There are two old sayings in the enterprise: “You can always go down, you can never go up,” and “You’re only as good as the worst deal.”
To paraphrase, once you give something away for free, they’ll never pay you for it, and once some other idiot gives what you’re doing away for free, they’ll never pay you for it. Logic sometimes does prevail.
Recently, a monster enterprise start-up, that will remain nameless, gave a target client, whom will also remain nameless, their enterprise suite of products and services all for free. The start-up was able to market on the back of the client, ensure that no competitor approached the client, and identified a potential flagship customer in a target vertical. The client had nothing to risk or lose.
When the ugly white elephant finally reared it’s gigantic head and the
poor salesmen start-up asked said client to pay the $15/month/user fee, the client did the math (over $100K a month), shouted some expletives, and immediately stopped using the service. Talk about signalling issues, this is what we call a lost opportunity, or in consumer terms sticker shock.
To avoid the above scenario, a usually overlooked, yet simple plan entrepreneurs can execute from the get-go is a pricing strategy. However the popularity of freemium leads many to believe that it in itself is a plan. Where freemium may initially appear to be a strategy, it is in effect no strategy at all.
To be clear, a pricing strategy is a roadmap to improve profits from a good or service. The key word being “profits.” After studying the needs and behavior of the marketplace and analyzing costs, one can determine a competitive price. As with any plan, everything is subject to change: competition increases, volume rises, production halts, the powers of supply/demand prevail, etc.
According to Wikipedia, “freemium is a business model by which a product or service (typically a digital offering such as software, media, games or web services) is provided free of charge, but a premium is charged for advanced features, functionality, or virtual goods.” Notice no mention of advertising, where user data is utilized to tempt marketers, and no mention of profits.
The key distinction between freemium and a pricing strategy is that one is driven by profit and the other is driven by hope. The hope that users will actually use your service for free, the hope that they’ll click on banner ads, the hope that they’ll actually pay for something, sometime, somewhere, once you figure out what exactly that “that” is. Actually freemium doesn’t really sound like a model at all.
But like the Monkees said, “I’m a believer!” Freemium does work for a host of successful outliers companies. Radio and television are great examples. When you think of YouTube, Facebook, Google, Kiss FM, and NBC, they all exist for two reasons; to entertain and to distribute advertisements. The more entertaining, the more demand, the higher the price on the supply of advertisements and vice-versa.
Maybe the freemium definition should read as follows, “freemium is an advertising distribution model by which a product or service (typically an entertainment digital offering) is provided free of charge, but a premium is charged for clicks, views, advanced features, functionality, and virtual goods.”
So unless you have a distribution platform for the consumption of content in which virtual goods are sold, or have marketers pay to display ads, freemium is not an option. Ahem enterprise SaaS start-ups.
Remember clients put more value behind a paid service. It entitles them to have expectations and valuable opinions. Anything “free” immediately gets tossed into the “hobby” bin, especially in B2B.
Better to start high and work your way down, then to start low and have to beg and lose a client in the process. Put a pricing strategy together. Fret not, you can always work your way down to free later.