Finding a Freemium model that works for you

Chris Anderson
The Long Tail

November 12, 2008

I was chatting last night with the CEO of one of the biggest software-as-a-service companies about how he could release a version of his product with a freemium model. The options that seemed best for him were these four:

1) Time limited (30 days free, then pay. This is the Salesforce [ https://www.salesforce.com/form/signup/freetrial.jsp?d=70130000000Cp2w ] model)

Upside: Easy to do, low risk of cannibalization
Downside: Many potential customers will be unwilling to commit enough to give the software a real test, since they know that if they don't pay they'll get no benefit after 30 days.

2) Feature limited (basic version free, more sophisticated version paid. This is the WordPress [ http://wordpress.com/features/] model)

Upside: Best way to maximize reach. When customers convert to paid, they're doing it for the right reason (they understand the value of what they're paying for) and are likely to be more loyal and less price sensitive.
Downside: Need to create two versions of the product. If you put too many features in the free version, not enough people will convert. If you put too few, not enough will use it long enough to convert.

3) Seat limited (can be used by up to some number of people for free, but more than that is paid. This is the Intuit QuickBooks [ http://quickbooks.intuit.com/product/accounting-software/free-accounting-software.jsp ] model)

Upside: Easy to implement. Easy to understand
Downside: Might cannibalize the low end of the market.

4) Customer type limited (small and young companies get it free, bigger and older companies pay. This is the model used by Microsoft's BizSpark [ http://www.microsoftstartupzone.com/BizSpark/Pages/At_a_Glance.aspx ], where companies less than 3 years old and under $1 million in revenues get Microsoft's business software free.)

Upside: Charges companies according to their ability to pay. Get fast-growing companies early.
Downside: Complicated and hard-to-police verification process.

He hasn't decided which one to choose, but I like 3 and 4 best. They allow you to reach the largest potential market with the most useful product, and then convert the ones that are likely to be the best, most committed customers.