Aaron Levie is the CEO and co-founder of Box.net, founded in 2005 with the goal of helping people and businesses easily access and share information from anywhere. Box.net is now used by millions of individuals, small businesses, and Fortune 500 enterprises worldwide.
There’s now a lot of buzz debating the business model of “Free” with the release of Chris Anderson’s new book. Most of the conversation has focused on free media and free consumer services, but ultimately the effects and expectations of free in our consumer lives will begin to emerge within our business lives. Today, there’s no shortage of examples of free or “freemium” business software, from commercial services (37Signals, PBworks, Google Apps) to open source (Mysql, SugarCRM), yet, there’s still a great divide of SaaS solutions selling their software with an “older” format (Salesforce.com) and even some with a really old model (SharePoint). Simply judging by the relative market caps of companies pursuing each model, no one in SaaS has built up a substantial enterprise business yet with the model of free or freemium alone. Mysql only got to $50M in revenue before it was acquired, and the majority of freemium enterprise service providers are still in the tens-of-millions range, with few exceptions.
Mark Cuban brings an interesting point to the debate: when you live by your free service, you die by your free service. There’s certainly merit in this argument if your business model is an advertising model based on pageview volume alone or if you’re holding up solely because of venture capital. When your uniqueness and flavor dries up, so may your users, and thus your revenue and funding. This was generally Mark’s concern when we introduced the free version early in 2006 (he was an early investor in Box, with no current stake): Why would people ever pay? How do you avoid just eating up a ton of costs with no revenue to supplement? What about when someone else comes out with a version of your service that’s also free with more bells and whistles? How will you remain competitive?
To put one main argument to rest, we’ve learned that there is no business model in Free alone (duh), while there may just be a large business model in Freemium in time. There are a few reasons why the freemium model has enabled new software products to grab significant market share while also build a strong enterprise business in the face of dozens of startup competitors and giants like (both free and pay). This model allows you to surface your service to a much wider customer base (cross vertical, geography, function) and learn from and efficiently attract all types of users onto the service. And – more significantly – maintaining a free version of your service for a single user or small group is a very efficient way to get users to eventually actually pay for your product: customers can quickly try out your service without a lengthy sales pitch and users with limited requirements can get by for free, but recommend the business version to their company when the time is right.
Take a look at Google Apps for a great example of this model done right. You can use as much Gmail and Calendar as you want as a single user or small group, but if you want the real business version on your domain, it’s time to pay up (see their 15,000 seat Genentech deal). Instead of spending large amounts of money on marketing that tells people about a product, create a community of free users and create evangelists in the process. It also helps avoid the risk of competitors coming in and undercutting your costs – fun fact: when in a sales “bake off,” Box.net loses the largest amount of deals to ourselves, not to another service.
Let me emphasize that in case you missed it: Not everyone will find the same value in your product or service. For those that don’t, why not keep them as users and turn them into evangelists?
Freemium allows the actual consumer of the technology to make decisions in an unprecedented way: if the product doesn’t solve their problem, they move on to something else. This forces you to create better, more usable products, and not simply build your business on aggressive and costly marketing and sales. Instead of focusing primarily on the purchasing party (often an IT or department manager), the model is inverted, with more power being put in the hands of the end-user of the technology. Onerous contracts and deep sales relationships don’t keep them there. This means your product has to rock, and it has to constantly be asking and answering the same fundamental question: are we providing the best valuable possible? If you’re not, Free users will leave and the rest certainly will never pay.
Freemium is also great strategy for products that have high switching costs – why not allow me to start using a free version, get hooked, and begin charging me when I hit a threshold of activity? Every day, in our own business, we have to make budget decisions on new software which can ultimately hold up the purchase by months; whereas if we were able to start using the product immediately we’d quickly hit a usage threshold, and we’d be more convinced about the solution at the point of purchase (no more buyers remorse). Instead, we end up doing a price bake off between multiple solutions, and whoever has the better sales rep and “story” essentially wins. What if Salesforce.com gave you the first 100 contacts for free, then you start paying once you need more? Once my first 100 leads are added into SalesForce, I’m not going anywhere else. If your service offers true ROI once implemented, why not let me implement it for free and charge me once I achieve some success? These strategies will reduce the sales friction of any service, allow businesses to be more competitive, and expand the potential market dramatically.
The great news is that because software distribution and sales models are adapting with the times, the number of people that can now access and afford your product has gone up exponentially in the past decade. Given the fact that we can now develop and deliver software much more easily and cheaply (distribution over the web vs. hardware and software sales), and thus reflect these cost improvements onto customers, we can now go after much larger or harder to reach markets more efficiently (small businesses, for instance). With the right product, reaching 10 million potential business users and customers is now trivial. Imagine doing that 10 or 20 years ago. And with an addressable market in the millions of users, it becomes a lot more practical than ever before to make a meaningful business just selling to a subset of that base.
So what to take from all this? Here are some quick lessons we’ve learned from “Free” in the enterprise:
- Free is not a business model, it’s a marketing and distribution tactic. Don’t forget this, and don’t get distracted into thinking otherwise.
- Free is not an excuse to make a lesser product, in fact it forces you to make a better product or no one will ever pay.
- Free will expand your market size and scope instantly; make sure you’re prepared, and make sure you can survive and thrive if only a subset ultimately pay you.
- Freemium works when you know who will want to pay for the service and what extra bells they will pay for. This can be based on usage thresholds, ROI achieved, more features, better support, etc.
- Freemium also works because larger businesses have specialized requirements that they’ll pay for: more security, more users, better management, etc.
- Treat free as an advantage – learn from all those new potential customers of your product, pay attention and allow niches to emerge that you can sell to.
- Lose customers to yourself, not your competitors
This discussion certainly isn’t over. We’re going through a major sea change. It happened to music, it happened to consumer services, it’s happening to newspapers and publishing, and it will happen to business software. The business models are changing. It means software businesses will need to be innovative and adaptable, but ultimately you’ll survive if people want what you have to offer, regardless of the price tag. Of course there will always be room for premium software to be pay-only, just like we still expect to pay a premium for a variety of content in the “real” world (movies, research reports, education, etc); but, for mass penetration the reality is Free and Freemium will you get there quicker, faster, and with less friction along the way. If that’s what you’re looking for, then it’s just up to you to figure out the actual business model if you want it to last.
That was the worst Mark Cuban post in a while.
Basically all he says is all companies are gonna die one day! Well DOH-licious!
Nothing he says applies just to “free” companies.
I read Mark Cuban’s post and I don’t think it is the “worst” post. Many of his points are valid.
Freemium isn’t a magic want and as Andrew Erlichson opined in his excellent counter argument to Freemium:
Freemium makes sense when at least one of the following conditions are true
1. Free users have zero marginal cost to the company. True for Skype and other P2P services that get participants to volunteer infrastructure.
2. The value of the product to a prospective customer depends on their being a large network. True in dating, Skype, Facebook, Ebay and Twitter.
3. The business can be run ad supported.
http://blog.pha...k-for-phanfare/
Nonetheless, thanks Aaron for a well written and articulated post.
Hi Niyi–
Thanks for the link from Phanfare – I’ve followed them peripherally, but didn’t know their exact experiences from freemium. I totally agree on the 3 points of when a ‘consumer’ service can support a freemium model (near zero marginal cost, network effect, ad supported).
That being said, their view is from a consumer angle. In this case, the problem is even your Paying base won’t be paying more than $10/mo ever for your service. That means if 1-3% of your total base of users pay $10/mo, you still don’t have a very large business. I didn’t highlight this in my post (now I’m realizing I should have), but the cost of enterprise/business SaaS can be justified into the thousands/month. Upselling a small percent of your user-base now can represent a very meaningful revenue stream. Additionally, a large amount of business software often provides actual ROI (which we don’t really think of in our consumer lives – what’s the ROI of family video sharing?). If enterprise solutions could figure out a way to get their product in the door, then charge on ROI delivery, we’d be seeing way more deals happen and cooler software come out of it…
Thoughts?
Nice post. Another point perhaps worth mentioning is that members of your free service may sometimes VOLUNTEER to help your service if it’s of real value to them.
On my website for collectors, over a hundred collectors volunteered to help out. Some of them are doing a tremendous effort on a daily basis. They are responsible for a lot of the value enjoyed by other members.
Someone might want to get Facebook to read this, they should try adding some more services rather than just copying twitter. Crowdsourcing is great, especially for charities and volunteering, maybe FB will become a non-profit!
Hi Aaron,
I’m glad you mentioned Enterprise SaaS. The margins are very high and when your production costs are low, or sunk, you can build a very profitable business easily with strong free cashflow.
Furthermore, from my experience, I’ve discovered that a lot businesses don’t really care if your product is free or costs a couple of 100 bucks a month.
They are more concerned about those magical 3 letters you mentioned – ROI.
Since ROI is linked to the cost price, you clearly have to get your pricing right but nothing, absolutely nothing beats delivering great value and great customer service.
That, is where I believe startups should direct their focus.
