One of the most recognized expert in the Freemium Space is Lincoln Murphy. He shares in his book “The Reality of Freemium in SaaS” his insights about the Freemium Business Model. He also writes about it on his blog. He is also a former speaker of our Freemium Meetup and we took the chance to ask him a few questions about Freemium.
“Freemium too often means ‘We hope others will do the selling for us.’ ” – Lincoln Murphy
FreemiumSFBay: What does the term Freemium mean to you?
Lincoln: Honestly, most of the time it means a SaaS company has a not-well-thought-out marketing strategy.
Freemium means Free + Premium, but too often it means “We want to avoid promoting or selling our product, we assume the product will sell itself and where it doesn’t… we hope others will do the selling for us.”
If it is the right model… it means “expensive and time-consuming” but for a select few companies out there, it can mean “success” – depending of course on how you define success.
FreemiumSFBay: When did you first hear about Freemium?
Lincoln: This model has been around for a long time – I can’t remember when I first ran into it – but in SaaS (or whatever it was called before that term was coined) it was considered “shareware” for web apps.
I first heard the term Freemium when Fred Wilson was talking about the model and some of his commenters said “Free + Premium = Freemium” … a term was born! (c. 2006ish?)
FreemiumSFBay: What was your first experience with Freemium?
Lincoln: I’m sure I was taking advantage of Freemium offerings – both the free version of products (without converting) and the paid ones (fewer) – for a while before my first professional experience.
My first professional experience with Freemium was one of shock at how poorly the model actually worked to convert the free users to paying customers. It was fine (back then – 2007 / 2008) for user acquisition but was not a very productive customer acquisition method.
Fast forward to 2013 and it isn’t even that great of a user acquisition method in and of itself since there are probably five other SaaS companies in the same category or market as you also using Freemium to reach the same people.
Now you have to differentiate and do the work just to get the users’ attention… and frankly, when the easy way – giving your stuff away for free – doesn’t work, what can you possibly do?
It turns out there’s a lot you can do, but it requires knowing your market, hustling, growth hacking, good ol’ fashion marketing, actually selling your stuff, etc… the stuff most companies that “went Freemium” were trying to avoid in the first place!
“Freemium requires good ol’ fashion marketing, actually the stuff most companies that “went Freemium” were trying to avoid in the first place!” – Lincoln Murphy
FreemiumSFBay: When should a company offer Freemium?
Lincoln: When the market is big enough to make the tough numbers game work and that same market is one that can & will actively share/promote the product to their friends, family, and colleagues.
But, umm… see my answer to your last question because Freemium isn’t enough these days.
FreemiumSFBay: Can you name an unexpected thing that might occur with a Freemium product?
Lincoln: Success. That should be the unexpected result.
Failure – statistically – should be the expected result.
Look, you want different results than that? Cool. Do something to differentiate your SaaS product from the rest and – reality check – Freemium isn’t enough, at least in the most popular (read: competitive) product categories.
FreemiumSFBay: What should you never do with a product using the Freemium?
Lincoln: In 2013, don’t assume that Freemium makes you special.
It might… maybe you can disrupt a market that doesn’t have a Freemium offering in it. But don’t assume you can. Do the work to see if that is the case.
Then work hard to make Freemium not just a user acquisition method but a customer acquisition method and viral expansion channel, too. That’s what will make you successful… and that also happens to be the hard part.
Anyone who can write code and build a product can give it away for free. That’s the easy part and not even unique anymore.
A tiny, super-small subset of all B2B SaaS companies ever in the history of the world have turned – or will be able to turn – that “strategy” of giving the product away for free into a viable business or acquisition target for larger companies. #truth
Don’t hide your Premium Offer behind a Giant Wall
FreemiumSFBay: The most successful Freemium stories are services like Skype–giving something familiar away like free phone service and creating a kind of “addiction”. Once a customer is in the habit of using one product there is pain in changing to another product. Is this a good strategy in getting someone to pay or does it take too long for them to convert?
Lincoln: Addiction is a great analogy… but addiction itself doesn’t mean much if the users aren’t also willing to part with their money.
People like to make the drug dealer analogy here, but drug dealers wouldn’t be in that business 97% of the people they got hooked on their goods used, but didn’t pay.
Addiction is great if you can monetize it!
Instead of drugs, look at World of Warcraft and figure out how they get people engaged and invested and get them to pay.
You don’t have to “gamify” your B2B app but understanding the psychology of how those games get their players addicted can definitely help you.
I have to say that addiction is actually a terrible thing and I don’t mean to minimize it… you started it, I was just playing along.
FreemiumSFBay: Users often expect free on the internet. How to do you change their mindset?
Lincoln: You don’t… you can’t.
You have to position your offering differently – as a premium product – from the beginning.
That’s true even if you have a Freemium offering; manage expectations that the free version is available, but the Premium version is something they really need/want.
Most companies with a Freemium offering position the free version as the main attraction and the premium as the sideshow… in the lot way out back… behind a giant wall…
FreemiumSFBay: If you have a free and a premium product, how “extreme” should the difference be?
Lincoln: It doesn’t have to be very different at all.
Consider Evernote which has very few differences between free and paid.
I became a paying customer of Evernote because I needed to revert to an earlier version of a document… a paid feature.
That piece of functionality only mattered after I became heavily invested in the product, around the 6 month mark (seemingly consistent with the rest of their user base).
If the base free product sucked, I wouldn’t have gotten to that point and I likely wouldn’t have tried – or cared about – any of the other features currently included in the free version if those were “premium.”
