No Free Ride with Freemiums

Feb 24, 2012

Pam Baker

Free has always been the golden ticket to bigger sales: free samples, free trials, free points, free delivery, free shipping, free anything and free everything.

Since the earliest retailer first thought to lure a shopper by greed alone, the well-delivered freebie has snagged more sales than possibly any other marketing tool. In the software business, the freebie loss leader is called a freemium but make no mistake it is the same time tested customer grabber.

"Savvy tech vendors are using the freemium model as a Trojan horse to embed their offerings in our personal and professional lives," explained Christopher Lochhead, partner at Play Bigger, a consultancy firm. "The key is to offer people enough free functionality that they actually use the technology while enticing them to pay for additional Scooby snacks."

Users love free software and rarely see the up sell as objectionable. Take TurboTax, for example. The freemium offer is the simpler 1040-EZ federal form, a form typically used by people with lower incomes, standard deductions and few assets. State tax service comes at an additional fee, so TurboTax still gets some revenue from most freemium users.

Users tend to perceive the freemium as Intuit, the makers of Turbo Tax, giving them a cost break when they need it most. Therefore, not only does the freemium build familiarity and goodwill, it also creates a no-friction acceptance of full-price services carefully matched to the user's increase in prosperity. In this way, TurboTax and other software companies grow their customer bases from scratch in a way that is highly palatable to the average consumer and highly profitable to the company.

"Zoho Corp. has approximately a seven percent to 10 percent conversion rate from free to paid," said Raj Sabhlok, president of Zoho Corp., makers of ManageEngine and Zoho. "Depending on the product and/or service, we get hundreds of free downloads/registrations a day. This all translates into a tens of millions of dollars in revenue tied to freemium conversions."

The strategy behind a freemium is to provide just enough product to make it meaningful for the user.

"This balance is critical," said Sabhlok. "Not enough features can negatively impact the perception of your product/company. Too many features can hurt sales. The idea being to keep the customer on your free tools until they're ready to purchase a paid-for version."

At any given moment, Zoho and ManageEngine have more free users than paid users, but the consistent flow of conversions from free to paid results in a strong and growing revenue stream.

Freemiums ideally do not cost the company anything either unlike the heavily discounted loss leaders at the grocery store or a manufacturer's mass produced free sample giveaways.

"Weeks Communications has a sunk cost in the code that was written for the software so the idea is to give the product away to promote the phone service and charge for the other features they offer," explained Seth Daniels, a sales and marketing manager at Weeks Communications. "This way WC can charge for the services and features that cost them money, and are not sunk costs, in order to pay for their cost of goods sold."

Other reasons software vendors offer freemiums include for search engine optimization (SEO) purposes since nothing draws an online audience like the word "free," and to beta test the software.

"Using clients as beta testers enables WC to learn who their target market is for Fathom rb and who will benefit the most from using their software," said Daniels. "By offering Fathom rb as a Freemium they can learn invaluable information on ways to change and upgrade their software as well as who the ideal client will be."

How freemiums foul IT

Users enjoy the benefits of freemiums but IT departments, not so much.

"It's a business model that venture capitalists and end users love but IT and finance hate," said Eugene Lee, CEO of Socialtext, an enterprise social software maker. "I've spoken with several CIOs who describe this model as 'holding a gun to their head.'"

"Yammer's model, for example, is to draw the line around IT governance and control. They give away complete functionality to end users but charge IT for features like deleting an offensive post, backing up data for compliance, etc.," he explained. "IT must pay for all participating users to get access to any of these control capabilities."

The freemium model can be quite successful in helping software makers gain penetration into the enterprise but that poses several problems for IT.

"The company's data is held hostage because account control is in the hands of the end user rather than the company, which has many security implications such as potential compliance violations, risk release of sensitive information, employee departures, etc.," said Lee. "The [Yammer] model essentially holds the company hostage to retain or have control of its data unless the subscription is paid.

"Lack of due selection process also undermines executive decision making power which means key functionality or security options may be sidelined."

A prolific and versatile writer, Pam Baker's published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine,, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers. She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making. She is a member of the National Press Club (NPC), Society of Professional Journalists (SPJ), and the Internet Press Guild (IPG).

Tags: Socialtext, Zoho, Intuit, freemium, Play Bigger, Weeks Communication,

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