So just how do you make money out of serving up a free lunch?
You’ve probably heard of the old expression: There’s no such thing as a free lunch! Well today that’s apparently no longer true.
Earlier this year Wired’s Editor in Chief, Chris Anderson, wrote an article and then published the book called Free. (You may recall that I mentioned last weekend that Chris was presenting the idea at ycombinator’s Start Up School).
Free is all about a business model called Freemium.
The idea that giving away free product is not only good marketing it is a great way to build an online business.
The general idea is to give all or part of your product or service away for free, with or without the support of advertising revenues, and then offer these new customers the chance to step up to a newer, improved model (at a price) later on down the road.
In marketing parlance you are in the business of creating a network of product champions - and where you have champions then loyal customers will follow.
The idea of using a free sample is not new to advertising and promotional professionals. It has long been recognised that free offers is one of the most effective ways of attracting a market. The only better way is through word or mouth – but Advertisers don’t really like to talk about that one too much for obvious reasons.
Nor, as Fred Wilson has pointed out, is Freemium a new idea in software circles. Many profitable software houses have been built over the past 2 decades using the shareware model.
Om Malik at Gigaom and Andrew Chen have both provided some invaluable advice on how Freemium can be a great way to bootstrap a start-up web business.
You should also take a look at Freshbooks. The Canadian based Freshbooks is one of the great Freemium startups of recent times. Here in his recent post milestones to cross before raising venture capital Mike McDerment, the CEO and Co-Founder of Freshbooks, provides some advice and insight for budding startups looking to bootstrap their idea into a business.
Freemium, of course, represents something of a paradox for tradition Venture Capital thinking. The pyramid below illustrates how difficult it is to get the market to pay for a new innovation based on the Big Problems Small Solutions scenario we discussed in the much earlier post: Don’t think Strategy: Think like a VC!.
The VC Investment Pyramid
The general rule of thumb in VC circles is it is always easy to get customers to pay for information about the problem (think: Magazines then Conferences) than it is to get customers to pay for the solution (think: Industry Reports, Management Consultants or Specialist Training and then Product).
The Freemium paradox says quite simply you don’t need to pay for any of these steps. It’s all available for free.
As Chris Anderson says…
The trend lines that determine the cost of doing business online all point the same way: to zero.
So life on the web is just a free lunch.
The question is: Is this model sustainable over long term?
Think of a future today where you launch your brand new web 2.0 site or iPhone App for free thinking that in 6 – 12 months time you’ll be able to launch a better subscription version to your newly acquired market of Free Champions.
However, when the time comes to launch the new improved version you discover that 10 maybe even 100 other bootstrap startups have now launched their new Freeware offering and it is has more features and benefits than your paid offering.
What is going to happen to your Free Champions? Do they stick around or do they move on? Do they go in search of the next free lunch or do they start paying you for the free lunch you have already provided? What do you think?
The reality is Freemium is a game of diminishing returns as each new entrant has to offer the industry benchmark just to gain traction with the Influences and Free Champions.
Today software developers are discovering that, if the database is the new media, then applications are the new content.
Applications are fast becoming fashion items, disposable and of limited lifespan. This means developing software apps today is no longer about changing the way people do business but about tapping into how people see and project themselves.
This means, although they don’t know it yet, software companies and their developers are now facing the same crisis that is afflicting newspapers and their journalists.
If this really is the case then it is only the customers’ data that offers us a true measure of the value of the Freemium business model. – And the value of that data all depends on how much it reflects where the customer has been, how much it reflects where the customer is going and how much the customer need access to it tomorrow.
So if your thinking about investing your time, energy and money into a Freemium business think Data First because, after all is said and done, functionality is just the hook to get the customer in.
Further Reading:
