Business Model 101: Why startups often fail at Freemium

Freemium is a much debated topic among startups as few companies have really done it well. MailChimp recently went on record talking about its great success at implementing Freemium though the author also claims that there wasn’t a great deal of science to their success. While a lot of MailChimp’s decisions seem to have been based on gut, instinct and a thing for Ben & Jerry’s free ice cream, they don’t deny the fact that a lot of thought does need to go into Freemium.

To start with Freemium, while a very “internet” term, is not a new concept. It simply refers to a model where basic services are free and access to premium services is at a price. It is important to note that the free users and the paid users are essentially from the same group of users. A website which is free to the students and charges access fees to the teachers is not a Freemium model.

Most startups end up messing up a Freemium implementation because the reason they implement Freemium isn’t correct in the first place:

Case 1: Some startups put on Freemium because a subscription model doesn’t see significant uptake for them.
Not every product can support a Freemium business model. There are two very basic criteria that a product needs to meet to go Freemium:

1. The “free” service should have real value to build a user base. The free user should get real value out of the product rather than feel restricted. There should be at least one critical action he can successfully complete with the product without hitting “Pay Now” banners at every point.

2. The “paid” features should add substantial value to the “free” service to be compelling for users to pay for it.

a. Some of the best examples are file sharing services like Rapidshare where the free service gives you a taste of what you can get but the paid service gives you significant advantage in terms of download time, broken downloads and parallel downloads.

b. The worst examples of Freemium are cases where the core service is delivered free and other VAS is charged for. In this case, the VAS is a luxury and not a need.

Case 2: Some startups think of Freemium as an architectural model rather than a business model. They go ahead and try out Freemium just because it is as simple as turning some features ON and OFF based on login and because their site is already architected for such performance.

To start with, Freemium is not something that works for every product just because you have the ability to restrict access to some features. More importantly, Freemium is not about features, it’s about workflow and access.
Before implementing Freemium, it is important to do the following product analyses:

  • Listing out all possible use cases for the product and detailing the workflow(s) for each use case
  • Creating user profiles for each use case
  • Ensuring that at least one work flow with a unique user profile can be completed with the free product
  • Ensuring that other work flows are critical enough for some user profiles to pay for them

It is important to understand features from the perspective of workflows. This is the only way one can legitimately decide which features to put under premium access.

Case 3: Some startups, having failed with subscription, believe that Freemium is something they should just try out since; after all, there is nothing to lose, by opening up some of the product to trial users.

Yes, it worked for MailChimp but you can’t just “try” Freemium without doing some number crunching first. There is a cost to maintaining a free community. As in every business, an analysis needs to be done to ensure that the ARPU exceeds the cost of maintaining a user in the very least.

What’s your opinion?

Coming up in this series:

  • Basic number crunching before you try Freemium
  • What to give away for free and what to hold back
  • Freemium on Saas vs. Freemium with Network Effects

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