December 11, 2016

The Freemium Devil

I recently read a great article on the Freemium model that resonated with me. It kept me thinking for several days afterwards about how some startups with freemium models made it” and how others failed.  The difference between success and failure has become a very fine line indeed.

I completely get it, it’s all about how many users your product or service has. The rationale has always been that more users == more revenue and many startups created wonderful free products (i.e. Dropbox) around that idea. Free isn’t so bad if you’re trying to build a startup yourself. I know many entrepreneurs who build startups on open source or free products. Open source and free is the backbone for a vibrant startup community but there are so many companies hawking their free/open source” stuff that I wonder how they make any money at all.

You need to make money, especially if you’re a startup. If you don’t, you’ll need cash and lots of it.  Whether it’s attracting talent or paying your receptionist, you’ll need cash for just about everything you do.

The only problem? Getting that cash is harder to get now more than ever.

The Dot Com Years

I remember vividly the Dot Com years when Venture Capital threw billions of dollars against good startups (Amazon) and half baked startups (Pets.com). When the VCs got burned, they started demanding more robust business plans and a path a profitable path to exit. Startups took notice and started to think about how to convert users to customers more either right away or at some point in their experience with the product.

If you have users and figured out a way to convert a portion of your users to paying customers then you’ll likely to get some funding. If you haven’t figured that out then you’ll probably end up making a Deal with the Freemium Devil

A Deal with the Devil

Freemium is like making a deal with the Devil. You want to get more users and minimize your acquisition costs so you put out a free version of your product or service. If all goes well, you’ll start seeing an increase in your user base. So then the problem becomes how to convert those users to paying customers.

Most of the time you gave away all your product’s functionality for free and now you want to charge for it. Your users panic and drop off because your suffering from the why pay for milk if you can get the cow for free” syndrome.

Maybe you reserved some functionality as an upgrade for users to pay at a later date. That’s smarter thinking but what if that upgrade is really lacking? The users can get by using your free product without ever having to upgrade!

It’s so confusing what approach to take, which way is right?

The Right Freemium Model

Kyle, in his Linkedin article, shines light on 4 Freemium models that look to survive the test of time.

  1. The Free Trial
  2. Tailored, hyper specific free products of lead gen
  3. Product qualified lead (PQL) engines
  4. Anti-lean startup approach

The free trial is just what it sounds like, a free trial that’s limited to a time period. The danger of this is that your sales reps keep extending the trial period for some apparently big fish” user. In the end, they never convert! Free trials are very successful if it’s a great product, at a great price, that’s easy to use and demonstrates significant value for the user on day 1.

The tailored, hyper specific free products of lead gen method is a relatively new one that I’m seeing being adopted with some success. The ones I run across give you access to a REST API but limits it maybe 1,000 calls a day. If you want 10,000 calls a day then you pay some $. If you want 1,000,000 calls a day, then you pay more $$$$. It’s a pay as you go type of model and I really like it.

The PQL model is something I’m very familiar with and I’m seeing its success first hand.  This is a robust land and expand model that typically provides all the functionality of your product but measures product use.  The goal of this is to identify a subset of users that exhibit a strong propensity to buy from casual users. While every PQL model is different it comes down to identifying the right leads for your sales team to go after instead of every lead that comes through the door.

The Anti-lean startup is an interesting model and I’ve seen some startups do this approach. It’s definitely a great way to generate a buzz for your product. Hopefully customers will line up at your door with money in hand BUT it’s got to be a great product.  This one puts a lot of pressure on the Startup to get it right on the first get go.  The biggest risk is that this product remains in Alpha mode and never truly gets released!

TL;dr

Before you put a free or open source version of your product out there, think about how to convert your users. Be smart about this. It’ll save you a lot of headaches in the future when you want to get VC money.

Posted by Thomas Ott /



Marketing Sales Venture Capital thoughts Startups


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