Agree completely. We at SurveyGizmo have found freemium to work pretty much exactly as you describe. We didn’t raise venture capital and have grown like a weed straight through the downturn. ROI is very provable, and we compete with a ton of other providers using the same model (in other words we’re not just unsustainably poaching customers by being free).
Cuban’s post screams “if it’s free, then how do you deal with it when someone makes a better product?”
Well, hello? What are you gonna do when someone makes a better product than you, PERIOD?
Or what if someone makes the SAME product as you and makes it FREE?
I love Cuban. But that post is so darn subpar Cuban’s typically high standards.
I thought you Americans learn the nothing is free in your first high-school business class?
Microsoft create free-ware in order to help crush Netscape with Explorer. Microsoft is working on a new model to crush Google, check back soon.
You blogtards seem to only copy simplton ideas.
A great post. Good sensible argument, and I especially like your point that Free is Not a Business Model. In fact, all bulleted points are well stated.
Thanks for taking the time to share your insights on this.
What argument? What a dumb post.
Decent read, except for the use of the Google Apps/Genentech example as a “model done right”.
The CEO of Genentech is on Google’s board for crying out loud. It has never been and never will be a good case example for Google Apps making traction within enterprises. It’s just incestuous Valley love. When the deal was consumated (pun intended) Google was so desperate for a case example, I would be surprised if Genentech even wound up paying the full $50/seat.
Yeah, good point..
I love these people who have never sold a piece of enterprise software in their career.
They go out and search for an enterprise sales VP. Then they find out from the enterprise software VP that they don’t actually have a product. Then they raise another round and replace the founder with a different enterprise sales VP with an disabused rolodex. Then the VCs insist on hiring a marketing MBA. Then the marketing MBA outsources all the work to a PR firm and ad agency. Then they raise another round and hire engineers to build enterprise software. Then they ship it. Then the marketing MBA writes a value proposition. Then they hire a sales VP. Then the sales VP tells the CEO that the marketing proposition is wrong. Then they acquire a company. Then they reorganize. Then they raise another round and change their website. And so on. You get the idea.
Not always true, but true enough of the time. Don’t know if I’m supposed to laugh or not.
I think it ws better when the corporations were doing the R&D investment, not the VCs. It’s a lot harder for a business unit to hide their errors. The VCs simply say it was someone else’s fault, never their own stupid investment idea in the first place.
wasnt this on npr?
These discussions always forget basic economics: when the cost to deliver a service is near-zero, the price will trend towards zero. Further, 0.00 is a magical price. Even 1 penny introduces a lot of friction.
Good points made. No mention of micro payments, which is 15 years overdue and I think would go a long way toward making online ventures more feasible long term.
Aiming to be the best free online service is like aiming to win the special olympics.
If you’re wondering what I’ve been doing all these months besides working and receiving work share benefits, I’ve been building a massive online service that targets people actually being pillaged by profitable online service companies.
And my goal is to undercut their fees, not to make the service free.
Nice special olympics digg.
“For those that don’t, why not keep them as users and turn them into evangelists?”
is brilliantly said. It applies to me in case of Pandora (probably not Gmail).
I love Pandora as long as I can use it free of cost. I don’t use it so much as I would ever reach their top 10% users but I love it and I tweet about how I love it. I have also gotten quite a few friends hooked up on it.
Yeah, I think I can understand your point in this article. Thanks.
Great post, and some good points.
I think the point that I’d re-emphasize is:
“Free forces you to make a better product”. A bigger point is the rise of importance of the user experience for enterprise applications over the last 5 years or so. I used to implement large scale enterprise financial applications over 10 years ago and was embarrassed at the end-user experience that our clients had to deal with. This is because the user’s opinions didn’t mater after the sales team sold a multimillion $ implementation.
Now, with Salesforce.com, Box.net and other successful SaaS model businesses, the “sale” is less dependent upon a sales force and more dependent upon the acceptance of the users by way of the app’s usability and function. So, this is a great post about a distribution strategy, but remember it leads to emphasis on building stuff people want and focusing on a great product.
Enterprise software users, rise up and demand good products!
old hat. Clearly shows the fear of thinking big. The greatest value is building the network. It takes guts to go free all the way. Freemium isn’t free – it’s called Shareware. It’s been around forever.
Real free takes scale. Look at companies like Spiceworks for example of how to go free all the way. The same concept will show up in other industries in the future. The truly brave entrepreneur will take the chance and go free all the way. Not cop-out with a freemium model.
