Update: Fred Wilson ironically has a new post up today (10 hours after I published this) titled, “Free vs. Paid.” It directly addresses my thoughts below...
Two years ago Fred Wilson Jared Lukin coined the term “freemiumâ€� to describe a new type of business model prevalent across web 2.0 products. The idea of freemium is offering a base of features for free and then up-selling additional premium features. Freemium isn’t scaling on a mass-level and these are my thoughts on why that is.
Theoretically, freemium makes great business sense as it allows two things:
1) Offering stuff for free creates the lowest possible barrier to adoption meaning that a product can quickly gain mass adoption while also establishing its value proposition to individual users
2) Ultimately as this value proposition is solidified, the true goal of freemium emerges: using “free” as a catalyst to entice/convert users into paying accounts
The problem with freemium is that while the model makes sense from the standpoint of sellers, buyers (the users) see freemium as something more akin to to “pay-lite;� an unintuitive concept. Sellers must offer enough free features so that users get enough value to become regular customers (and hopefully tell friends to join as well). As competitors emerge, they kill one another off in a Darwinian manner as each competitor offers more free stuff than the other guy until there is nothing premium left to up-sell.
Even without competitors, freemium still has big problems. Consumers are trained to act in black and white terms: we buy or we don’t buy. Because freemium products offer services for free that are ‘good enough,’ this new idea of hybrid consumerism — that we actually need ‘premium features’ (i.e. the status quo ISN’T ACTUALLY good enough) — is contrary to what we are accustomed. The idea of paying for something we already get for free is counter intuitive. Not only is it counter intuitive, but it’s a question we normally revisit once a month as we are informed that our monthly subscription charge has been drawn down. Remember the inflection point between free and paying is an enormous gap. Under freemium sellers delay that buying decision while also improving the free offering over time. It simply doesn’t make sense to most people why they’d ever need to pay.
When you are given something for free, it’s difficult to understand why you can’t obtain more for it for that same great price. And when you can’t get more for the same price, it’s natural for us to seek alternatives or create work-arounds. It is human nature that if you’re given an inch, you assume you can take a mile. Psychologically it is difficult to remain loyal when you’re given a sense of power (getting stuff for free) and then having that power stripped away. Any college student understands this concept as related to open bars. We’ll drink our faces off while it’s free; top shelf all the way! But as soon as it becomes a cash bar, we’ll downgrade to $3 beers, or leave the bar entirely.
I believe it will still be years before the consumer adapts to this new psychology of online buying en mass. In the meanwhile, we’ll need to develop different models and strategies that are less direct departures from the traditional pschology underpinning consumer behavior.