Can you believe that there is a wrong way to price a free product? That premise sounds a bit counter-intuitive. Giving it away should be the easiest pricing strategy to implement. Actually, it isn’t.
Recently, a group of executives shared their insights about so-called freemiums at the annual MassTLC unconference. By the way, the term “freemium” as defined by Wikipedia refers to the marketing strategy of using a free offer to build a base of users who can be converted into paying customers (free + premium = freemium). Freemium is often used in the context of web 2.0, but when you think about it, the general concept has been around for ages. We’ve all seen those “try if free – cancel (or send it back) at anytime” type offers. Like many, I tend to be suspicious of such deals, particularly the ones that credit cards companies have tried to hard-sell me.
Web 2.0 freemiums have evolved from aggressive promotional tactic into a legitimate business strategy. Provide users with a taste of real functionality in order to establish credibility, build trust and then let it blossom into a customer relationship. For SaaS companies especially, freemium is an essential part of a pricing strategy. At the unConference, we identified two freemium models that trade-off functionality versus volume.
ConstantContact, a leading email marketing firm, has had success by providing full functionality, but limits volume to 100 email addresses. Beyond that threshold, charges kick-in.
SurveyMonkey, an online survey tool, allows users to create any number of surveys and participants, but limits the functionality – number of questions, types of questions, branching, etc. More sophisticated surveys require an upgrade.
Both models are viable because they cleverly take into account the user’s economics. That’s the key take-away: to establish a reasonable threshold where a free customer is willing to pay a little more to get more.
And what about “freeloaders”, those users who will never cross the paid threshold? They can turn out to be an important referral base to other paying customers. Speaking from my own experience, this has certainly been true for ConstantContact and SurveyMonkey.
I’d welcome other great examples of freemium. Feel “free” to comment!!
Director of Products