I remember trying box.net and I had a horrible experience. First off nothing worked and the so called free model which they had back then was free for 7 days with a CC… which I find shaddy because they are assuming a % of people will forget to cancel.. and then I couldn’t cancel my account online because they said it wasn’t secure.. To me if a company is saying you have to call to cancel then you are saying your sign in is not secure.. then I called and the lady gave me a hassle… so I told them over email I would youtube, twitter, blog there asses if they did not cancel my account..and what do you know they canceled it over email. Glad to see they got rid of the 7 day freemium with CC model… and the free service does work. Look at Mozy…
The core question is whether any substantive *value* is being created via the freemium model.
Sure, Google et. al. have built high-value businesses around search (though not yet around anything else). But outside of search we have yet to see a company with a true freemium strategy build a liquid $B capitalization.
The best proxy for this may, in fact, be Craigslist, one of the first freemium players. Billions of dollars in classified advertising revenue didn’t shift to a new player; it simply evaporated.
That’s probably the reality going forward: the price of software — both enterprise and consumer — is going to continue to fall in absolute terms. Part of that is due to significantly lower costs: tools are better and cheaper, support is increasingly self-service, and the community is your sales and marketing department.
All of this is great for customers, and probably for entrepreneurs (more, smaller successes).
But for investors? I wonder whether the capital funding these businesses isn’t really hoping for the kind of exits we used to see with the big enterprise software plays.
Is there a free/freemium Oracle out there? Siebel? Microsoft? Intuit? Sun?
Doubtful.
Another nail in the venture capital coffin.
Is there a free/freemium Oracle out there?
MySQL
Siebel?
There are too many free CRMs to name
Microsoft?
Google
Intuit?
Mint
Sun?
Sun is already freeware. It’s so free that they are practically bankrupt right now.
If you are talking about their hardware/solaris, talk RedHat and the Fedora project.
Shame on me, I compared Netra/Fire to Fedora. OK, swap that out with CentOS/Dell.
Chris,
I agree with all of the examples you cite. They’re all (or mostly) excellent products.
But exactly none of them has created a big company, much less a big market cap.
Sun went free as a last-ditch effort to remain relevant after its business was decimated by free offerings from others.
Red Hat is probably the most successful of the freemium businesses, and has less than $700M in revenues.
My point is not about the viability of free/freemium business models, but rather the ability of such businesses to generate venture-style returns.
Actually Sun went “free” (and open source) for exactly the reason mentioned in the article – it was seen as a distribution tactic. Zero barrier of entry for developers to use any part of the sw stack in return for building apps on the platforms Sun could monetize (enterprise infrastructure sw and the hw). You can make a strong argument that the first part of the strategy worked – the issue was the hw never kept up w/the level on innovation needed to differentiate (meaning the apps ran just as well on Windows, Linux, etc.)
{sigh}
Unfortunately, Aaron’s views are slightly off and (with all respect) often the views of those who are relatively new to this game.
As he himself states “no one in SaaS has built up a substantial enterprise business yet with the model of free or freemium alone.”
This is exactly right. Even 37signals took years to build a client-base and create a relatively large scale business and they were one of the web 2.0 pioneers.
I’ll put this very simply – people associate the relative worth of something with the amount they pay for that service or item. It’s that simple. If you pay nothing for a service, NO MATTER HOW GOOD IT IS, they will always, ALWAYS in the back of their mind view it as something that should be free. What do you think would happen if Google started charging for Gmail if you have more than XXX hundred emails? Do you honestly think that the millions of die-hard Gmail fans would simply take our their credit card?
The answer is no. Why? Because gmail never charged for the service. Neither did Yahoo with Yahoo Mail or any of the others. Look what happened when Yahoo launched Yahoo Mail Premium. Massive exodus.
Freemium is NOT the right way of moving someone from TRYING a product to BUYING it. A TRIAL is. Freemium might create a handful of evangelists, but evangelists that don’t find enough value in my service to actually pay for it spreading the word about “how great this service is, but I wouldn’t pay for it” are evangelists a successful business should do without.
Freemium models are often those undertaken by people simply scared to go out and charge. It’s ok to be free in private or early beta, but eventually if you have a service worth paying for, that model should be dropped and you should offer a trial.
Trials let people know that there is a VALUE associate with this service. The psychology of the user is considerably different.
Ask anyone who is on their third or fourth SaaS offering and have been their screaming about why they can’t convert long-term users and you will understand.
Freemium is not a good model, unless you don’t know which direction you are heading.
Trials stink. They frequently require a credit card and they completely screw up the decision timeline. Feemium as a much better approach.
