Harness the Power of 'Freemium'

Network News

X Profile
View More Activity
Entrepreneur.com
Thursday, September 10, 2009; 12:00 AM

On the Web, services such as Google, Facebook, and Twitter are the undisputed kings of free, providing robust services at no charge to users. But a host of other companies use free in a much more traditional way--as an enticement for paid upgrades. The model is known as freemium, and while it may not make headlines, proponents say it can make millions.

Unfortunately, finding the right balance between free and paid in the freemium model can leave a new business in uncharted waters, with few hard and fast rules to follow. Here, three entrepreneurs using the freemium model with services in different stages of development explain how it's being implemented in their businesses, and how it might be implemented in yours as well.

Set expectations from the beginningIf paid web services have an evangelist, it may very well be Jason Fried, partner at37signals, a web-based software company that offers a suite of online applications.Basecamp, the company's flagship product, helps companies of all sizes collaborate on projects with their clients through a simple but powerful web interface. The privately held company is tight-lipped about revenue, but with more than 3 million user accounts in Basecamp alone, Fried says that both revenue and profit are in "the multi-million dollar area."

As for when a web service should start charging, Fried's answer is simple: immediately. Charging from the outset tells users that the product has a specific value, Fried says. Trying to charge for something that was previously free can undermine the product's value, causing potential customers to ask why the service is suddenly worth more than it was in the past.

"My feeling is that you should begin charging right from the start...The longer something is free, the less it's worth," he says.

Chris Nagele, principal atWildbit, offers a slightly different perspective. Starting as a free service can work, he says, if the addition of paid plans is done correctly. His company's flagship product,Beanstalka version control service that helps software developers and designers track and save changes to a project, launched with only a free plan, but that free plan came with the understanding that paid plans would soon be available.

When the paid plans launched, the free plan was left unchanged. The new plans simply offered more features for a higher monthly fee. Adding a price only works if you're adding value as well, Nagele says.

Scratch your own itch to find a compelling productWhen creating a service that users will pay for, the best source of inspiration is often to solve your own problem, according to Fried.

37signals began as a web design firm, but in working with clients Fried and his partners became frustrated with existing project management software. They developed Basecamp for their own use before offering it to the public in 2004. As a result, the company stopped doing contract work a year later. It now devotes 100 percent of its efforts to developing and supporting its own applications.

"We consider ourselves the target, and then we go out and find other people who are exactly like us," he says.

Sachin Agarwal, CEO ofPosterous, tells a similar story. He and his co-founder, Garry Tan, wanted an easy to use, premium blogging platform for their own use. The result was a service in which creating (or updating) a blog is as simple as sending an email. (Try it by e-mailing post@posterous.com.) Attachments of almost any kind--images, videos, audio--are automatically converted and posted along with any text.

The 15-month-old startup has yet to generate revenue, but plans to introduce paid features to complement its free offerings, Agarwal says.


CONTINUED     1        >

More in Small Business

[All  Business]

Partnership

Resources for anyone who runs a small business or wants to start one.

[Small Business Blog]

Small Business Blog

Post.com's Sharon McLoone on the ins-and-outs of starting, owning and managing your own business.

© 2009 Entrepreneur.com, Inc.

Network News

X My Profile
View More Activity