Over the last 18 months I have viewed, reviewed and even worked with several executive teams who have plans to launch or have launched a business based on the Freemium business model. Very quickly some have realized the challenges of this type of business model and have survived while others never got off the ground. Based on this experience I decided to write this small piece.
Freemium: The combination of free and premium levels of services.
I would say that over the last ten to fifteen years, and especially in the last five we have seen cloud based, SaaS, PaaS and mobile app development companies dominantly use the freemium business model to launch their platforms.
In most cases there is a small set of free services for basic users, while premium users get additional upgraded services. In several cases, the free users are inundated with ads, while the premium subscribers can opt-out of the ads.
Some of the most well known names outside of the network marketing community using this style of marketing are Linked-In, Dropbox, Hula, Match and most professional news sites use some form of freemium model. As a matter of fact we use this model at MLMHelpDesk.com
The question is, does this business model work when you combine it with an income opportunity? Well, without a doubt I think it can work, if the founders of the company are willing to recognize the challenges they face and are prepared to address the challenges before ever launching a marketing campaign, but asking the following questions.
1. What Should Be Free? If you have an app with 30 or so features, which should be included with the free version and which will add enough value that power users will upgrade? If you are building out a social networking community, what features should be free and which will bring real value to the end user. The challenge facing tech companies using the network marketing channel is to add features that provide benefits the actual user who will not be part of the comp plan.
In many cases I have seen where features are added (what we call marketing tools) that will not have real value to someone who is into social media. When this happens, then the perception can become the reality and what looks like a great business model becomes a pyramid due to the fact that the only people becoming premium users are the independent professionals inside the network.
2. Will The Potential Users Fully Understand The Premium Level? This has been a huge issue for LinkedIn, while Dropbox users fully understand the benefits for upgrading.
The message from before the first marketing collateral is created must be very clear as to what features are available at the free level, and more specifically what the benefits are to the premium features. If the end user doesn’t grasp personal benefit to the premium level, they will never upgrade.
Worse yet if the only benefit is for the independent sales force to generate revenues through the compensation plan, regulators, critics and network marketing advocates will question the validity of the model.
3. What Is The Target Conversion Rate? This is a challenge that can really cause issues for tech companies entering the network marketing community if the business model is setup around attracting an independent professional sales force and not a true community of social media driven end users.
If the executive team doesn’t have a realistic expectation of how many free users will upgrade to the premium level, then they will be shooting in the dark and have no real benchmark in which to use for measuring their success or failure rate.
The opposite can also be true. If most people are upgrading to the premium level, then the company may have far too many benefits for the price and are losing revenues because the premium level is priced lower than needed.
In my personal experience with our freemium blog model, I have found that a 5% conversion to the premium level is a monthly average. We have split-tested different pricing, and benefits and finally came to a model that works well for us in the home business niche as well as the woodworking, green living and tech and gaming news niches.
4. Is the Company Prepared For The Conversion Life Cycle? This can be a real challenge if the team, especially early on. Most companies under hire in order to save on the cash burn. However, with the freemium model this can be tricky.
Let’s assume the message is strong and there is plenty of free users signing up. And out of the free users 5% are upgrading on a regular basis. The question is, will this hold, go up or fall off?
In most cases the early adopters will not focus on the pricing and will be totally focused on leading the pack. Especially when it comes to mobile apps and social networks and will upgrade to share the message. If there is a compensation structure I can assure you this will happen, because most of those early adaptors will be fueling the viral movement.
So the challenge here is to make sure the value proposition is as high for those outside the network as it is for those earning a commission off the premium users. Of all the challenges the company must know these numbers in order to protect against regulatory issues and to make sure the company can grow and gain profitability. Remember, “Free is never Free” so the company will be paying to service and maintain the free users.
5. Are The Free Members Becoming Evangelists? Knowing that most free users will not upgrade is a given. But what you want them doing is spreading the gospel about the app, news site, or platform you have launched. If they do not recognize the full value of the proposition, then the project will fail.
When a compensation structure is attached, and each free user is offered the ability to earn compensation from upgrades, you will quickly see two types of free users emerge. Those who truly love the site, app and/or platform and will share about it because of their personal experience, while others will spread the word based only on the fact they are hoping others will upgrade.
In both cases, you are building evangelists, but what you want are those who see the real value and share about it. If the company can keep the free users happy and engaged, they will spread the word through social links, comments, hashtags and just about any other means they can. And it should be noted, those free members who are sharing only because they hope to get compensated, will in most cases be gone in 90 days when they see a new shiny penny roll by.
6. Is The Company Committed To Ongoing Innovation? This is where I find the biggest challenge never addressed. Many tech companies are shortsighted. In a few cases they launched hoping to get bought by a larger company, while others just wanted some fast cash.
It’s also a huge mistake to use freemium as a list-building tool, or customer acquisition tool just to drop the free level somewhere down the road. Building trust is hard, but losing it is easy. Getting users is far harder than building trust with the ones you have so they see the value to upgrade. Take your time, provide real value and over time you will reap the rewards.