This begs the question: Would Google have made more money if Gmail was offered as a trial instead of a freemium service?
I think not.
(sigh!!!)
(With respect)
I would say your views are slightly outdated. They represent the mindset of the old order:
1. The customer is too ignorant to make decisions on their own.
2. The customer is too ignorant to recognize a value proposition.
This perpetuates the arrogant myth that the provider is the one in charge. Hint: it’s really the customer.
I take quite the opposite stance as you, in that I would gladly pay for services that I’ve come to rely on, AND have proven they work for me. The only way I can do that is by using it every day, in the capacity in which I need to use it.
I have never paid for Gmail, but I’ve used it everyday for many, many years. I do believe it is a service I would pay for. (Yahoo mail I use as my spam catcher, it’s a horrible product) And to Aaron’s point, in my capacity as an IT consultant, I’ve setup several paying companies on Google Apps for domains. I’ve sold the hell out of Google… gladly. It just works. In contrast, put a damn trial page between me and your product, and you can be sure I’ll move to the next search result in my quest for a solution.
Customers are not stupid. Trust them and they will reciprocate.
You mistake slow growth for no growth. There is a new order. The onus is on the service provider to innovate. ROI will take longer. I see nothing wrong with that.
@jd – I am IN NO WAY suggesting a credit card for a trial. That is a very quick way to lose a prospect. A trial provides the EXACT SAME idea that Aaron is pitching about letting them try the service first until they reach a certain “point” (time or other) and then you simply shut it off or ask them to pay. The difference is in the *perception of value*
@pc – @UncleMatt – Perhaps my _mention_ of Gmail as an example was confusing. I never suggested that they charge, it’s a completely different model BUILT on volume and advertising.
For the rest of us building SaaS services without the volume of a Google, you should think long and hard about how you want the value or your service perceived before charging a “freemium”
Josh, I agree 100% with you. The perception customers have with “free” is it’s disposable, of less value than something that is not free. I know people will angrily disagree with me here, but this is true for your common person online. I’ve also found that offering something free invites many casual speculators. They often do the opposite to “evangalising” – they say your product’s not great or even sucks because they didn’t invest in it (invest in time or money) – they didn’t “get it” because there was no barrier to entry, no commitment. They signed up, “didn’t get it”, and left saying negative things about your product/service. Your true customers WANT to climb over that barrier – the very act of committing to a product or service is something people LIKE to do. They are ambivilant about free because free is not exclusive. Free is free for everyone. Paying for a product or service is a way for a customer to say: THIS ROCKS. I love it. And I WANT to pay for it. And because I’m committing myself, I’m going to invest my time into this product or service. And by doing so, they become true evangalists.
One final point : I’ve found “freetards” to be the most difficult-to-please people. You will answer : “that’s great! They will make your product better!”. No. They. Won’t. They are difficult to please precisely because there is no REAL relationship between the vendor and the customer. No transaction took place. And this ambiguity leads to trouble as they see themselves as customers first, and maybe not even a fan of your product or service. They’re in some ways interlopers. A paying customer has already bought into your concept and is somewhat a “fan” of your product/service and a lot easier to manage from that point of view (unless, of course, you end up over-promising and under-delivering, then it’s fair enough that paying customers voice complaints).
I know all of this from hard experience. I offered websites for free, for low cost, for reasonable cost – across the board. Now I pitch the price VERY carefully because I know at a certain price point you get decent customers who are willing to commit their time and money to our service and not just disabuse us because there’s no barrier to entry.
@Andrew, @Josh
And what I’m saying is, listen to yourselves, listen to your arguments, then take a step back and think for a moment.
If free is a barrier to entry for your product… you’ve got serious issues with your product. Don’t blame the poor ‘freetards,’ don’t shoot the mesenger.
@UncleMatt -
Sorry, can you explain that one to me. How is “free” a barrier to entry for a product? How do you see my argument as stating that?
I’m simply saying that one should consider a free TRIAL as opposed to a free VERSION that they hope to upsell so the psychology of the user is “this thing that I am TRYING has a $$$ value to it.”
The one caveat to this is IF the value of the user is greater than the dollar value from the sale (i.e. you use their data to sell other products or the like) then obviously we are looking at a different model but when placing FREE up against TRIAL, I guarantee that the conversion rates of those using the same product when positioned as free versus trial will be dramatically different.
If someone is claiming that users find no value in their product… because it’s free… they’re claiming ‘free’ as the barrier to entry. Yes, it’s rediculous, that was the point.
But flip answers aside… I won’t argue that quip… if we just had some beer, this would be a great conversation.
