Freemium 2.0

Although "freemium" is not a new term, the model has recently undergone significant changes, and customer expectations have changed along with them. The free offerings of days past, at least in the case of software, were often terribly hobbled versions of products, missing key features, or worse, saturated with advertising. This old model of free tried to annoy users into paying for premium versions and failed to drive positive customer perceptions of the solutions or the businesses offering them. More often than not, they simply confirmed for people the old saying, "You get what you pay for."

While some of these old-school versions still exist today, most free solutions are generally very good products, providing a solid level of functionality for many customers' needs and delivering a positive user experience. But this begs the question—why should you give these kinds of products away?

What companies offering quality free solutions are doing is bringing in customers at the early stages, when money may be tight or when time constraints prevent them from making thorough cost/benefit analyses associated with new tools. Free offerings give these customers what they need to accomplish specific tasks and goals at a specific time. That may be all some customers ever need—and that's OK. If they are happy with the tool they have, they will likely tell their friends and contacts, and help grow the provider's business through word of mouth. In today's world of social media, "telling" your friends about a cool new tool that works—and is free—is only 140 characters away.

Some companies even have a significant portion of their customer base as nonpaying. Crazy? No. The businesses that know how to manage a large free user community are highly successful, owing to the fact that they truly understand why users upgrade to paid editions.

A percentage of the nonpaying customers will grow their businesses, eventually reaching a tipping point where they need more of what they're using. And that's when the paid offerings start to make sense. At that point, they are already happy with what they are using and have a relationship with the business that provides it—why go elsewhere? Customers don't pay to avoid advertising or to make a barely usable product usable; they pay because the product already works—they just need it to work more often or on a larger scale.

Several companies in the email marketing space are illustrative of this strategy. I have a colleague who uses one company's service for a nonprofit he works with to design and send email newsletters and then track results. He doesn't pay a dime and has been very happy with the offering, telling others about his favorable experience. However, as his subscriber base grows, he knows he will need to upgrade to a paid option that will provide him with the ability to send his newsletters to a larger group. And he has every intention of upgrading via this same service when the time comes because of his existing relationship with the business.

We know from our own experience at BoldChat that offering a free solution is a sound business strategy, even beyond the reasons outlined above. Our new parent, LogMeIn, likewise has proven this to be a successful model for attracting new business and building word of mouth. In both cases, we have a base of unpaid but loyal users across our product lines—from a live chat offering well suited for online businesses to remote access solutions used by millions to gain anywhere, anytime, any-device access to their computer files and applications. These users can play a key role in our research and development process, providing valuable feedback that helps us define future product enhancements and features. And we know that, eventually, some percentage of these customers, seeking professional capabilities or simply seeking to scale their own business, will become paying customers.

Chart It Out

Freemium is not necessarily the right model for everyone, and you need to make sure that at least some percentage of the users you target do grow over time. The most difficult thing to overcome when crafting a free strategy is the temptation to handicap your free product in favor of the paid editions. The desire to do this is very powerful, but will ultimately dismantle your chances of success. Build a high-quality free product that works and delivers against the fundamental value proposition of your firm. Put limitations on it, certainly, but put the right ones.

To help focus your thinking in this area, try using this model: Create a three-column chart with the headings Feature, Free Edition, and Paid Edition at the top of the columns. In the features column, list the most used, most common features of your offering. In general, you want check marks in almost every cell. Perhaps there's a slight limiter placed on the free version in one or two areas, but you don't want to create such disparity that the free product isn't at all attractive for someone just getting started.

In Conclusion

The primary goal is always to provide your customers with useful solutions that will drive a positive perception of and experience with your company, regardless of whether these customers are paying or not. If you do this well, added revenues will follow. If you decide to offer a free product, make sure you continually monitor usage and statistics to determine how the free offering is impacting your business, and make adjustments to your model—and your products—as necessary. As mentioned earlier, your customers will provide a wealth of information that can be used to positively impact your business in a variety of ways. Free product offerings may sound counterintuitive, but they're something you may want to consider as you explore different options and pricing models for your business.

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Steve Castro-Miller is vice president of chat technologies for BoldChat, a LogMeIn brand.

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