The freemium business model works by offering basic services for free, while charging a premium for advanced or special features.
The model was first described by Fred Wilson on March 23, 2006 on his blog.
Several convictions have been developped about freemium. For Fred Wilson this is very important that all barriers to the initial acquisition are eliminated in order to attract customers. Then some analysis explain that the model is based on the following actions:
The model was first described by Fred Wilson on March 23, 2006 on his blog.
Several convictions have been developped about freemium. For Fred Wilson this is very important that all barriers to the initial acquisition are eliminated in order to attract customers. Then some analysis explain that the model is based on the following actions:
Advantages of the model are mostly:
- to attract a lot of consumers to try the product and reduce the problem of the hard competition of the web. Sampling is a very efficient communication mean. And as this kind of business is still not frequent, it generates even more buzz and communication about the product
- to create loyalty by generating habits
- to compete with new marketing tools on a very fast moving market: More and more products are now accessible for free on the web. For music industry for example, this trend is now a real threat for majors. Experience shows there is no way to avoid the free availability of music on the web. How to compete then? By using same tools?
But of course the most obvious issue for this model is the revenue model. How to make money while giving for free high valuable products and services? The model absolutely needs to optimize the conversion rate from free use to premium use. But according to Sebastien Provencher this conversion rate doesn’t exceed 3% in average. This is the most important drawback of the model. For the moment, advertising rarely covers those website’s costs. And with low conversion, opportunities to make those business profitable are not obvious.
A second drawback, linked to the first one is that the limit between the initial basic service and the premium one is still very diffcult to draw. There is few histocity on those kind of business and no best practice has really been identified. The difficulty lies in the importance to provide a high valuable service to attract consumers while creating a frustration about the premium service. How to satisfy and frustrate in the same time? That’s the tricky point.
The last disadvantage of this model is linked to fix costs. To provide the basic package, costs are running whereas no revenue is linked to it. At the beginning of the business, the provider needs to create high valuable products or services with few revenues for an unknown period. The service can be used for free for some months before generating conversion. Even after, the effort made to provide the basic service is not linked to the conversion rate, so it is not linked to revenues. It is then a high fix cost model, with all related drawbacks such as sensibility to slow downs of the market (first to fall with crisis and last to rise when growth is back).
Nevertheless the Radiohead case has to be analyzed. On last October 10th, Radiohead decided to launch his last album In Rainbows on line for free. Actually that was not totally free since people could pay for it in a way reflecting their satisfaction. According to the Times, one third of the album downloaders decided not to pay for it. On the other hand some fans paid more than 40£. A few weeks later, the collector album was launched on traditional market.
For the moment no communication on the profitability of the operation has been made, but some other famous music groups such as Nine Inch Nails used the same idea.
The question now is how the music industry will transform to ensure profitability? Madonna gives a part of the answer since she leaved her lifelong record label Warner to sign a contract with concert promoter Live Nation. As for Radiohead case this is a kind a freemium business orientation: music will now be provided for free and concerts, collectors products will become premium offers.
On my understanding, freemium will shortly become a new major model for a lot of industries. In that case, marketing costs would move from advertising to free sampling on the web. Why not imagine free trainings or even free access to the web as teasers?
Examples of freemium business.
Skype – basic in network voice is free, out of network calling is a premium service
Radiohead last album “In Rainbows” – music is freely accessible on the web. The consumer can give some money to artists according their satisfaction. A premium collector album was then launched a few months later in traditional off line channel.
Second Life – A network free game in which additional abilities are accessible with fees.
Links :
Wikipedia definition
Fred Wilson’s post: "My favourite business model"
Fremium’s name birth
- to attract a lot of consumers to try the product and reduce the problem of the hard competition of the web. Sampling is a very efficient communication mean. And as this kind of business is still not frequent, it generates even more buzz and communication about the product
- to create loyalty by generating habits
- to compete with new marketing tools on a very fast moving market: More and more products are now accessible for free on the web. For music industry for example, this trend is now a real threat for majors. Experience shows there is no way to avoid the free availability of music on the web. How to compete then? By using same tools?
But of course the most obvious issue for this model is the revenue model. How to make money while giving for free high valuable products and services? The model absolutely needs to optimize the conversion rate from free use to premium use. But according to Sebastien Provencher this conversion rate doesn’t exceed 3% in average. This is the most important drawback of the model. For the moment, advertising rarely covers those website’s costs. And with low conversion, opportunities to make those business profitable are not obvious.
A second drawback, linked to the first one is that the limit between the initial basic service and the premium one is still very diffcult to draw. There is few histocity on those kind of business and no best practice has really been identified. The difficulty lies in the importance to provide a high valuable service to attract consumers while creating a frustration about the premium service. How to satisfy and frustrate in the same time? That’s the tricky point.
The last disadvantage of this model is linked to fix costs. To provide the basic package, costs are running whereas no revenue is linked to it. At the beginning of the business, the provider needs to create high valuable products or services with few revenues for an unknown period. The service can be used for free for some months before generating conversion. Even after, the effort made to provide the basic service is not linked to the conversion rate, so it is not linked to revenues. It is then a high fix cost model, with all related drawbacks such as sensibility to slow downs of the market (first to fall with crisis and last to rise when growth is back).
Nevertheless the Radiohead case has to be analyzed. On last October 10th, Radiohead decided to launch his last album In Rainbows on line for free. Actually that was not totally free since people could pay for it in a way reflecting their satisfaction. According to the Times, one third of the album downloaders decided not to pay for it. On the other hand some fans paid more than 40£. A few weeks later, the collector album was launched on traditional market.
For the moment no communication on the profitability of the operation has been made, but some other famous music groups such as Nine Inch Nails used the same idea.
The question now is how the music industry will transform to ensure profitability? Madonna gives a part of the answer since she leaved her lifelong record label Warner to sign a contract with concert promoter Live Nation. As for Radiohead case this is a kind a freemium business orientation: music will now be provided for free and concerts, collectors products will become premium offers.
On my understanding, freemium will shortly become a new major model for a lot of industries. In that case, marketing costs would move from advertising to free sampling on the web. Why not imagine free trainings or even free access to the web as teasers?
Examples of freemium business.
Skype – basic in network voice is free, out of network calling is a premium service
Radiohead last album “In Rainbows” – music is freely accessible on the web. The consumer can give some money to artists according their satisfaction. A premium collector album was then launched a few months later in traditional off line channel.
Second Life – A network free game in which additional abilities are accessible with fees.
Links :
Wikipedia definition
Fred Wilson’s post: "My favourite business model"
Fremium’s name birth
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