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Why Freemium Doesn't Work

Posted by ryuzaki0 on from the you-get-what-you-pay-for dept.

itwbennett writes "Tyler Nichols learned an obvious but important lesson with his freemium Letter from Santa site: 'most people who want something for free will never, ever think of paying you, no matter how valuable they find your service.' He also discovered that non-paying customers are more demanding than paying customers, which only stands to reason: If someone likes your service enough to pay for it, they probably have an affinity for your brand and will be kinder."

12 of 321 comments (clear)

  1. Free2play in games... by blahplusplus · · Score: 4, Insightful

    ... seems to contradict his argument. The game is free to play but there are aspects of the game that are enhanced if you pay.

    1. Re:Free2play in games... by Anonymous Coward · · Score: 5, Insightful

      No no no, the major companies making millions of dollars on Free2play games don't count. One guy with 100k customers offering shitty PDF downloads of something anyone could make for free with with basic knowledge of Microsoft Word didn't make as much money as he wanted and had to answer hundreds of emails, so therefor freemium is dead.

    2. Re:Free2play in games... by Mad+Merlin · · Score: 4, Insightful

      Multiplayer games also benefit greatly from network effects. Nobody would play WoW if they were the only one on the server.

      If you don't have a 9 figure marketing budget, you're probably struggling to get more players, and as mentioned already, most multiplayer games aren't fun without a lot of other players. So keeping that in mind, why would you go and shoot yourself in the foot by turning away 90% (or probably more) of your potential users by requiring payment up front?

      For example, Game! is free to play and has been played by thousands of people, it also has a marketing budget of $0. I can only imagine if I'd required payment up front it'd probably have been played by dozens or maybe hundreds instead. That's a pretty big difference.

      Unsurprisingly, people have been conditioned to expect things for free on the Internet. Making the jump from free to a penny is much larger than the jump from a penny to $10 or probably even $100. People will spend $5 on a latte every day and think nothing of it, because nobody is giving away free lattes, but ask them to spend $5 to access a website and they'll balk, after all, there's all those other websites that they can access for free.

      --
      Game! - Where the stick is mightier than the sword!
    3. Re:Free2play in games... by tbannist · · Score: 5, Insightful

      Even worse, Tyler Nichols contradicts his own argument. If you read through the comments on his blog you find that he eventually admits that nearly 100% of his paying customers tried the free version before paying, thus the first part of his premise is wrong. Most people who tried the free service didn't pay him, but enough did that he was considering keeping the site going as a pay only site. So his evidence contradicts his premise that freemium doesn't work. Instead he presents evidence that some businessmen are so wrapped up in their own indignation that they can't recognize a business model that's actually working as intended for them.

      His biggest problem seems to be that his unsolicited marketing email was marked as spam (because it is spam). The best solution to that problem is either to accept that the free people may not even remember your site a month after they use it and expect some of them to flag it as spam, or to only send email to people who upgraded to the paid version. They're the people most likely to pay for his related easter site, anyway.

      --
      Fanatically anti-fanatical
    4. Re:Free2play in games... by Enderandrew · · Score: 4, Insightful

      I believe Zynga took in more money than EA this past year. And a couple years ago Zynga didn't even exist. EA has been scrambling to copy Zynga's freemium model.

      MMO after MMO that was losing money have switched to freemium models and become more successful than they ever were with premium models.

      And companies like IBM, Google, etc. make billions on the back of open source software. But clearly you're right that this is the exception and can only work in a handful of cases. They must only succeed out of dumb luck, because the model itself can't possibly make any sense. Companies like Google don't know what they're doing.

      --
      http://blindscribblings.com - Tasty pop-culture in conceptual fashion.
    5. Re:Free2play in games... by Anonymous Coward · · Score: 4, Insightful

      I really don't think it's a sucky model at all, I actually think it's a great model. It gives customers two very important things: the ability to try before they buy and the ability to pick and chose what they want based on itemized cost. People complain that it's "dishonest" because they use the word free but you end up spending money, but that's because people are stupid. Almost everything on a Freemium model is upfront about the fact that they are not a charity and some parts will cost money. Except instead of having to give a pile of money upfront for things you may or may not want, you get to give things a try for free and, if you like it, spend money on what you want to spend money on as you use it. That said, it's not a miracle or a catch all, there are a lot of ways it can fail:

      1. Pay2Win, or the non game equivalent where the free version is a useless, crippled piece of crap that's not suitable for anything. People see through this cheap ploy pretty quickly and generally just develop an extremely negative association with the product, and the company would have been better off without the free version.

