Have a quick look at AppStore or Google Playstore and you understand that free apps outnumber by large percentage over paid apps. It appears that customers simply do not want to pay for software/service unless it adds much more value than price paid.

It is very important decision in life of Start-up whether to offer Freemium model for its software/services or not.

There are essentially four ways to offer Freemium models.

Category I – You offer software/service for free and do not care much about  how crappy it is. You would assume that customers will use it anyhow since it is free. Since customers are not paying for it, you can selectively address/ignore their complaints as well. It works to the extent, especially where there is not much competition in the mix.

Category II – You offer decent quality software for free, assuming that it will grow very fast without spending much of the advertising dollars. You rely on word of mouth instead.  WhatsApp or any social network is good example.

Category III – This is most prevalent model where you expect that more and more people will try software/service for free (e.g Trial period) and find ways to monetize them. You plan to persuade customers switching to premium/paid version of software or go for in-app purchases.

Category IV – Customer consider your service/software not as Freemium, but just Free. Consider any personal email service you use.

How do you make money instead ? You monetise it based on data it generates, rather than end-customer instead. During MSN-Hotmail era, lot of email providers tried to monetize email services based on banners/ads (I think, Yahoo mail still does the same), then Google mail (Gmail) came along. Instead of opting of in-mail advertising, they offered related services (Orcut,Google Drive, Google for work etc.)  to the customers. Gmail offered them large cache of free customer data which they monetized to offer other services.

If you are in crowded marketplace (e.g. Healthcare for one), you can not simply rely on giving your product free and charge $x-y for premium plans as competition is offering. If you can not beat them in their own game, you should consider alternate innovative options instead.

 

For example,

You can build product around core problem/process with minimal functionalities addressing peripheral processes. You can offer it for Free to specific sets of customers (e.g. Small companies). Cost-concious customer over-time realizes this overlap and switches from competition to your product. If you are offering Healthcare practice management/billing/CRM software, add a bit of EMR (Electronic Medical Records) functionality as well. So, if hospital/doctor is already using existing EMR solution, there is good chance that they will switch to yours’ one leading to Cross-selling. Idea is to capture entire end-to-end interaction/process in your product itself rather than leaving it to the competition. You would reduce pain for integration, thus increasing customer’s reliance on to your product.

SAP started developing ERP product addressing Financing functionality primarily in 1980s. Since, majority of the decision makers in organizations were from Finance departments, SAP was helped by their push of ERP to other departments like manufacturing/logistics. You can apply similar thought process to your product development/selling tactics.

With so much of VC money stashed in start-ups, Freemium has become new norm regardless of many accounting perpetual losses. While most of them are still trying to be successful at Category III, would be wise to consider moving to Category IV soon before some-else will.

 

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