[Web Informant] 31 August 2009: Free vs. Freemium in online markets

[David Strom]

Web Informant 31 August 2009: Free vs. Freemium in online markets

I was talking to a colleague of mine who is an Amazon Vine reviewer
(http://www.amazon.com/gp/vine/help) -- a select group of customers
who are invited to post their opinions about new books and other items
on Amazon's Web site. They get free copies, and their reviews aren't
edited or modified in any fashion by the company after they are
written. I was jealous, but started thinking more about the meaning of
free.

Coincidentally, I have been reading (on my iKindle, of course) Chris
Anderson's latest book "Free, the future of a radical price." The book
is based on a Wired magazine article of the same subject (he runs the
editorial for the magazine). He describes the various efforts of
vendors to make money at giving away free stuff, by building a market
or demonstrating value or building word of mouth. In the digital age,
it is easy to have a place to download an app or read through a Web
site and then offer paid upgrades for people who want more. Fred
Wilson coined the term "freemium" to refer to this practice, and it is
now so widespread that most online shoppers have come to expect that
they can get something for nothing on just about every Web site that
they land on these days. Or least a limited 30 day trial or download
or subscription.

Indeed, in the new ventures that I have been mentoring I start almost
immediately thinking about what they can give away for free. It is
still the best way to start out in this chaotic eWorld. If you are
starting a new business, you might want to take the time to at least
skim Anderson's book. You also might want to read this New York Times
article that analyzes the cash flow from Evernote, an online services
company:
http://www.nytimes.com/2009/08/30/business/30ping.html

Evernote converts less than one percent of the 4500 customers who sign
up everyday to try their service into paying customers at $5 a month.
But the more interesting number is that within a year of using the
free service, the conversion rate jumps to four percent, because
customers get more deeply involved and are willing to pay to enable
more storage or more features. This brings the share of revenue per
customer up from three cents to 35 cents. That is a powerful argument
towards free. What is also interesting is that their variable costs
have been plummeting, as you would expect: from 50 cents a month per
active user when they began operations down to nine cents today.

This is very typical of an online business, and indeed another example
is how Google continually adds storage to its Gmail service, or why
Yahoo can offer unlimited email storage – because these costs are
dropping fast.

Then I realized that I have been doing this exact same strategy for
the last 15 or so years ever since I started this Web Informant mail
newsletter/blog/social network thingie. Whatever it has become, I do
spend a lot of time each week thinking about what I am going to write
to you all, and then posting it in its various forms around the
Internets. And I don't ask you for money (well, I do ask for
charitable contributions once a year, but that is another matter) and
do it willingly and with the expectation that at some point in the
future, you will "upgrade" to the paid Strom service of having me
write something or speak somewhere or consult on something. Not all of
you have hired me, of course, and some of you will never do so (don't
worry, I don't take it personally).  But enough of you do that this
method has served me well in my business, bringing many loyal readers
and clients over the years. The free Web Informants, and the various
other cyber collections of stuff that I curate (there are tons of
products on various lists here at http://strom.com/places) and
hand-pick have built up a level of value, trust, and quality that I
like to think you all appreciate.  And that is the true value of free,
to me.