offer a “free” subscription? When are you cannibalizing your existing (paid) business and when is there an opportunity to grow your overall business? Or, put another way, when is free strategic, and when is it stupid?
When you should consider offering a free subscription option:
- If the free subscribers are likely to convert to paid in a predictable way. This is probably the most often identified rationale for offering a free subscription. It’s an extension of the “free trial” rationale—that is, if I give you enough time with the product, you will want more and be willing to pay for it. Before you go down this path, make sure that you have a compelling reason to trade up:
- Limited time offer. Free for a limited period has a natural inflection point for upgrades.
- Limited depth of offer (storage space, users, files, etc.).
- Limited features. Sometimes people upgrade for a particular feature that is not available on the stripped down version
- If the free subscribers are sources of new paid subscribers. Sometimes free subscriptions are given out because they will lead to more subscribers. There are a few flavors:
- Free subscriber is an “expert” who advises others. For example, if you have music content, you may give a music critic or artist a free account, in the hopes that they will talk up your service
- Service is naturally networked, or viral. Some examples include email, secure file delivery services, or instant messaging. The key here is that just by using the service, the user is spreading the service to potential users.
- Free subscriber has natural incentive to recruit new participants
- If you need critical mass of users When you are launching a new service, and the service is networked—you can’t charge the first few users. It might make sense to build a community on the free version, and then add a premium version to leverage the network for a fee.
- If you are trying to change behavior and usage. If you have a new type of service and your users aren’t familiar with, it might make sense to build some trial first. For example, in the early days of LinkedIn and Webex, all services were free. The challenge with launching a service for free as a means of gaining trial is that those people will expect to always be served for free. You could set expectations that the free service expires after a year or so, but there is a chance that the market will require that you grandfather the early adopters. So think carefully before you launch your service for free.
Too many companies offer something for free because they think that “free” will attract new customers, but don’t have a business model that monetizes these “freesters”. Free can be a key part of a successful business model, but only if it leads directly and relatively quickly to revenue.
