Business Model 101: The Free, The Mium and Mel Gibson

This article is part of an ongoing series on The Freemium Business Model.

Having gone through the considerations for Freemium as a business model, it is worth noting the broad principles on which existing Freemium implementations differentiate between the Free and the Mium.

A good number of people tend to think of Freemium only in the context of Saas. While those are the most common form of Freemium sites available, the model is not limited to only them.

There are five types of implementations that come to mind, which use Freemium as a business model.

1. Infrastructure-based Freemiun
2. Saas Freemium
3. Network-based Freemium
4. Workflow-based Freemium
5. Cross-sell Freemium

Infrastructure-based services

I’ll call them infrastructure-based services for want of a better name. These include services which offer storage or bandwidth for users to manage their digital media. Online storage like YouSendIt and Dropbox as well as share-and-download services like Rapidshare are the successful services in this category that come to mind.
It might seem relatively simpler to set a Freemium model here because you need to play around various levels of storage and bandwidth rather than feature sets and workflows. The price can also be quickly played around with through some good A/B testing. However, the apparent simplicity is what comes back to bite you. Storage and infrastructure are commoditized and if you’re not providing any frills around the basic service, you are essentially competing on price.
Website hosting services are another twist in this category though most services here provide the basic storage for free and additional website management services (and of course your own domain name) at a fee.

Saas

This is the most common, and often the trickiest, of the 4 models. Clearly, it’s really important to have a good understanding of your customer segments in this. There are 4 common parameters on which the Mium is differentiated from the Free:
1. Number of users: Do you have a product where access for multiple users could be an added benefit? This could work if you solve a fairly universal problem, say invoice management, and give it free to a single user but charge it for a multi-user company. Another model that uses this is distributed salesforce management where you can have multiple pricing tiers depending on the size of the salesforce.
2. Workflows: You offer a basic workflow for free and charge for more premium services around it. This needs a really good understanding of the customer so that you are certain that the “extra” is worth paying for and that there is a significant market willing to pay for it. There is no one way of figuring this out except to spend more time with your target customers.
3. More-of-the-same: A common error that startups make is to think of Freemium as giving more of the same thing for paid users. It does work in some cases but won’t work for every product. E.g. a website for designers which allows 20 filters for free but 200 filters when you pay will work since the serious designers would see more value in having more options.

Nothing is as useful as some A/B testing. Of course, if you’re going down the path of Freemium, it helps to invest in making your code modular early on so that you can try out multiple combinations to get to the one that finds best uptake.

Network-based services

There are two types of products in this category:
1. Social Networks: LinkedIn is a classic example where you get basic access to build your profile and network as a free user/recruiter and get premium services as a paid user/recruiter. It’s no longer just about try and buy. Free users are core to the value proposition of such a product because they increase the value of the network for the paid users. Freemium on a social network is a bit tricky because you actually end up giving a lot to the free user for them to want to engage with the network.
2. UGC-driven sites: Again, free users are very important because they typically generate the content on these sites that bring in users who subsequently convert to paid.

Workflow-based Freemium

This is a case where the free user cannot use a single workflow end-to-end but has to pay at that critical last step (or two). Tax-filing websites are a great example which let you fill out the form for free, thus demonstrating the value of the site as well as somewhat locking you in, and then charge for the final step of filing the tax returns.

Cross-sell based Freemium

Well, this isn’t Freemium in its strictest sense but the essence is the same. You allow the user to use one product for free but charge him for using another product with a similar benefit. To clarify, TurboTax, in the US, offers free tax filing for federal taxes, but makes you pay for the state version. This works because most people in the US have to pay both taxes and having seen the benefit of using one product, they are more inclined to use the state version as well.

Whatever the model be, the following are some of the key things that should be looked at when implementing the Free and the Mium:

The Free:

1. Ensure that there are no barriers to signing up for free (simple registration, no non-critical personal details, no credit card information)
2. Be certain of what locks in the user in the early phase of trying a product. And make sure you don’t charge for that.
3. If it’s not the workflow-based freemium, try to ensure that at least one critical workflow can be completed on the product to show its utility.

The Mium:

4. Do not keep too many pricing tiers unless necessary. It just complicates everything for the user.
5. Ensure that you are covering any extra user maintenance costs with your pricing. It’s fine if your paid customers cost you more to maintain (customer support, premium services etc.) as long as the price covers the additional costs.
6. If you have a long lock-in period for your pricing, don’t keep changing your pricing too often. E.g., if you charge for one year at a time, don’t keep playing with your pricing every 2 weeks. Users will feel they are getting a bad deal and are better off waiting for you to drop your prices further.
7. Movement from free to premium plans should be simple and seamless.

And finally…
8. Like Mel Gibson (as Nick Marshall), know what your customer wants! And charge her accordingly…

About the author: Sangeet Paul Choudary is a leader in the New Ventures group at Intuit Asia-Pac.