Earlier in the week, we talked about some of the challenges that online-billing company Chargify faced when they decided to discard their freemium pricing model and transition their non-paying customers into paying customers. That post elicited a fair amount of discussion (both online and offline) among the readers here as to the overall viability of the freemium pricing model in general. Despite the obvious contradictions of trying to create a successful business model when the vast majority of your customers pay nothing for your services, there are a number of freemium models that are actually quite successful (Skype, Flickr and LinkedIn being the three that come to mind first), but the conditions must be perfect.
And for the sake of simplicity, I’ve narrowed these conditions down to four basic conditions:
First, the market must be large enough to attract the millions of users needed to make the 1-2% conversion rate (nonpaying to paying customers) make any sort of business sense. Because of the large numbers required, it makes sense that most all of the successful businesses in this space are consumer focused.
Second, the marginal cost of bringing on additional (free) users has to be as close to zero as possible. This is where scalability and costs become especially important.
Third, you need to limit the pricing options (for your paying customers) to no more than three tiers. As is the case with most things in life, the more pricing choices you offer, the more complicated your pricing appears which leads to more confusion. And when potential customers are confused, they very rarely become paying customers.
And most important, you must ensure that there is a clear distinction in value between your free and paid offerings. And that distinction must be very clear and quickly apparent in the eyes of your customers. Don’t rely on fancy tables on redirected pages to do the trick – odds are that if you can’t articulate that value right away, more times than not, those prospects (or nonpaying customers) are not going to click through to to view that fancy table.
Here’s the takeaway: Most successful freemium models exhibit four common characteristics: They occupy large markets; the marginal cost for bringing on additional (free) users is zero; they limit their paid pricing options to no more than three tiers; and most important, they offer a clear distinction in value between their free and paid offerings.
