Chris Anderson on the “Freemium” business model
I had the opportunity to hear Chris Anderson speak today. He is the author of the book and concept, “The Long Tail”. He spoke about his latest analysis of evolving business models.
In his new exploration, he looks at how one can build a business offering basic services for free and charging for premium/advance features.
He described that this was different from the age-old concept of free samples where you would give away 5% of a product or service in order to generate revenue from 95% of the remainder. Instead, in this model, one would give away 95% of the product or service and make profit from the remaining 5%.The particular model really only works for products and services where the marginal cost to produce each additional unit is $0 (or close to it). This, of course, limits the viable products or services to be ones that live in the digital world. An example he gives is Software-as-a-Service (SaaS for short).
Although I do think Chris Anderson has identified a trend in this web 2.0 world, time will tell if it really is a sustainable model or a dot-com-like euphoria.
I think Freemium may be a good approach for some services but age-old business common sense still applies. There still needs to be enough people willing to pay for that 5% of your product to keep the business running.
In the end, there really is no free lunch.
P.S. The concept “Freemium” was originally popularized the venture capitalist Fred Wilson in 2006.
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While I heartily agree that good old business sense applies (Sales isn’t at the top of the P&L because it’s in alphabetical order), I do see a distinct difference between many of the folks giving away freemiums and the dot-bomb companies who declared that all the rules had changed, and “eyeballs” were all that mattered. The smart companies are getting advertising revenue from the free versions of their products (e.g. – SpiceWorks, Linked-In), and charging to have the advertising go away and/or adding more complete functionality.
What I find interesting is the business opportunity this creates, because consumers and many small businesses now have a wealth of (software) tools available at little or no cost – but they still have the problem of deciding what to use, how to tie it all together, etc. The availability of these offerings is creating the need for technology advisers (personal CIO’s?) who are paid directly for adding value for their clients, because the products themselves aren’t sold for a large enough sum to pay for the advisement that used to be part of the sales process.