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Competing (and Thriving) Against The Freemium

Posted on 3.26.2009

Web entrepreneurs have a difficult choice to make with the release of every new service - should it be offered complimentary to bring in streams of users and make them aware (growing the service virally) or should we charge for it with an aim of shortening the road to profitability?

While the former (freemium) might seem like the best way to go, there are many inherent challenges and, despite the continuing slow economy, people are still spending. So why not encourage them to pay for what you've created from the get-go? Let's look at the challenges in greater detail and what Web entrepreneurs can do to get people to buy paid versions today.

It's first important to explain this portmanteau (a combination of two known words); a freemium is a business model that works by offering basic services for free, while charging a premium for advanced or special features. You might think that offering a freemium would be a pretty easy decision to make. You may be right, but that doesn't mean there aren't challenges. For those who are selling their products and not giving them away, this provides an opportunity to take advantage of the weaknesses of those doing so.

The Challenge of Freemium
Those offering freemiums are forced to choose which services will be free and those consumers will have to pay for. That presents a problem because a conscious decision has to be made on the features that will be left out. Any mistake in the division of those features or services carries with it the potential to send consumers elsewhere. And that's just the beginning of the problem with freemiums. Developing products, and using the necessary hardware and infrastructure costs - and it's getting more costly each day. Supporting customers that don't pay (and have little motivation to do so) can't go on forever - it goes beyond the bounds of any rational economic principle. Pricing offerings can be equally challenging; those that use a free service to simply test the service will be unlikely to upgrade to a paid version that is $50 or $100 per month - even if it's really good. Instead, they'll simply continue using the means they were previously or search around for another alternative - perhaps even a paid version from a competitor.

The Opportunities of Paid

The draw towards trying new things is too great for many consumers to deny. Even if someone mentions its existence, that's enough for first adopters to try it out. This effect, called immediacy, leads people to pay a premium to have first or early access to something. If it's truly new, publicize it as such and watch consumers open their wallets and copycats offer their free versions of your product.

George Carlin once said that people will buy anything and I wholeheartedly believe that. While his example was a little out there (a left-handed nose hair trimmer with a state motto on it) there remains a lot of truth in it - people will pay (oftentimes more) to have something that’s personalized for them. For example, why choose a standard theme for an open source weblog platform like WordPress when for a few hundred dollars you could have one customized to match your specific expectations?

Despite your familiarity with a product, it doesn't mean that it's shared among others. What this means is that people will gladly pay extra for support, a formal education, a community that encourages sharing of problems and resolutions, in order to have something like software explained to them. Many large-scale software vendors are turning to this model and it's proven to be their primary source of revenue.

Consumers will also pay when they can have it their way - in the words of Burger King. That means making products usable and accessible in the way that clients/consumers actually want them. You’ll find that Website Magazine for example can be read in print, on the Web and even on mobile devices like the Android or iPhone. This doesn’t necessarily mean that consumers will pay for the use of them, but in the future, it may be enough to do exactly that.

Can you compete against those using the freemium model? Yes you can and in most (if not all cases) doing so is a much better solution for the sustainability of your company – if you make some good decisions and resolve to focus on what consumers really need; support, greater access and personalization.


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