Freemium Vs. Premium

August 3, 2008 – 12:00 am by RM Crill

If you’re launching a web service for consumers, you have an important decision to make: how will you take your web application to market? You have a pricing decision to make and trying to grow your user base by selling at list price probably won’t work. Most successful launches involved products that are free for initial users.

Of course, free for initial users doesn’t mean free forever for everyone. Typically, Freemium refers to products that have two (or more) versions with the lowest functionality free to users. Think of AVG anti-virus or Adobe’s PDF. Premium refers to products that are sold at all levels but usually (and probably should be!) are offered with a free trial period (like many enterprise software products).

Your decision regarding Freemuim vs Premium is based on these factors:

  • Support requirements
  • Serving costs
  • Go to market method
  • Migration potential

Let’s be clear that this is a decision regarding shades of grey in many cases – it’s not easy but the above factors will provide a framework to think about it.

Support Requirements. Freemium models usually grow more quickly at first (free forever has a lot of appeal). If you think this will be the case with your offering, consider the amount of support you need to give to users. Some applications require customer support or labor to set up accounts. A Premium model can offer more controlled growth to ensure a good user experience as you grow your user base. And don’t think the community is going to provide support; certainly not initially. You don’t have a community yet and one will never grow unless there’s initial support.

Serving Costs. To have gross profits on a Freemium model, you’ll need solid adoption to the up-sale versions and/or advertising revenue. While your product could break the trend, about ½ – 3% of consumers typically upgrade from a Freemium product. If you’re selling other products (think of free photo sharing sites selling prints and coffee mugs), adoption can be slightly higher but likely won’t exceed 5% in any event. If your serving costs are high, you may not be able to afford all those free users and you may need a Premium model to ensure positive margins.

Go To Market Method. Growing your user base for a Fremium product requires building a consumer brand. There are limited options for partnering or boosting the initial user base outside of marketing. Successful launches depend on viral growth. This strategy is always scary to me – it you build it, they will come. A Premium product has a look and feel that’s more suited for traditional sales methods – channel sales, even inside sales. This is because you’re, well, selling (not giving something away). Implementing a Premium strategy means you can force-feed the user base to get it going. If the product has a viral growth opportunity, then you should be able to see it grow that way (you may need to change to Freemium for it to grow quickly).

Migration Potential. Let’s assume your crystal ball will have a bad day when you make this decision and you need to change your mind. Moving from Freemium to Premium will require breaking a promise to your users (the promise that the product will always be free at its base level). You can only do this in the very early stages of growth and, even then, it could be quite costly to your reputation. If in doubt, launch with a Premium model because changing from that launch point is more palatable.

It might sound like I’m advocating launching your product with a free trail period instead of a free version. I’m not. This is a complex decision that every company must deal with differently – I believe this framework will allow you to make that decision.

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