Freemium and Free Trial – More than marketing models for Web 2.0 Startups?

It is my deliberate attempt to label Freemium and Free Trial as marketing models and not revenue models because, unless combined either with a direct revenue model such as subscription or with an indirect revenue model such as advertising, these models merely generate prospects. In order to justify my point of view, allow me to present my understanding of Freemium and Free Trial. Under Freemium model, some parts of an application are always free; such features may be constrained by usage frequency (number of hours per day), users (users per session), certain transaction (number of emails per day), or storage limit (maximum storage). Users have to buy a paid version to remove such constraints. Free Trial, on the other hand, allows a user to use fully-featured product for a limited time period. After the trial period, the user has to purchase a license to continue to use the product.

Freemium, the more recent of the two models, has been gaining momentum with the advent of Web 2.0 technologies. The reason is Web 2.0 technologies allow the companies to appropriate the benefits of the goodwill created by free use of an application, provided it is useful and well received by its users. Users who use and either like or dislike the application often blog, tweet or even upload elaborate videos, informing the world about how the product measures up to their expectations. The resulting word of mouth may generate significant traffic on product’s company website. Similarly, Free Trial model is no different than Freemium model in its ability to generate buzz about a product, resulting in surge in traffic. Both models are very effective in generating prospects in terms of high traffic on a company’s website; however, as I claimed earlier, there needs to be a revenue model in place in order to either convert these prospects into paying customers or to monetize the traffic indirectly.

Said that, I believe the choice between a Freemium product and a Free Trial product (and even a free product) is as important as the choice of business model for a startup company. Entrepreneurs must invest time in understanding and making a conscious choice about their business model and the product marketing model before tossing out even a product beta as a Freemium or a Free Trial. Important considerations must be given to the targeted users needs and behavior, type of user – consumer or enterprise, customer retention strategy, market size and growth, competitive products in the market, product differentiation, revenue model – direct or indirect and pricing strategy. Analysis of these aspects may even reveal a need for a completely different strategy – free product – supported by advertising based or a micro-transaction based revenue model (such as the one followed by Zynga).

Some of the companies using Freemium model successfully are LinkedIn, Skype, and Flickr. Other using Free Trial are Salesforce.com and most of the anti-virus companies such as McAfee. Each of these Freemium and Free Trial companies has a subscription-based revenue model. Still other companies such as Pandora, which started as a Freemium product, give away its product for free to generate large amounts of traffic on their website. This traffic is monetized through ad-based revenue model.

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