The “Freemium” Business Model: It’s Not a Slam Dunk

Is it possible to make money by giving your product away? Adobe (PDF Reader) and Adobe’s acquisition of Macromedia (Shockwave Player) have proved it. Web 2.0 has allowed consumers to get a lot for free thanks to different monetization methods.

Should you give your product away? But that’s a different question.

Freemium is a business model that wraps up free services to sell a higher level of service. The user does not pay upfront, so there is no hesitation in adopting. According to the theory, consumers will purchase the premium versions as they gain more comfort.

Theoretically, when the consumer’s risk is mitigated, they will feel loyal and loyal towards the company. This model should encourage viral adoption, usage, and consumer loyalty.

The theory is excellent, but the reality isn’t as simple as it appears.

For a company to be sustainable, it needs cash flow, solid relationships with partners, customers, and employees, and products and services valued on the market. Here are some reasons why you shouldn’t give the store away:

If you’re a business owner, managing payments is essential

You’ll find that most of the costs you incur in developing software or hardware are upfront and fall in the period before launch. Cash flow is a crucial business measurement. You won’t last very long if you can’t handle money, returns, and transactions, even with a freemium business model.

It is essential to convert as many sales as possible to the premium version. It is vital that the system you choose be accurate, reliable, and tested. Trust is the key to successful transactions. If you mishandle a transaction, the customer will not use your product or service, no matter how cool it is.

Perception drives value

Most customers will not use the free product but will value their time. Understandably, people are wary of startups that offer free products. They don’t know if you will still be around in 6 months. There is no such thing as a free lunch. Do not insult their intelligence.

Loyalty + trust = Relationship

Why do I buy Logitech products and trust them? It’s because the technology has been proven through many uses. I also love how its products are always more than I expected. Will another vendor offer me a free item? I may look, but I will unlikely purchase it because I love my Logitech mouse and keyboard.

Price is not my primary determining factor when purchasing. Even if the price difference were significant, it would be minimal compared to my trust in the products and my confidence that they will make things right if a problem arises.

The price difference between a retail product and a freemium can be as little as pennies per dollar over the life of the device. I enjoy knowing that everything will work, and the cost to acclimate to new tools keeps me loyal to my current setup.

Some free products lack the technical chops

I’ve seen a lot of free software. Some of it did not work as I had hoped. Friends tell me that NewsGator is still not up to par and that I should wait until Skype’s quality improves before using it with clients. I expect a lot from ease of use. Adobe Acrobat is precisely what I need it to be. I bought the whole package many years ago without hesitation. Free does not equate with poor quality. Poor quality can also erode the value of your brand.

Customer feedback may be less enthusiastic and less complete

Customers who use your free service or product have no relationship with you. In tech companies, customer feedback is crucial to ensure that bugs are fixed and that the development team has objective information. This will help make the next version’s new features a real improvement that users want. Apple’s OS is an excellent example of how the collective feedback from loyal users helps improve products.

Many companies that offer free products lack multiple revenue streams

Finding new revenue streams requires creativity. Other cash-generating ways include advertising, customer service, surveys, and channel or partner fees.

Investing for the long term is the key to the success of the freemium model. This means that you and your business plan to still be around in 2020, hopefully servicing the same customers as you did during last quarter’s launch.

I find it laudable that Cory Doctorow gives away his books online. It’s a great way to spread knowledge. I like that the Web allows him to distribute nearly a million free books. Keep in mind that Cory is not a company.

Customers must know that the company is committed to staying in business and growing. I don’t wish for pictures of my son, uploaded to a free service, to be lost in the ether just because AcmeDrive could not find a viable business model.

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