I think your point about conversion rate is missing a bigger picture; and, I will have to defer to my wife’s argument to explain. She works in web analytics. Every day she gets asked if this or that has raised conversion rate on a website. And every day she asks the same question back: what does conversion rate have to do with anything?
Conversion rate means nothing. As a matter of fact, a drop in conversion rate can be a wonderful thing… it means you’ve driven more traffic to your site. Not everyone buys.
My point, and maybe that of the author, is: would you rather have a conversion rate of 100% with 500 users… or a conversion rate of 1% with 50,000 users?
The law of diminishing returns mandates that you’ll hit a brick wall sooner or later (pay model). Better to keep the rest of the users around regardless (free model). Pure economics.
Josh/Aaron – No company has made it using a freemium model? j2 Global built a pretty good business ($30 million in free cash flow last quarter) largely using a free to paid model for fax.
Free will always win out over paid.
“Free” is a business model used by drug dealers since the roaring sixties. First get them addicted, then start charging them. Nothing new here.
This is a very insightful post. Thank you.
Very interesting post and very relevant to startups planning their marketing tactics / business models. I recently attended Doug Richard’s School For Startups (ex Dragon from Dragon’s den and Founder of TruTap):
http://www.scho...rstartups.co.uk
At one of these events Doug mentioned “Creating Envy” when finding that fine line between Free and Premium. I think he hit the nail on the head. I would recommend this event to anyone serious about sowing the seeds for their business success.
great article. i particulary like the point “Free is not a business model, it’s a marketing and distribution tactic. Don’t forget this, and don’t get distracted into thinking otherwise.”
Free might be the future business model in current internet era but certainly not the future!
I think the world is moving toward “free” business. Why would you download a hundreds of dollar photoshop while you can just go to phazeddl and download the portable version of photoshop? You get what i mean? How many dumb people on the net keep buying virtual goods while most of us can easily go to other sites and get them for free? Google has achieved a very big success because it’s free. Facebook free, Twitter free, and all the big companies provide free services.
eBay and Amazon can’t be counted in the competition since they sell real stuffs (not software or virtual stuffs that you can easily get for free from warez site/forum)
Free may get you users but are they the users you really want? I think not…
Here’s my take on how I think “Free” will ultimately become a bad choice and fail and “Paid” will take it’s place.
“Father Guido Sarducci on the Free” versus “Paid” Internet Debate”
http://over40in...ree-versus.html
Just stumbled across this:
Tien Tzuo of SalesForce talking at Stanford University:
http://ecorner....o.html?mid=1667
Everyone starting a business should watch stanford.edu
Great article. We use the term “evangelists” for the customers who use our product for free as well. When you study your site traffic, every visitor that bounces or abandons a sign up page is a lost chance to spread your message. And in our world the vast majority of our visitors bounce or leave after a few pages.
In this world, why not try to position your software to retain as many of those 70, 80 or 90 percent of visitors that usually leave as possible? What is worth more to you—the people leaving and never coming back, or the people using your product in a limited capacity that does not hurt your bottom line, while turning them into either evangelists—or quite possibly—customers?
That said, I think what we all need to learn is to not give away great products for free if we are trying to build a business. If we give away the enchilada, we are all collectively dragging down the market value of what we sell.
We can’t keep saying “free alone” works and then use the same five or six companies as proof it works. Google is over ten years old, and they certainly don’t give away Adwords for free. That’s the common thing people miss about Google. Search is free. The multi-billion dollar advertising enchilada is far from free.
I think Techcrunch should cover open-source enterprise software companies more. It is an interesting topic and software like OpenERP are starting to challenge established companies like SAP or Oracle.
Open Core as a business model has been very good to us at MindTouch. By Open Core I mean a free and open source core of the product that paid for value adds are stacked atop. This works very well in enterprise software. I wrote about how this has worked for MindTouch a few days ago: http://www.mind...fies-recession/
Free doesn’t work for me.
As a software house I want to focus on developing useful software, software that people have a specific need for. I don’t want to create something frivolous and I certainly don’t want to have to support it with ads!
As a consumer, it still doesn’t work for me. If everyone is competing on free, that means that I’ll end up wading through huge amounts of rubbish trying to find something that really works. Then when I find it I have to contend with ads all the time. And since the companies’ revenue is not directly tied to their software, its usefulness or functionality, it’s quite possible they can go out of business at any time.
A ferrari has never been free, but then they have higher aspirations than just getting everyone rolling on something with wheels and an advertising board.
