Freemium is a business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features. The word “freemium” is created by combining the two aspects of the business model: “free” and “premium”. The business model has gained momentum in the last few years and is becoming the most popular business model among Web start-ups. Some of the most popular services, such as Pandora, Flickr, LinkedIn, Spotify and Skype use the freemium model. It’s a very simple economy to create:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base. As the theory goes, if you convince enough of your lower tier users to move into the premium tier you’ll cover your losses in the lower tier.
The freemium model is simple to employ and as your free customer base grows, so will your paying customer base. Even if a small percentage of your free customers upgrade to your paying plan (say, 1%), you’ll begin generating much needed revenue to pay your bills and do very well. In theory.
Finding the balance between what to offer for free and what to charge for is not easy. The trick is to put enough in the free version to get traffic and usage, but not so much that there is no incentive to upgrade. Companies who use the freemium model need to integrate their free service or product into someone’s routine so fully (either by making sure it’s accessible on their computer and on their mobile phone, for example) that users reach the point where they feel they simply must pay.
As utopian as very smart people like to make out the freemium model to be there are equally as smart people who warn that this is a dangerous road to travel down and one that could come back to bite you on the ass.
In April 2010 popular Social Network ‘Ning’ sent out a press release, noting that 75% of its users do pay for some sort of premium service. It may well be then that Ning’s announcements are less a reflection on the freemium model than on the company itself. Despite over $120 million in VC funding, Ning has been unable to develop a sustainable business. The announcement about the end to free Nings was accompanied with news that 40% of their staff would lose their jobs – an indication perhaps that the company’s overhead was simply too high. It’s a cautionary tale about how people are over-estimating users willingness to pay once they had the service in some shape or form for free. Actually the user tendency, especially in today’s economic climate is to use a service for as long as it’s free and then when they need or are asked to pay for something they simply move on to another new, free service. It’s like following the 0% balance transfer around on credit cards. If you’re smart and you put in the effort you’ll never need to pay. More to the point, why would you?
Andrew Parker on his blog The Gong Show also points out how this freemium model could end up alienating the very advertisers that are keeping you alive in those beginning times:
This revenue model seems silly to me. Advertisers pay a premium in order to reach people in their specific demographic with disposable income. This idea of people paying to remove ads ensures that the audience for your ads are actually CHEAPER than the average internet audience. Why? Because the people in your audience with disposable income who are willing to pay for web services are the ones that will self-select out of your audience for your ads because they are willing to pay for your product. So, all that remains in the audience for your ads are people that are too cheap to pay for your service. That doesn’t sound like the audience that Disney, Coca Cola, or even your average direct response advertiser wants to reach.
What about the other effect of Freemium on actual market-places like the music industry? As early Napster and BitTorrent and other illegal file-sharing websites have demonstrated, many people are no longer willing to pay for music in an age where everything can be cracked and obtained for free online. So why not offer them free music legally? The ad-based model works on the assumption that, every few songs, the service inserts an advert, the revenue from which is, in turn, distributed among the record companies whose songs are being played.
Earlier this year, a claim emerged from songwriters in Sweden that Lady Gaga was only paid $167 (£108) for a million plays of her smash-hit ‘Poker Face’ on Spotify. This figure was later proven false – the figure didn’t represent the entire sum, only a part of the share given to the song’s Swedish co-writer. However, despite whatever discrepancies there may have been, the figure remains shockingly low. This is one parachute starting to show a few holes.
In the subsequent weeks, reports started to fly around on the internet (as it does) surrounding these figures and how close they are to the real numbers. A Billboard analysis of revenue from recording royalties from non-interactive streaming services (such as internet radio services, as offered by Last.fm), revealed that in the US in 2009, only ten artists made more than $2,000. For on-demand services like Spotify and We7, only 25 artists made more than $1,000 – Michael Jackson posthumously taking the top spot with $10,000.
So, while the popularity of internet streaming sites soars, and superlatives are thrown around on press releases and in internet forums, a bitter taste remains. Utterly limitless, free music, with only a few adverts here and there? Some things are just too good to be true.
There’s a mental state that Freemium is creating too which is that in life things can be obtained legally, for free now. We don’t HAVE to be pirates to get our fix of music or movies and there is such a thing as a free lunch afterall – Hallelujah. In reality though it devalues the act of owning if you never really bought it. Users aren’t stupid, far from it, they’re very smart and they deserve to create their own capitalism. We’re all prosumers now remember? But if you’re not paying how are the people distributing earning anything? It doesn’t work, right? Ad-supported networks don’t work, people have ignored adverts for years now. So give it some thought, how do creators of content get a wage from nothing??
“Freemium streaming services are clearly not net positive for the industry and will not be licensed” according to Warner Music Group Chairman Edgar Bronfman Jr. who stated bluntly in February that he was adamant Spotify’s ‘freemium’ business model “is not the kind of approach to business that we will be supporting in the future.”
Here’s another very interesting thought: The original illegal sharing networks all ran on the system of P2P – Peer To Peer – but within the industry of file sharing the term P2P was actually credited with the meaning “Power to People“. It was truly believed a revolt against ‘the man’ was taking place. It was a big f’off to the capitalists that had drained our wallets dry for so long. If enough people were doing it then how could it be stopped. It’s a digital coup de force. A revolution. A rebellion. We stand united and we cannot be stopped. Now take that mentality and apply it a service such as Spotify who has a reported 7 million users now. That’s 7 million really pissed off people if the service is stopped by the industry it’s crushing. It holds the cards in the form of mass market. Shut it down and they’ll simply go somewhere else. They’re legally doing what they used to illegally do. People power will dictate Freemium, not industry.
The model, although technically unsustainable does have it’s heroes though. The people who on the whole have got it right. Flickr for example. You probably never even realised it was Freemium or made the connection. There’s a free service there and it works really well for the normal man on the street. But it also has a premium subscription service that the pros out there love, relish and are more than happy to pay for. But more importantly it’s a Freemium service that doesn’t run off the back of someone else hard work. It runs off the back of the users hard work. It’s the kindest form of UCG. We pay to populate it, not pay to drain it dry. So I say long live the Freemium economy for some things, and curse it in others. It’s the proverbial double edged digital sword.
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