Business Model 101: Making the most of the free users

To round off the discussion on Freemium, it’s interesting to understand how the free users can tilt the business model favorably. The discussion so far has been on base-case Freemium where the free users add costs to the business. However, there are several scenarios where the free users can help make Freemium more viable than the base case.

Virality: The most obvious way in which free users can tip economics favorably for a Freemium business is by promoting the product virally. This is also one of the main reasons one would want to go Freemium because apart from allowing users to try the product before deciding about buying, it also helps in generating positive buzz about the product. Virality, if it kicks off well, helps bring down the cost of customer acquisition substantially making the Freemium business a lot more viable. It is interesting to note that, very often, Freemium businesses that shut down prematurely are also the ones that were just pushing traffic to their site without ever hitting true virality.

Monetizing the free users: The other key model of using the free users to tip economics favorably is to monetize them. After all, you have the audience, why not make some money. One of the most common ways of doing it is to push an advertising-intensive interface to the free users, often frustrating them to a point where the clean non-cluttered interface of the Premium version is actually one of the attractive features worth paying the premium for.

Data as an asset: If the product captures real-world user data (spend, interests etc.), free users also provide the volume that can make this data interesting from an analytics perspective to run the right lead-gen campaigns or just create macro-level market customer intelligence for third party consumption.

Of course, the free users help in other ways as well:

1. In Freemium with network effects (e.g. LinkedIn), the free users make the community valuable for the paid users (e.g. premium recruiters) in the first place and the model cannot survive without free users.

2. Free uses provide great data to help optimize the product and improve paid uptake over time since an ongoing free user base provides more usage patterns than a 30-day free trial user base ever will.

Finally, one of the spaces I am yet to see Freemium work well is the content business. Looking at companies like Imeem, the cost of giving licensed content to free users is far beyond whatever the service can make out of the paying users, landing the companies in large amounts of debt. Newspapers have seen low uptake when exposing part of the article for free and hoping for users to pay a standard premium user fee for full access. Perhaps micropayments, in a manner similar to song-by-song sales of iTunes, will make article-by-article unlocking as the standard of the newspaper industry someday, perhaps not, but that’s another discussion.

Author: Sangeet Paul Choudary