Death to Freemium

April 19, 2012 — Leave a comment


By Dmitri Leonov – @dmitri

There’s a psychological barrier to paying online, and it needs to stop.

We pay for things in real life every day.  We don’t hesitate to drop a fifty for a tank of gas, or $4 for a cup of coffee.  But when it comes to paying for $5 for an online service that actually delivers significant value – it’s a no-no.  I’ve been guilty of this for years myself, and now that I’m sitting on the other side of Paypal,  I see the light, and have started to pay for web services that I value.

Why is this happening? Why is there a perception that everything online should be free?

Is it Google’s fault? Yes.  Google is offering a ton of services for free because it has become an incubator – it’s incubating and releasing a ton of best-in-class products, knowing that Adwords will pay for everything.  As a result, no service that Google offers will ever be able to charge money (except in France: Other internet  giants are guilty of this as well.

Is it the fault of VCs? Yes.  For venture backed companies the key to success is a large user base.  Monetization of that user base is a secondary priority. And if all else fails, you can get acquired for $1 billion.

The VC model is based on 1 home run. They don’t care if 99 of their portfolio companies fail, but as long as 1 gets sold for $1 billion, they are happy.  A decent double-digit-millions exit is not exciting to them. So when faced with a fork in the road: a) build a sustainable business with a real business model, or b) give the product away for free to grow as fast as possible, thus treating your free users as a marketing cost – the incentive is to go for option b.  Go big or go home. Or don’t raise money.

Is it your fault?  Yes.  Stop being cheap. Just because something is “virtual”, doesn’t mean it’s not valuable.  Ask yourself: “Is this more valuable than a vanilla latte?”

Freemium is bad for business

In the last couple of years I’ve heard a ton of startups (myself included) answer the “How do you make money” question with “Freemium, duh!”  There are a many shiny examples of widely successful freemium companies that killed it.  But they are exceptions, and unfortunately they set a bad example.

As a business, you can’t pray that enough of free users will convert to paying customers.  The decision to go premium should be based not on philosophy, but on math.  You have to model everything out. Say without freemium you get 100 leads and convert 10% to paying customers.  You think by going freemium you could grow your number of leads by a factor of X.  But of the original 10% paying users converts, 9% would now choose the free option, and only 1% would pay.  In this case you have to be damn sure that X>10 in order for this to not destroy your business.  This is why it’s hard to make money with freemium:

Freemium is bad for the users

I’m a happy user of my friend’s service.  The service is free, although I would happily pay for it.  Earlier this week I found out that my friend is killing the product because there’s no viable business model. I was pissed.  Here’s a product that’s valuable to me, but I can’t use it.  If only these guys just charged their users, there would be no problem. (I realize I may be an exception, and there’s no actual market for this service, but that’s not the point).

The only real way for founders/investors to get ROI on free services is to sell the business. When a free(mium) service gets acquired for it’s technology, user base or talent, the users get an excited email from the CEO saying something like “We’re proud to become a part of the <insert large company name here> family!  Rest assured that our service will continue as is.”  This is the last time they hear from the CEO, who no longer gives a shit about the users.  So you get the same outcome as with my friend’s service which shut down.

Death to Freemium

This perception that stuff online should be free makes it harder and harder for new businesses to charge money for value.  If a freemium paywall happened in the real world as frequently as it does online, stuff would break pretty quickly:

“You can get 10 gallons of gas for free, but if you want more, you have to pay”

“Get a Big Mac and fries for free, but if you want a soda, you have to pay”

All these problems go away when we realize that it’s ok to pay for stuff we like. We need to apply the normal real world economics to online pricing.  Then companies can build products and charge a price commensurate with value.

PS: As I’m writing this, I’ve heard the same stupid ad on Spotify 5 times (seriously every 2 songs).  Time to drink the koolaid and pay for a premium subscription.

By Dmitri Leonov

(All opinions in this post are mine, and don’t necessarily reflect the position of SaneBox on this issue)

No Comments

Be the first to start the conversation!

What do you think?

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s