October 16, 2008

Freemium is Not a Business Model

During dot-com (v.2) when it didn’t matter if a startup actually had a business model, a concept that had a lot of street cred was “freemium”.
Coined by Jarid Lukin, and propagated by Fred Wilson, freemium was seed as a solid business model because companies charged for advanced features even though they offered basic services for free. The model was based on the notion that if you gave consumer a taste, they’d happily pay for more.
The problem is freemium doesn’t work for the vast majority of companies, especially ones focused on the consumer market. In theory, it sounds good but in practice few people actually pay for more features. Sure, there are exceptions to the rule but those are few and far between.
Freemium is flawed because most people don’t need more features than what they can use for free. Poll Daddy, which was acquired by Automattic earlier this week, is a great example. If you’re willing to live without customer support and a few small wrinkles, you can create as many polls and surveys as you like. If you’re want the features and more survey responses (>1000/month), there are two premiums packages: $200 and $899/year. For most people, a premium package is unnecessary.
Freemium is another example of how people seemed to forget business fundamentals during the wackiness of Web 2.0. At the time, it seemed like a great idea but freemium probably ranks along with “eyeballs” as yet another flavor of online Kool-Aid that everyone happily drank without thinking too much about it.
If there is a foothold for freemium, it’s the corporate market where customers are willing to pay for high-quality services as well as customer support. This is why companies such as 37Signals and Freshbooks have thrived because enough customers want more than freemium services.
For consumer-focused companies, however, freemium is fool’s gold…and, most important, it’s not a business model to create a viable and vibrant company.
More: Check out Fred Wilson’s thoughts on why freemium is his “favorite business model”.
As well, Steve Hodson (aka “the cranky old fart”) had a post a few months ago asking “Is Freemium the Way to Go?” with this conclusion: “As idealistic as the freemium model may appear it may not be the best answer for any of the parties involved – whether they be the start-up, the advertisers or the users.”
As well: For entrepreneurs and investors, a good read is Paul Graham’s “Why to Start a Startup in a Bad Economy”.

Technorati Tags: business model, fred wilson, freemium

Ready To Spark Your Marketing?

Embark on "The 90-Day Sprint" with the assurance your investment is protected and your satisfaction is our top priority. We look forward to partnering with you on your journey to marketing excellence.

A blue spark illustration