I agree with the Aaron’s main argument that freemium is the right path to take by SaaS providers. But at the begging (like my company binfire.com) we believe to get traction we should offer the free model first and later offer freemium services.
YES the future is free. More companies are going to follow this concept.
are we all going to be unemployed?
I don’t believe there is a choice between “free” or “premium” (unless you are pure play, old fashioned enterprise SW or a dot org). You need the “premium” to make money, and you need the “free” for the hockey-stick. The “free” will have to have a clear purpose though….is it about reaching scale, ubiquity or building a low-cost lead generation platform or all of them combined?
The real question is, what comes first? The “premium” or the “free”. For applications that bring value to businesses, in todays environment, throwing out things for free first is a luxury.
Build a robust business first, demonstrate the value you can bring, then add something for free to get to scale.
In enterprise software, cost is not just about how many direct $$$ you pay or even the human cost to install, configure and rollout. Implementing enterprise software often has a organization cost and associated huge switching cost. Anyone who has been here before knows this. Once you are deep into Saleforce.com, turning your organization in a new direction is very costly, so the ‘better’ solution talked about needs to be really, really ‘better’. Often godlike better… That said, freemium is a great model to get the customer out of discussion mode and into a real evaluation. Enterprise software vendors who are scared of this model, usually have good reason to not want their prospects getting too close to the software too soon. And yes, this is where well build solutions can shine, really compress the sales cycle and create a very effective challenge for their non-freemium competitors.
We are just about ready to release a major part of enterprise software for free. It is currently a VERY expensive product our competitor sells and we believe that by giving it away it can help us further penetrate the market. I totally agree with this post. freemimum is a great way to reduce sales and marketing costs of enterprise software. I posted about this on my blog http://blog.cos...tial.com/?p=333
Why would I listen to a 16 year old attempt to teach me about enterprise software?
BTW, SFDC is not enterprise software, it’s a CRM. Big difference.
You should listen to Aaron because he’s wicked smart, not 16 (at least 19
), and usually (young BillG, Scott & Andy@Sun…) it’s the young who set the trends in the enterprise.
[44-year-old CEO who learns from the young guns]
A few personal learnings (making money the old-fashioned way):
1. The point of earning revenue and using that revenue to improve your product to stay ahead of the competition seems to be lost on the current generation. This is also the missing link in Mark Cuban’s blog. A free product without unlimited VC money is not going to be able to compete with the next free product that comes along with some more VC money and improving on your product having learnt at your expense.
2. There is an inverse relationship between mass appeal and pricing. The higher the mass appeal, more likely you will find some big company doing this for free or at a very low cost in the future. A niche market can run high margins if your product has value. Pick your trade-off point carefully. This goes against the Web 2.0 goals of making it big with a zillion users with a mass-appeal idea. Very difficult to do without the established players “copying” it away without patent protection and/or luck. Friendfeed is a good example.
3. Any software that is protected by a hardware barrier to entry can be sold much more easily. Third party software on such platforms can be small business shops but cannot grow to be giants. Amount of VC money thrown at Facebook and iPhone apps is silly.
1. The current generation leverages the input from its users (open source) to satisfy its users. That point seems to be lost on the older generation.
2. There is an inverse relationship between price and adoption. You’ve made a false assumption regarding free and mass appeal. Web 2.0 is all about niche, not mass. It’s when the niche is uber popular that it becomes mass. Exception, not rule. And if your software project is free (or as close to it as possible), how can the ‘established players’ compete? They can’t.
3. I’m not sure how Facebook has a hardware barrier to entry, but OK. And if you want to see a case of paid-fail, look no further than the App Store. Thousands of 99-cent apps that are losing money for their developers. Primarily because of saturation/redundancy. If they coalesced instead around one good app, it would be better for all of us. That’s what open source does, and does well!
The result of encouraging paid software is iFart apps as far as the eye can see.
1. Input from the users won’t make the product better unless time/money/sweat is put into it. No Web X.0 is going to change that ever.
2. Web 2.0 is too ambiguous to use it in an argument. Established players will steal and implement your ideas (no patent protection), and offer them for free. No matter niche or not – they may think otherwise. Congratulations, you just got your market napalm burnt. Welcome to try make a living here.
3. Not exactly the “entry” barrier, but since Facebook spends hundreds of millions $ annually to host all that “2.0″ content – it is a serious problem for anyone small to do anything similar.
AppStore point is completely off, because there are even more crappy free iPhone apps than paid ones.
Using Gmail as “freemium” is a poor example, because the fact is, it’s not zero-revenue product to Google (since it displays ads). If Google offered an ad-free email as a default, that would be an entirely different story.
