As freemium is rapidly growing in use among companies, this is an essential question to ask. Freemium entails giving away something for free in order to entice at least some customers to pay. Historically products have also been given away for free, but the difference from freemium being that free users were conditioned to an ensuing purchase. Freemium, however, entails that potentially most users of your product or service uses it for free. The problem is then how this can be economically viable.
According to Chris Anderson the primary enabler of freemium is the decreasing cost of digitized products and services on the Internet. What this enable is extremely low marginal costs, e.g. Evernote’s 9 cent per active user per month. MailChimp went from premium to freemium as they saw how cloud computing made their services cheaper to operate — and they benefited enormously, increasing their profit in their first freemium year by 650%. Thus, we see that freemium works for some, even though they have conversion rates in the single digits. And this is important. According to Phil Libin, Evernote created their business to be viable at 1% conversion rates. Thus, as long as Evernote is above this rate, they are economically viable.
So why is it economically viable to give away a product or service to most users for free? One answer is that it’s because it reduces costs considerably. Acquiring a new users can be extremely challenging and costly, but what happens if you crowdsource this process? What happens if word-of-mouth and network effects enable you to attract and acquire customers far faster and cheaper than before? When MailChimp went freemium after eight years of premium their numbers of paying customers increased by 150% in a year, at the same time as their cost of customer acquisition dropped considerably. Thus, there is still a quid pro quo with freemium — the free users are not using the service entirely for free. One of the ways they pay is by attracting new users. Thus, freemium can be seen as a marketing technique. (However, it is not a marketing technique everyone can choose without understanding the implications of free on their business — it is certainly not for everyone.)
However, if freemium is marketing, what happens if everyone started using freemium? Well, that I really don’t have an answer to yet. I think we have only seen the early beginnings of freemium. Dropbox is doing something extremely interesting when they incentivizes users to get others to register (by giving them more free space). I think we will see a lot of different strategies for optimizing the crowdsourcing of customer aquisition in the coming years. Additionally I really do believe we will see mutations from freemium into other interesting models. One of these mutations are Atlassian’s Causium model.
So I do think freemium is an economically viable model, but I also do believe we are no where near understanding the full potential of it. There is still a lot of interesting things that will happen the next few years, that’s the only thing I’m certain of.