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Freemium or Your Money Back

Many truths, such as "you get what you pay for" are outright wrong. The phrase implies a correlation between the value of a product or service and its price. Although the rule often applies to a wide variety of products and services, it isn't true when it comes to software and e-services. We are surrounded by high-quality products and services that happen to be free.

Free and commerce are actually old bedfellows. Free trials, samples, even recurring services such as broadcast radio and television are familiar and well understood. But freemium is a relatively new concept and, as such, has generated lots of confusion -- and for good reason: It doesn't really exist. Although it is a common practice, the term is not in most dictionaries. Of course, that won't stop me from explaining it.

As I'll be discussing during my Enterprise Connect Orlando session, "Can You Make Friends With Freemium?," on Thursday, March 19, freemium is made practical by the unique characteristics of software and Internet delivery. Once software is written, its manufacturing and distribution costs are relatively trivial. In the '80s, independent software developers used grassroots distribution methods, such as bulletin board systems, to distribute trial versions of their programs.

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Personal computer users were generally happy to try new software. Each trial user was a prospect, so the more trials the more sales. Developers encouraged users to share CDs, and "shareware" was born.

The cost of computing has now dropped into the relatively trivial category. A freemium offer typically provides a base free service. Subscribers become the primary prospects for paid services via upgrades. Although conversion rates are often very low, a freemium offer brings additional benefits to the vendor.

Specifically, a freemium model can be a quick route to relevance. A user base is a valuable thing, and now creating one often comes before monetization. A user base also can aid the development and maturity of the solution. "Build it and they will come" is being replaced with "ready, fire, aim."

Four Free Models
Even though free and business are old friends, freemium is a new twist. Four distinct business models leverage free. The first, most familiar, is the classic cross-subsidy. Many of us learned this model after stopping for free ice water at Wall Drug in South Dakota. With cross-subsidies, the price of other products and services fund the free component. It's often used as a lure or a means to introduce new products. Examples include loss leaders such as Black Friday deals, free samples, free estimates, and free trials.

The next model, also popular, involves third parties. Free radio and television only appear free because advertisers fund them. This creates two separate business communities by separating the users from the paying customers. Many of Google's free services, including search, are funded by third parties.

"Gift economy" describes the third model. This applies to exchanges that do not have an explicit agreement or expectation for compensation. The most popular example is Wikipedia, to which contributors, without compensation, offer their expertise and time to create reference content. Motivations for these gifts vary widely, but community building is a common theme. Other examples of gift economies are open source projects and the Burning Man event. As an ad-free blogger, I participate in this model.

The newest model is freemium. Although paying customers effectively fund non-paying customers, it isn't considered a cross-subsidy model because non-paying customers are welcome to stay indefinitely. Freemium services are not just limited trials or samples, but include a fully functional service intended to be valuable in its own right. As a result, freemium works best with services that can be split into logical tiers, though this is easier said than done.

Freemium works because of Internet economics. What's shocking is how common our expectation of free is today. We expect to find free apps in our smartphone app stores, and efforts to get people to access paid content are rarely successful.

Freemium in the Enterprise
Freemium isn't just for consumer services -- increasingly it's finding a home in the enterprise. Just recently, Microsoft relaunched its business intelligence software, Power BI, under a freemium model, possibly in response to IBM doing the same with Watson. Cisco launched Project Squared last year under a freemium model. Fuze, Dropbox, Slack, Yammer... the list is long with familiar brands.

IT departments have mixed reactions to freemium. It is inherently more attractive than writing checks, but it also eliminates a powerful adoption filter. Freemium often results with corporate data going into remote servers without IT vetting. Even worse, some freemium models place administrative controls in their paid plans. For example, deleting archived data on Slack requires an upgraded premium plan. That isn't inherently evil, it's just important to understand upfront.

On the other hand, freemium offers a proven benefit. Most enterprise IT solutions, including UC, are difficult to evaluate fully prior to purchase. The classic example: Will users really reduce their travel with new video conferencing tools? Traditionally, the enterprise evaluates benefits and alternatives and then accepts the risk. With freemium, an organization can often trial a solution, only committing (upgrading) after the technology proves itself to be effective and useful.

Freemium offers the vendors some unique benefits as well. They should view it as an alternative sales channel, one that can be less expensive than traditional direct or indirect channels. Sales channels effectively escort prospects down the sales funnel. Freemium services do the same, but customers often complete the journey on their own.

Dave Michels is a contributing editor and analyst at TalkingPointz.

Join Dave at Enterprise Connect Orlando for his Thursday, March 19, session, "Can You Make Friends With Freemium?" Register today and receive $300 off your event pass using code: NJSPEAKER.

Join Dave at Enterprise Connect Orlando for his Thursday, March 19, session, "Can You Make Friends With Freemium?" Register today and receive $300 off your event pass using code: NJSPEAKER.

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