Way back in the old west, there was a saying. No, not “the good, the bad, and the ugly” or “a fistfull of dollars” or “for a few dollars more.” Those were from Italy in the late ’60s with fairly decent voice overs. But the saying was “there’s no such thing as a free lunch.” Until recently that maxim had been quite true. If you got something for free, somehow you just ended up paying for it later.
For instance, last night I went to Soby’s in Greenville, SC because I had a $25 coupon. They were giving me $25 of free food without any minimum purchase or anything other than two people at the table. Of course, I had to pay gratuity. I expected that. However, what I didn’t expect was that while their food was awesome, the portions were a bit smaller than I had figured. So in the end, I wound up buying $65 in food, and after the coupon and gratuity, I spent $50 even.
Now don’t get me wrong. I loved the food, and the service was great. But the fact is that the company sent out these coupons knowing that people would really have to order more than one thing. The company being slippery marketing fiend like myself was not planning on giving me a free dinner, just a discounted dinner.
But I just said at the beginning of this blog post that “until recently that maxim had been quite true.” While there certainly are no free lunches, there are some free internet services. The evolution for these services has been very interesting. Over the past few years, ecommerce companies have been using a business model called freemium in order to pay for their business. Essentially, about 1% of your users pay for the other 99%. Sounds like a socialist system. But it works.
Here’s how it works. A company gives away a very good service for free. Along side the free service, however, it offer bells and whistles for a premium. This business model would be like Ford giving away Tauruses that have the basic features, but if you want GPS, anti-lock breaks, etc., you have to pay for it. Obviously, this business model doesn’t work for physical goods. (At least not yet.) But it works marvelously for online products and services because many of them have little to no cost associated with duplicating themselves. Seriously, in order for you to open an account on Facebook, Facebook doesn’t have to shell out anything more than the cost of the electricity. Thus, the economies of scale are gigantic.
In fact, the low cost associated with creating a new account is one of the reason why freemium is becoming a model. How does a company justifying charging a user a $10 setup fee when the cost associated with adding just one more account is along the lines of $0.00004? Some companies don’t try to justify it any more. They don’t try to explain how much work they put into these products in services. Instead, they say implicitly, “yeah, we realize that we duplicating this service for you didn’t cost us much.” But these companies still need to make money, so they sell you up from the free package now.
So the goal for companies like LinkedIn is to attract a huge users base in order for them to attract a few paying customers right along with the free users. In essence, the free user is putting peer pressure on the paying user by getting them to join the system for which the paying user knows he’ll need the bells and whistles.
However, this system isn’t perfect. One problem is that the initial free users need to see some value in joining your system. This problem couples with the second problem which is a catch-22: people won’t join your system unless people are joining your system. So some means of jump starting the freemium system is necessary. Usually the best means is having a killer app at its core. However, that’s easier said than done because if you offer too much for free, not enough users will go for your premium service. But if you don’t offer enough, you won’t get enough users altogether, and then you still won’t have enough premium users.
The last thing I want to mention about the freemium system is how to communicate it. In short, if you want to adopt this system of giving something away for free, don’t brag about it. If your product is really all that great, let other people brag for you about the free aspect. So adapt Google’s approach with Gmail. Google gives you ten reasons why you should use Gmail. The last one is about the price:
10. All this is free?
Yep.
Nuff said.