I hate sales people that call looking for phone numbers and contact names. Freemium is a way to get those names and have people come to you.
Also, competition is the hallmark of capitalism. McDonalds has Burger King and Sonic to compete against. You win with the basics of business – quality, advertising, political bribery-lobbying. You play the game for 5+ years, get the sales and cash out before the competition beats you!
Thoughtful Post, thanks Aaron. As a guy who lives and breaths this stuff everyday, its good to see the debate unfold. Like you have done, I think the answer is to test and refine your primary offers (trial, free, Credit card required, etc) to understand your target audience and their appetite for your service. There is a delicate balance you have with your traffic and audience — and it is our job as marketers in this new era to work with your customers to grow your business while providing value to the greatest audience possible.
@patrickmoran
ENTERPRISE APPS SOFTWARE: BIG VERSUS SMALL, & SALESPEOPLE
Great post and a nice variety of differing comments! I want to add a perspective that is missing: within enterprise apps there exist 2 types: (1) big apps like financials, manufacturing with the need for integration between related modules (inventory linked to work-in-porcess linked to bills of material etc.) and (2) small apps with fewer capabilities and limited integration requirements. For the big apps freemium examples are Zoho and Freshbooks. For the small apps, Google gmail is an example.
One huge advantage of freemium (which a few have already commented on) is that it is a form of “free pre-sales” since the customer gets to try the product instead of having the vendor do the pre-sales, demos etc. It reduces the costs for both vendor and buyer. Another advantage of freemium is that it provides free “product feedback”.
There is always going to be a need for good salespeople, especially in enterprise accounts.
Box looks quite interesting, and hope they help business by promoting their existence further to the online masses.
One would assume that FREE is the future of the internet, as everyone is virtually running WordPress, PhPNuke, PhpBB, VBulletin, Pligg and so many other free brands on their dedicated servers, and have successful sites with high incoming organic search engine traffic
Aaron, some great points. Isn’t “freemium” a piece of what the cloud is all about, currently driven by Google and Salesforce? I appreciate that these have more to do with base platforms to develop apps on, but given the complexities of enterprise apps, how far off do you think “freemium” really is? (I mean, even Linux, as a tool box of drivers, aims at being license-free, but consider that most enterprises have multiple operating systems and apps).
One of the best posts and comment threads I’ve read on TC in quite some time. There’s clearly some religious fervor on both sides of the freemium debate. It’s just nice to see the debate edging into the enterprise space more and more.
Like Patrick, I live and breath this stuff. And until recently the it’s been kind of lonely here in the B2B space… i.e. not a whole lot of peers/reference points for successfully freemium products in the enterprise. But that’s changing quickly and there are more & more examples out there (e.g. check out GoToMyPC’s recent S1 filing to look at what your freemium business might look like “at scale”).
There are a couple of things that we set out to accomplish with our freemium strategy that are worth mentioning…
1. Cost-effective brand awareness & trust
Every day we reach tens of thousands of users in our target segment, absolutely free. We don’t pay per impression or per click — our brand is there for everyone to see without spending a cent on banner ads, Google AdWords, etc. More importantly our free product provides actual value to end users — so we’re actually building product adoption (the bane of many an enterprise app) and a real sense of trust before they ever purchase anything from us. All of this without having to be “sold” on a value prop, differentiation, etc.
2. Incremental revenue from the small end of SMB (1-3 users)
Our freemium strategy also allows us to capture incremental revenue in the small biz segment without being overwhelmed by tire-kickers. Freemium embraces tire-kicking as a free product effectively allows us to wait for people to raise their hands and purchase via self-service (e-commerce) or engage with a sales rep for larger opportunities. But only after having adopted the product and made an initial cost/value evaluation for themselves (based on use of the product, not just a data sheet, whitepaper, or case study.)
Despite being pro-freemium, the nay-sayers on this thread (along with Aaron himself) bring up some valid points for us to keep in mind. Freemium won’t work for every market segment and product category. Our CEO posted on the topic yesterday. He spells out two critical requirements for a successful freemium strategy — scale and conversion.
http://blog.ins...k-for-everyone/
And for those of you offering a freemium product in the enterprise space, I’d love to compare notes sometime and hear what & who are your go-to resources. I follow Andrew Chen, Chris Anderson, and Fred Wilson on the topic but I’m always looking for new perspectives.
I think free is the future of the Internet. It’s just a matter of cutting down expenses and finding other ways to make money.
That’s what I did on http://www.findajobalready.com.
Barak
I didn’t know 37Signals is completely free…