The idea of a “crippled” or “limited” Free version where the functionality is reduced to almost being unusable speaks directly to the vendors complete misunderstanding of the psychology related to Engagement, Investment, and Conversion.
There are 7 different types of Freemium that I’ve identified and this type of hobbled free version is called “Unlimited” Free Trial and you can read more about that here:
“Free users are often the most demanding, noisy, complaint-filled users you’ll ever have.” – Lincoln Murphy
FreemiumSFBay: When users convert, do their expectations also rise?
Lincoln: I don’t think the expectations rise, I think they change. But… it’s in different ways than conventional wisdom might have us believe.
Free users are often the most demanding, noisy, complaint-filled users you’ll ever have.
They have unrealistic expectations about what they are entitled to (often perpetuated by the vendor themselves, BTW) and if the vendor fails to meet those expectations, those free users are the first to complain, take to Twitter and Facebook, blog about it, etc.
Paid users often have a different agenda; they need to solve a problem or take advantage of an opportunity – especially in B2B – and if your product does that, they’re happy.
When free users convert to paid, often they change their expectations. And just as often this is actually because expectations are now better managed by the vendor because now that they’re paying we have to treat them like we’re serious. If you treated everyone that way you might have a higher conversion rate!
There’s a ton of psychology involved here and few marketers in Freemium companies take the time to understand these basic human behaviors.
FreemiumSFBay: Do free users, ones who likely will never pay, have any value to vendors?
Lincoln: In theory, yes… either due to their spreading the word (viral expansion) for the vendor or by adding to the Network Effect data that the vendor can monetize directly or use for other value-added services to paying customers.
In reality, rarely.
But that’s because SaaS and Web App vendors still think they sell software and are building static products, completely missing this awesome opportunity.
Consider something like Mint (acquired by Intuit back in 2009 for $170M; pennies today, but not a bad exit way back when) and how it never would have gotten to where it did by thinking of itself as a software product.
Most vendors don’t build their product with any of the “stuff” required to take advantage of the free users and just *hope* a good amount will convert or tell their friends.
I feel bad for hope… so many people pin their future success to it… that’s a lot of pressure!
Freemium: The vendor needs to know their audience
FreemiumSFBay: How important is the Social Media to the success of Freemium?
Lincoln: The use of different social media channels could be a massive boon – or yet another failed channel – for a Freemium business.
It just depends on how they use those channels (every Social Media network is different, for different audiences, and different ways of interacting).
The vendor needs to know their audience, understand how they communicate, know how they are (or are not) willing to invest their social capital, and try to take advantage of that at the right time in the interaction between the user and the Freemium product.
A strong Viral Expansion strategy is not just a “tweet this” button or contacts import function.
FreemiumSFBay: How can Freemium create a “buzz”?
Lincoln: It completely depends on the market. Are you disrupting a staid market full of legacy vendors? Simply having a Free product might be newsworthy, but how you get to that market might be through boring, unexciting “old-school” channels.
Are you trying to disrupt a market that already has Freemium offerings in it? That’s a very different story where Freemium isn’t a differentiator, but a market expectation that simply brings you on par with the competition.
Okay, you’re in-market… now what do you do to differentiate? If everyone uses Freemium as their marketing tactic, you won’t get a buzz lift off of Freemium.
Now you have to differentiate off of something else… something, ideally, customer-centric.
FreemiumSFBay: How can you best use the “buzz” to promote your paid product?
Lincoln: If you can get “buzz” with Freemium and you leverage that to attract people to your site, you should position the Premium version of your offering as the main thing.
This way you start to manage expectations of your free users as they sign-up and continue to do that as they move through the Engagement and Investment phases of your offering that the Paid version is there and they should – or will want to – sign-up for it eventually.
In fact, make them an offer immediately to sign-up for the premium offering. If they say “no” to that offer, at least they know you have a premium product.
“Freemium can work but it takes a lot of time, money, and resources.” – Lincoln Murphy
FreemiumSFBay: What is the one issue you find most troubling with the Freemium Model?
Lincoln: That so many companies float it as a viable Marketing Strategy without really understanding Freemium, without thinking it through, and by basing their success on hope and luck.
Freemium can work – there are definitely some companies that have found success with it – but it takes a lot of time, money, and resources to make it work.
And that’s assuming the product is right for a market that is right… and many folks I run into that think Freemium is the way for them don’t fit into that mold.
FreemiumSFBay: To go Freemium or not to go Freemium–which way are you leaning?
Lincoln: It should only be a choice after you’ve done the work to know if Freemium has a chance of success in your market, with your product, with your funding (current and realistic potential for), with your leadership team, etc.
Only after you’ve figured all of that out should you have a particular “leaning.”
Lincoln Murphy is the Managing Director at Sixteen Ventures. He has worked with several hundred Software-as-a-Service (SaaS), Web App, and Software companies — of all sizes and stages — around the world helping them generate profitable and scalable revenue models, accelerate customer acquisition, increase customer retention and reduce churn, and significantly expand (profitable) revenue over customer lifetimes. When it comes to Freemium, Lincoln has been a vocal opponent not of the model itself, but of buying into the hype. He’s the author of The Reality of Freemium in SaaS and has been featured in Inc. and Fast Company magazines. He is a sought after speaker at worldwide industry events, including Freemium Summit for his work on Freemium. @lincolnmurphy @16v LincolnMurphy.com
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