Some of today big companies offer their services for free (Google, Facebook, Twitter, Linkedin, Slideshare, Youtube, etc.). They generate revenue through ads, having a paid version with more features or offering paid add-ons to users of the free product. This is known as freemium.
Should my product have a free version?
In order to benefit from offering a free version, your product must benefit from having a huge user base because of at least one of the reasons below:
- your product has many social features (Linkedin, Facebook, Twitter, Skype, etc.)
- your product needs user generated content (Slideshare, YouTube, Flickr, etc.)
- your product will attract a user base to whom you’ll be able to show paid ads (Google, Facebook, etc.)
- your product will attract a user base to whom you’ll be able to sell something in the future (Linkedin, Slideshare, Skype, etc.)
So before going freemium you need to understand why you are offering a free service. Then you need to figure out…
How do I make money to pay the costs of the free product?
After you figured out why you intend to offer to free service, you need to know how to generate some revenue because offering a free product will cost you money. All of the companies cited here had to figure out how to make money from their huge user bases. Here are some ways they used to generate their revenue:
- you can sell the attention of your users to advertisers (Google, Facebook, Twitter, Youtube, etc.)
- you can convince part of your user base to buy the paid version (Linkedin, Slideshare, etc.)
- you can convince part of your user base to buy one-time add-ons (Skype is the only example that comes to my mind with Skype credits)
Tip: If you decide to go freemium, don’t forget that you can only offer a free product if your marginal cost of adding another user to the product user base is as close to zero as possible, otherwise it won’t be a sustainable product and your urge for revenue may kill your freemium product.
Freemium is a viable business model but before offering a freemium product, you need to figure out:
- why offering this product as a freemium might make sense
- how you intend to make money to cover this product costs
- the marginal cost of adding another user to this product user base must be as close to zero as possible