I was recently interviewed for a WSJ article that was exploring the trends associated with the popularity (or lack thereof) of the freemium model called “When Freemium Fails.”
In researching my answers for the WSJ reporter, I dug up some data on TechStars companies over the last several years that use the freemium model. Here’s the data:
Note that there aren’t that many data points here (up to 50 per year), so don’t take this as science. It’s just a relative indicator. It’s interesting that in 2009 there was a peak for our companies in use of the freemium model. After the market downturn, I think that investors in general got more picky about “real” revenue models. Since 2009, people have consistently been pronouncing the model dead. As with most things in StartupLand, there is no right answer but the debate is interesting. So much depends on your company and what you’re doing.
As an example, one of the areas that I like to invest in is vertical search. Through TechStars and/or my funds, I’ve invested in companies like Mocavo (genealogy) and Next Big Sound (music industry intelligence), and recently one more that I’ve very excited about that hasn’t been announced yet. With vertical search, it’s all about the crack. Give the user a taste of the power of your search results, with ZERO friction. Think about google – they give away the search and make money around it. Vertical search is one of those areas where I think freemium can still make a ton of sense. As another example, the “free app download” on the app store with in-app purchases available inside of it is just another spin on freemium.
I had a meeting today with the vertical search company that I recently funded. In their space, the market norm is to charge tens of thousands of dollars for access to their search results. They were considering blowing up the market and making the search free. I enthusiastically encouraged them to do that. But this forced a good conversation about not taking money that was on the table. After all, people were willing to pay for this. Real money. Our conversation broke out into two threads.
The first thread was about leaving money on the table. We decided that using Freemium would in fact leave some money on the table in the short term, but in the long term would greatly enhance their ability to own the market and have a huge downstream effect. I hear the skeptics out there. Sure, leave it to the investor to suggest a go big or go home model that requires more up front capital. True, you have a right to be skeptical. However, the goal of the conversation and the context was to figure out how to own the market and create the biggest pie for everyone.
The second thread was about how to extract the money – in effect – what the business model should be. In order for users of this new vertical search engine to pay, there are at least three paths that can be taken. The first path is set up a pay wall and run the customers through a sales process. The second is to do a free trial, and let them experience the product for 30 days while setting an expectation of payment soon. The third is to let the product sell for you by giving away tons of value, in this case via free search. Then let the users upgrade to your paid offerings by showing them what they might look like after they become dependent on your basic (and free) product which has now completely disrupted the market.
The difference between free trial and freemium can be nuanced. The fundamental thing to remember is that both are paid models. I believe freemium is still a great strategy when you have something that you can give away that will reach a very wide audience very quickly, and where there is obvious value around that core giveaway that you can make money from later on. It’s a way of quickly capturing the hearts and minds of a population of users by giving them something very valuable for free. Note that it only works when what you’re giving them is in fact very valuable.
All that’s new is old again. Freemium was popularized as a term about 5 years ago but has been used by software developers for much longer. The paid software business models available to you are simply a bag of tools. Don’t ignore freemium, it’s still great for some situations. Remember that if your only tool is a hammer, everything starts to look like a nail.