HOW TO: Change Your Business Model From Paid to Freemium

free imageUmberto Milletti is the CEO of InsideView, the social CRM application which brings comprehensive sales intelligence gained from social media and traditional sources directly into any CRM platform for increased sales productivity and revenue.

Much has been written on the pros and cons of the freemium model by Mark Cuban, Malcom Gladwell and Chris Anderson, among others. Rather than debate, this post is a guide to how you can actually implement the freemium model for your business if and when you get to a point of serious consideration. I can share some of the unique experiences from our own business and how we switched from paid to freemium and whether it makes sense for your company.

Yes, You Should Consider Freemium

First question: Does freemium make sense if you already have a healthy paid-only revenue model? The answer is almost always “yes.” I know you’re thinking time is precious and often limited, but ask yourself, “What position would I be in if someone offered a free product that competed with mine?” If you are in the software or information business, the odds that it will happen are pretty good. Sure, it might not be as good as your product, but is it good enough to siphon customers?

We’ve seen this movie before, with enterprise software vendors ignoring SaaS and open–source technologies under the belief that they would not penetrate the enterprise. (Ten years ago PeopleSoft’s CEO famously declared “Marc Benioff is trying to get in the big leagues with a Wiffle ball and plastic bat.” That bat is looking a lot like maplewood now.) The freemium model is creating similar disruption in the enterprise software and information markets.

What Are the Make-or-Break Factors?

Upfront, it is much harder for a company moving from a paid product to go freemium (Paid2Freemium) than it is for a company that initially offered a free product. For the latter it’s a matter of survival, while the former usually has a solid business and thus, much more to lose. It is analogous to traditional software companies having a very difficult time shifting to SaaS because of the revenue-recognition impact to their existing model. But in addition to protecting a business from the above-mentioned attacks by a competitor with a free offering, a well-tuned enterprise freemium model can actually bring tremendous sales and marketing benefits: Low-cost, potentially viral adoption, and upsell starting points.

Here are some areas that prospective Paid2Freemium companies should explore:

Is Free Too Expensive?

You can’t afford to have a free version of your offering if it’ll cost you an arm and a leg to support those free users. You need to think about the delivery costs (including IT), support costs and any setup costs incurred by your organization. If you realize free will cost you too much, you have the option to define the free version of your product to be cheap to delivery, easy to support and set up (free users don’t expect a complex application anyway).

Do People Love Your Product?

If your product doesn’t have momentum, you should probably wait before introducing a free product. You don’t want lots of free users out there bad-mouthing your product because the user experience wasn’t so great. The bar for product quality is actually higher for free products than it is for paid products (which might seem counterintuitive). Some end users might be forced into using a paid product because it’s company mandate. Those same users will not engage with a free product unless they like it, since there is no one to force them. One of the great side-benefits of having a free product is that it really forces you to focus on the user experience.

Differentiating Your Free Offering From a Paid Offering

This is probably the hardest part, and probably one that will take a number of iterations to get right. You might always be tweaking the location of the upsell points that entice a free user to pay for your premium offering. Start with putting these upsell points in places where there is some value for the free user to need more and it’s evident there will be an increase of value if they turn into a paid user. A good example is Skype, which allows you to freely make calls to other Skype users, but upsells you to a paid call when you want to dial physical phones.

Will I Encounter Internal Resistance?

You should, otherwise your management team and your board are asleep at the wheel. One of the main areas of concern will be the potential cannibalization of your revenue stream. Your sales organization is likely to be concerned about this point. There might be questions about marketing (“Will free diminish our brand?”), product development and IT (“We need a bazillion dollars to create a highly scalable product and infrastructure”), finance (“You can’t make money with free, it’s just a cost-suck.”)

This transition will require strong leadership and a core belief at the top (usually, the CEO). Otherwise the internal organizational antibodies will kill the free product before it’s had a chance to grow into your successful new business model.

The Freemium Journey

If you do decide to experiment with a freemium model, it’s important that you view it as a long journey — not a project with an upfront start and a finish line. It is an experience that will either modify the DNA of your company, or will fail (which is fine, at least you’ll know the pitfalls that your future freemium competitors will encounter.) The DNA of a freemium company is quite different from that of a traditional B2B company and evolving will make you stronger. Have you experienced the successes or challenges of a freemium model for your B2B company? If so, please share your experience with us in the comments below.

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Image courtesy of Flickr, inggmartinez

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