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My Favorite Business Model
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
Examples:
Skype – basic in network voice is free, out of network calling is a premium service
Flickr – a handful of pictures a month is free, heavy users convert to Pro
Trillian – the basic service is free, but there is paid version that is full featured
Newsgator – the web reader is free. If you want to synch with outlook and your mobile phone, that’s a paid service
Box.net – you get 1gb of virtual storage for free, but you have to pay for more than that
Webroot – you can get a free spyware scan, but for full protection you need to pay
This business model has been around for a long time. Shareware always used a model like this and there are many successful software companies that have been built with this model.
It works even better with web native services. A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently. It is important that you require as little as possible in the initial customer acquisition process. Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea. You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.
Don’t require any downloads to start. Don’t require plugins. Support every browser with any material market share. Make sure your service works on various flavors of Windows, OSX, and Linux. In short, eliminate all barriers to the initial customer acquisition.
And make sure that whatever the customer gets day one for free, they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch” or a retrade of the value proposition.
The best examples of this business model are when the customer implicitly understands why the paid service has to cost money. More storage costs for photos or virtual storage are good examples. Termination costs on other carriers networks in the Skype model are another. When it is just additional features that don’t carry an incremental cost to offer, it may be harder to convert free users to paid users. But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results.
I would like to have a name for this business model. We’ve got words like subscription, ad supported, license, and ASP, that are well understood. Do we have a word for this business model? If so, I don’t know it.
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» Name That Business Model from Changing Way
Fred describes his favorite business model:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium p... [Read More]
Tracked on Mar 23, 2006 1:30:08 PM
» Fred Wilson on My Favorite Business Model: Turning Pro from /Message
Fred wants to know what we should call the Skype/Flickr/Trillian business model: [from A VC: My Favorite Business Model] Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word [Read More]
Tracked on Mar 23, 2006 5:37:13 PM
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At the risk of indulging in a bit of Redmonk introspection, I wanted to comment on this post from A VC (AKA Fred Wilson), entitled "My Favorite Business Model." If you're not interested in conversations of industry analyst business models,... [Read More]
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» My Favorite Business Model from chew shop
VC Fred Wilson shares his favorite business model: Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer pre... [Read More]
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» My Favorite Business Model from Startup Fever
On the other hand, Fred Wilson writes about his favorite business model:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search market... [Read More]
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Earlier this week Fred Wilson (with Jarid Lukin) coined the phrase “Freemium” for the business model described: Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, ref... [Read More]
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Posted March 23, 2006 in Venture Capital and TechnologyComments
Tiered?
Posted by: Stu | Mar 23, 2006 10:05:37 AM
I call this a VHP business model:
Value First + Habit Forming = Profitable Future.
Insightful post. When do you think we'll see premium feeds? Within the year?
Posted by: Mike Sansone | Mar 23, 2006 10:14:24 AM
The crack dealer model ?
Posted by: Keyvan N. | Mar 23, 2006 10:21:56 AM
i would say its not a single business model. but it fits a clear pattern - lowering the barriers to participation.
Posted by: james governor | Mar 23, 2006 10:32:25 AM
Free + Premium = Freemium?
Posted by: Jarid | Mar 23, 2006 10:56:57 AM
How about, "Tiered services"?
- free (or basic) tier
- premium tier
- super-premium tier
Totally agree that this is a key architecture for the web.
Posted by: Nicholas | Mar 23, 2006 11:52:35 AM
Loss Leader?
Posted by: Roland Turner | Mar 23, 2006 12:25:44 PM
How about "A good one".
Posted by: chartreuse | Mar 23, 2006 12:48:02 PM
its called upselling.
Posted by: Andrew | Mar 23, 2006 12:54:40 PM
What do you think about "Two-Tier pricing" like what your "beloved" Telcos are trying to do?
Posted by: PlanMaestro | Mar 23, 2006 1:11:32 PM
Last night I was in a discussion with people from AOL, Good Mail, and a bunch of others about the paid certified email approach to reducing spam. I noted that as soon as you introduce a paid model, you get a different, unintended flow of commerce, repelling those who depend on free (spammers, small nonprofits, small businesses) and attracting those who can afford to and want to hop the obstacle of a price. (I then reminded them of the words of the great philosopher Egan from Ghostbusters, who said in 1984 "print is dead" and suggested "email is dead" and was subsequently pelted with tomatoes and chairs).
Maybe something wil come of this: From an economic perspective, free flows like water. Money introduces a value decision and a transaction, both of which slow the flow and change its path.
Posted by: charlie crystle | Mar 23, 2006 1:21:06 PM
Free2Fee
Posted by: Hans Omli | Mar 23, 2006 1:33:38 PM
webenue
reveneue = web based revenue?
Posted by: Pete | Mar 23, 2006 2:07:20 PM
How about freequisition.
Posted by: Grant | Mar 23, 2006 2:30:54 PM
1 more vote for freemium :)
Posted by: nicolasD | Mar 23, 2006 2:37:04 PM
Tryvertising?
Heroinware?
Posted by: Chris Yeh | Mar 23, 2006 2:39:24 PM
Yeah, that is the model.
I call it "enterprise subsidizes consumer" (ie, in my edge competencies ppt). Not totally accurate, since sometimes it's consumer subsidizing consumer, but gets the idea across...
Posted by: umair | Mar 23, 2006 3:24:00 PM
Over here we call it "TheLadders"... :-).
Posted by: Michael | Mar 23, 2006 3:37:41 PM
Great summary. I've thought about all these elements for a while, and it's not rocket science, but seeing it summed up in a clear, concise way like this is very useful.
I'm a terrible namer, so sorry I can't help out there.
Posted by: Chris Neumann | Mar 23, 2006 3:44:19 PM
upsell - it's a common sales strategy that's now become a business model; I'd call this the zero-base variety, so ... zero-base-upsell ... it's my favorite too - the "free" users aren't a strain, they're typically involved in improving the product
Posted by: David G | Mar 23, 2006 3:59:25 PM
This is the "Pay As You Grow" model. The more you grow with the service the more likely you will pay for additional value added features.
The toughest part of this model is deciding what to offer for free and what to charge for. If you're free offering isn't useful, no one subscribes, and if it too useful no one upgrades to pay features. The companies Fred mentions above all fit the successful version.
Posted by: Scott Lake | Mar 23, 2006 4:16:17 PM
I keep thinking of the old Saturn V booster rockets that powered the Apollo spacecrafts into orbit.
There was a lot of effort to escape the bulk of the earth's gravity (the freebie stuff) but then wow -margins flow with little incremental effort.
Posted by: NIck Nichols | Mar 23, 2006 4:55:15 PM
I've always called this the "drug dealer model" (first gig's free).
Posted by: Diggdot.us Reader | Mar 23, 2006 5:09:05 PM
upgradable
Posted by: Danielle | Mar 23, 2006 5:14:11 PM
Try and Buy
Posted by: Sean Winstead | Mar 23, 2006 5:14:15 PM
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