My Favorite Business Model

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.

Examples:

Skype – basic in network voice is free, out of network calling is a premium service

Flickr – a handful of pictures a month is free, heavy users convert to Pro

Trillian – the basic service is free, but there is paid version that is full featured

Newsgator – the web reader is free. If you want to synch with outlook and your mobile phone, that’s a paid service

Box.net – you get 1gb of virtual storage for free, but you have to pay for more than that

Webroot – you can get a free spyware scan, but for full protection you need to pay

This business model has been around for a long time.  Shareware always used a model like this and there are many successful software companies that have been built with this model.

It works even better with web native services.  A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently.  It is important that you require as little as possible in the initial customer acquisition process.  Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea.  You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.

Don’t require any downloads to start.  Don’t require plugins.  Support every browser with any material market share. Make sure your service works on various flavors of Windows, OSX, and Linux.  In short, eliminate all barriers to the initial customer acquisition.

And make sure that whatever the customer gets day one for free, they are always going to get for free.  Nothing is more irritating to a potential customer than a “bait and switch” or a retrade of the value proposition.

The best examples of this business model are when the customer implicitly understands why the paid service has to cost money.  More storage costs for photos or virtual storage are good examples. Termination costs on other carriers networks in the Skype model are another.  When it is just additional features that don’t carry an incremental cost to offer, it may be harder to convert free users to paid users. But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results.

I would like to have a name for this business model.  We’ve got words like subscription, ad supported, license, and ASP, that are well understood.  Do we have a word for this business model?  If so, I don’t know it.

Comments

[Stu]

Tiered?

[Mike Sansone]

I call this a VHP business model:

Value First + Habit Forming = Profitable Future.

Insightful post. When do you think we'll see premium feeds? Within the year?

[Keyvan N.]

The crack dealer model ?

[james governor]

i would say its not a single business model. but it fits a clear pattern - lowering the barriers to participation.

[Jarid]

Free + Premium = Freemium?

[Nicholas]

How about, "Tiered services"?

- free (or basic) tier

- premium tier

- super-premium tier

Totally agree that this is a key architecture for the web.

[Roland Turner]

Loss Leader?

[chartreuse]

How about "A good one".

[Andrew]

its called upselling.

[PlanMaestro]

What do you think about "Two-Tier pricing" like what your "beloved" Telcos are trying to do?

[charlie crystle]

Last night I was in a discussion with people from AOL, Good Mail, and a bunch of others about the paid certified email approach to reducing spam. I noted that as soon as you introduce a paid model, you get a different, unintended flow of commerce, repelling those who depend on free (spammers, small nonprofits, small businesses) and attracting those who can afford to and want to hop the obstacle of a price. (I then reminded them of the words of the great philosopher Egan from Ghostbusters, who said in 1984 "print is dead" and suggested "email is dead" and was subsequently pelted with tomatoes and chairs).

Maybe something wil come of this: From an economic perspective, free flows like water. Money introduces a value decision and a transaction, both of which slow the flow and change its path.

[Hans Omli]

Free2Fee

[Pete]

webenue

reveneue = web based revenue?

[Grant]

How about freequisition.

[nicolasD]

1 more vote for freemium :)

[Chris Yeh]

Tryvertising?

Heroinware?

[umair]

Yeah, that is the model.

I call it "enterprise subsidizes consumer" (ie, in my edge competencies ppt). Not totally accurate, since sometimes it's consumer subsidizing consumer, but gets the idea across...

[Michael]

Over here we call it "TheLadders"... :-).

[Chris Neumann]

Great summary. I've thought about all these elements for a while, and it's not rocket science, but seeing it summed up in a clear, concise way like this is very useful.

I'm a terrible namer, so sorry I can't help out there.

[David G]

upsell - it's a common sales strategy that's now become a business model; I'd call this the zero-base variety, so ... zero-base-upsell ... it's my favorite too - the "free" users aren't a strain, they're typically involved in improving the product

[Scott Lake]

This is the "Pay As You Grow" model. The more you grow with the service the more likely you will pay for additional value added features.

The toughest part of this model is deciding what to offer for free and what to charge for. If you're free offering isn't useful, no one subscribes, and if it too useful no one upgrades to pay features. The companies Fred mentions above all fit the successful version.

[NIck Nichols]

I keep thinking of the old Saturn V booster rockets that powered the Apollo spacecrafts into orbit.

There was a lot of effort to escape the bulk of the earth's gravity (the freebie stuff) but then wow -margins flow with little incremental effort.

[Diggdot.us Reader]

I've always called this the "drug dealer model" (first gig's free).

[Danielle]

upgradable

[Sean Winstead]

Try and Buy