      2. Macrosized microtransactions. This one is interesting, in that we still haven't really found where the line is. People buy $15 dollar virtual hats for Team Fortress 2, but then get angry over a $10 price tag on a DCUO expansion. In the non game world it gets even murkier, and I don't think has been explored very much yet. For example, how many people here have upgraded the size of their GMail inbox? Is it overpriced? Underpriced? I have no idea.

      3. Your product sucks, like this guy. As I said, the Freemium model isn't a miracle. A great business model on a bad product is as useful as a nice tuxedo on a pile of dog shit. See also, Hotmail. Although, interestingly enough, it would appear that you can put out a pretty crappy MMO in the Freemium model and make a lot more money than a mediocre MMO with a subscription model.

    6. Re:Free2play in games... by slim · · Score: 4, Insightful

      Come on get real here...

      The freemium model is a sucky model. It does not mean that freemium can't work for some.

      If it works for some, then by definition it's not a sucky model. It's just not a magic bullet that works in every circumstance.

      Just like how OpenSource works for some, eg Redhat, but on the whole Open Source is devastating the software development and sell model.

      Because the wellbeing of the software-as-a-saleable-item market is not a success criterion for Open Source.

      If my refrigerator manufacture business is a disaster for your "importing ice from the Arctic" business, that doesn't mean that mine is a sucky business model.

    7. Re:Free2play in games... by AnonyMouseCowWard · · Score: 5, Insightful

      He didn't even say he didn't make enough money... in his comments section, he points out that most of his paying customers were free users first. That to me means freemium works, even for him.

      His biggest complaint about his whole experiment seems to be that his "free" users marked his mail as spam. However, one thing stands out: to use his site/service, you have to agree to a TOS, in which he mentions that he might send you mails. There is no opt-out button. That's worse than a sneaky default spam mail with a well-hidden opt-out checkbox... in his case, there is no such checkbox. You want to use his service? Then you agree to his spam. To me that means his service is not free, but hey, maybe I value my privacy more than a letter to Santa.

      I understand he put hours and money into creating and hosting his site, but that does not entitle him to believe his mail is important, especially when there is no option to opt-out in the first place... and the fact most of his paying customers were free users first points to the fact he's just whining for whining, and doesn't understand what "freemium" means.

    8. Re:Free2play in games... by mvdwege · · Score: 4, Insightful

      All three examples you cite were killed by Microsoft, 2 directly, one indirectly. Open Source had nothing to do with it.

      Mart

      --
      "I know I will be modded down for this": where's the option '-1, Asking for it'?
  2. For 1 data point by Zoxed · · Score: 5, Insightful

    So 1 site gets it wrong, and the whole model is broken ?
    I think not !!

  3. Who would pay for a Letter from Santa? by gatkinso · · Score: 4, Insightful

    Seriously.

    I can think of examples where Freemium works (EVE, JIRA).

    --
    I am very small, utmostly microscopic.
  4. Your mails *are* spam by urdak · · Score: 5, Insightful

    While he makes some interesting points, I think he misunderstands the spam issue, and why his users, especially free users, rightly marked his mail as "spam":

    If I look at spam I get, some of it is "random" spam. E.g., someone I never heard of trying to sell me viagra, or asking me to help smuggle $10,000,000 he stole while being the president of his country. But a growing percentage of the spam are people who confused a one-time business relationship with my desire to read all about them and their products for the next 20 years. E.g., I'm constantly getting mails from a particular hotel I once stayed at, mails from some company I once bought from, etc. People *hate* that, and it doesn't really help that they once used your services - they still hate the spam.

    But why did free users complain more? That's easy: Every paying user remembered you and your service, and most of them "forgave" the one time "thank you mail" (but be warned, they won't so easily forgive repeated annoyances). From the free users, a lot of them probably don't even remember what service you provided them. Heck, it is possible that half of them never even fully used (e.g., didn't even complete a card) or didn't enjoy your service, and you don't know that. These people have no recollection who you are, and thought that even a "thank you" letter was an outright spam.

    What should you do about the spam thing next time? Don't make the "I want to get mails" checkbox hidden in some long form and default to on. You have two options - either make it default to "off" (so only people who REALLY want to get your mails will get them, but be warned that few people will actually want that), or, if you want it to default to "on" make a very very clear screen which basically says "I'm giving you this service for free, in exchange for the right to mail you in the future. If you do not agree, or would consider such mails to be spam, please do not use this service.".