Does a Freemium Model Drive Revenue?

David Satterwhite is a Sales 2.0 pro, with an impressive track record running sales in companies such as newScale, Genius and Yammer. I’m so glad he’s willing to share his insight here as a guest blogger.

The term “Freemium” refers to a model in which you give away some part of your solution for free to acquire customers, with the hope of generating revenue from some of these users with a “premium offering” of some kind down the line. The Freemium model has been used often in the business-to-consumer (BtoC) world; companies such as Facebook, Twitter and LinkedIn allow people to use their products for free, gather millions of users and then find ways to monetize the business over time, typically with advertising and/or premium tools.

Lately, I’ve seen increasing use of, and interest in, the Freemium model in the business-to-business (BtoB) world. The benefit of the Freemium model is you can capture a lot of users quickly. If done right, these users refer the product or service to friends and colleagues and, if the stars align, “virality” happens. That‘s nirvana in the Freemium world, and that’s what happened for Facebook and Twitter. Once the viral effect took place, the number of users grew exponentially.

From a BtoB sales perspective, these many “free” users equate to pipeline building. However, instead of spending enormous amounts of time and money on demand-generation tools and campaigns, telemarketing, cold-calling, etc., the Freemium model takes care of engaging prospects. Your sales team can focus on contacting users who have already shown interest in your offering by using it for free, so you can say goodbye to cold-calling.

There is still room in this model for leveraging Sales 2.0 best practices, but there are key differences in the approach. For example, the traditional lead-qualification function can be used to develop and nurture the free users, passing them to sales when they are ready to upgrade and pay for additional features or services. Demand-generation tools also can be used to nurture the free users and educate them on the value of premium tools available for purchase.

However, all these free users aren’t very meaningful unless they eventually can be converted to paying users (though it can be easy to lose sight of this in the quest for virality). The monetization strategy is indeed tricky and is one of two places where the Freemium model often fails. We BtoB people are especially prone to making errors here. In our zest to capture revenue, we can err on the side of trying to sell too much too fast. And when we do this, we stifle the benefit to free users and slow down our virality — or even stop it. The first law of Freemium is to keep the funnel growing. Don’t turn your monetization dial up so high that you negatively affect your Freemium dial; if the free-user growth slows down, the whole model comes to a halt. So, the first law to monetization in the Freemium model is, “First do no harm to free-user acquisition!” The secret sauce is to find just the right premium features that won’t get in the way of a free user getting enough value out of the product to start using it meaningfully, but will motivate him or her to want to pay money for “more.”

Back at the top of the funnel is the big free-user “dial.” The key here is matching the right product to the right market; this is the other place where the Freemium model can fail. It requires a large market of potential users, as the majority of your users will always be free users. Therefore, small market equates to small revenue and, often, failure. And the product is super important. In contrast to the old enterprise software market, where great sales, marketing and services teams could make up for a mediocre product, the moment of truth in Freemium comes when you’re not around to influence the outcome. So your product has to be extremely focused on a specific high-value activity an end user will want to take advantage of immediately; there can’t be bugs. This is the ultimate user-experience test. If the customers get confused or have trouble, they’re most likely gone. There’s no sales person around to get them back on track. From what I’ve observed, this requires a very different type of product development. This is where the BtoC guys shine. They are used to building product that can’t hide behind sales, marketing and services.

To successfully drive revenue with a Freemium model, you need a large market; a focused, easy-to-use product with extremely quick time to value for an end user; and a very strategic monetization approach that provides an adequate conversation rate (3%–13%) without slowing down free-user acquisition.

Do you agree with David’s observations? What are your experiences with the Freemium model?

Tags: Freemium, Sales 2.0

4 Comments to Does a Freemium Model Drive Revenue?

1. 

   Yes, I would agree with the observations. I have had experience in the past where we gave away licenses of the very product that we were trying to sell which in many ways either deferred any decision or gave so much functionality that they had no need to buy more for awhile or ever.
   I do believe that a good way to drive sales would be to build content that will drive people to your product or service. i.e. if you are a gambling web site build a online calculator that measures risk based on what you are playing and the cards you are dealt. It creates value but does not deter from your core business. In the end cusumers and businesses are looking for value.Thank you Anneke and David for sharing your insights.
Darren Suomi on August 5th, 2010
2. 

   The observations make sense, but of course, the devil is in the details. Figuring out the right mix of free/premium features is not easy. Give away too much and you get no upgraders, give away too little and you get no pipeline. Secondly, how intrusive do you want to be to drive premium customers; push too hard and you lose users, don’t push enough and you get no revenue. It is easy to describe the model; truth, most companies fail at this model because it is hard to execute successfully. One beauty of this model is that you work with large numbers of free users. Therefore, if in doubt about the amount of ‘free’ you want to give away, initially test a few combinations of feature sets to see which gives the optimal combination of downloads/purchases.
David Lavenda on August 9th, 2010
3. 

   David,
   Completely agree that this is the biggest part of the challenge as well as the opportunity. The balance of viral vs revenue requires constant focus, discussion, and option testing. But someone is going to get this right and it will be an incredible model for selling the enterprises in the future.
David Satterwhite on August 9th, 2010
4. 

   Since the freemium model is very similar to the open source model, I’d like to share my findings of a recent survey I completed with executives of 25 open source companies. There is more to the success of a Freemium model then is outlined above. It’s actually a complex formula with many variables. Please read for yourself and let me know what you think.

   http://www.mindtouch.com/blog/2009/09/01/why-this-open-source-success-formula-will-increase-your-revenue/
Mark Fidelman on August 16th, 2010

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