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Why Freemium Doesn't Work
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."
... seems to contradict his argument. The game is free to play but there are aspects of the game that are enhanced if you pay.
The article raises "freemium" in a wider business sense, but I suspect that a lot of slashdotters will be used to coming across it in discussions of massively multiplayer online games.
I'm a long-term pay-to-play MMO gamer (Final Fantasy XI, World of Warcraft and now giving The Old Republic a whirl - just made a fairly long post about my experiences with it in my journal). I've also given some of the new generation of "freemium", "free to play" or "pay to win" (pick your favorite term) MMOs a go. However, I couldn't stick with any of them for long - from my point of view, this model provides a much inferior player experience.
It's not just about the money - though that is an issue. With a subscription based MMO, I know how much money will be going out the door on the game every month. So I pay my $15, have that as a line in my personal budget, and that's it. On a sheer time/cost ratio, MMOs tend to come out extremely well. With a Freemium MMO, I may end up telling myself that I'm going to spend a certain amount each month, but I also know that if I get stuck or frustrated, there's going to be a strong temptation to go beyond that.
But the really key point in TFA is "non-paying customers are more demanding than paying customers". That may be true from the service-provider's point of view. But it also has implications in the MMO world for the player. A subscription model game requires a degree of buy-in and committment from its player base. The other players you meet all want to be there and are paying for the privilege - and aren't, except in extreme circumstances, going to do anything to jeopardise that. The result, in my experience at least, is that levels of vulgarity, abuse and griefing - as well as outright cheating - are much lower in traditional subs-based MMOs than in the Freemiums.
So 1 site gets it wrong, and the whole model is broken ?
I think not !!
Seriously.
I can think of examples where Freemium works (EVE, JIRA).
I am very small, utmostly microscopic.
Let's not be stingy here. I second the contention that non-paying users are forthcoming with questions and reports, but I won't call them demands. The education tools (http://www.glean.org - mainly information literacy-related) we provide serve a number of schools, and some sites have heavy user traffic. All are free, but we do try to ask for donations to support our (nonprofit, 501c3) work.
And, when the sites glitch - or don't function properly, or as expected - those same users let us know about it. Quickly!
While few are likely to donate money to support our work, many are involved in bug reporting, formative evaluation and the testing of new education tools that we're launching. It's these kindnesses - in-kind support, you might say - that has been so valuable in helping us move forward.
At the end of the day, it's not cash - which is needed to move the organization forward. And, yes, our free users do have expectations - not unreasonable, as they rely on our services as well, and that the site has likely set some expectations about the service(s) that will be provided.
Of course, the lack of cash can be frustrating. However, I suggest against labeling, or reading, their expectations as demands. Instead, it's more helpful to understand how the audience is willing to help, and if/what can be done (in the case of TFA) to turn the free user base into paying customers.
Cheers,
--Dave
'most people who want something for free will never, ever think of paying you, no matter how valuable they find your service.'
Just how valuable is a gimmick letter template with some cheap clipart background images which you have to print out yourself?
The final product is something that could be done with any word processor in about 10 minutes.
These comments are my personal opinions and do not necessarily reflect the opinions of the other voices in my head.
From Forbes magazine's Nov 2011 edition; emphasis mine:
[Dropbox] has solved the “freemium” riddle, with revenue on track to hit $240 million in 2011 despite the fact that 96% of those users pay nothing. With only 70 staffers, mostly engineers, Dropbox grosses nearly three times more per employee than even the darling of business models, Google. [CEO Drew Houston] claims it’s already profitable.
"Results? Nichols found free customers are higher maintenance and more demanding than the paying customers. 20 or so paying customers asked questions while "hundreds" of free ones did. And when following up, paying customers never flagged his emails as spam, while many free customers did, and complained."
The numbers mean nothing if we don't know how many paid and how many didn't. I think 20 to "hundreds" is probably a good ratio for paid-to-free in the first place.
As for the spam, if you didn't ask for an email from a free service, and it appears to be advertising something (like his premium services), I think spam is a good label for it. I personally wouldn't flag it as such, but I understand those who would. Without seeing the exact email, it's hard to know why they might do it, though. And the paying customers... Were they annoyed by the email, too? Did they get the same email? How did he know which of the 2 flagged it spam or not? Merely the complaint emails?
In my experience, it's all fine and good to have free customers, so long as you keep them away from your paying customers and don't let it affect them negatively. Free customers really are more demanding. For some reason, they seem to feel you owe them something. It seems to be a bell curve with each end being more entitled, and the middle less so, approximately centering on the market value of the product.
"If you make people think they're thinking, they'll love you; But if you really make them think, they'll hate you." - DM
After reading the article, the only "evidence" that the Freemium model does not work is that free users that got his "thank you" email flagged him spam. I bet he also attempted an upselling on that thank you email. People that get stuff for free tend to be very picky about getting emails even reminding them they can get a paid version.
Anyways, what he described is not even "fremium"; it’s a free edition of the site and a paid edition of the site. Freemium is a model where the product is entirely free and additional gimmicks or features are unlocked by micro-transactions (like 99c for extra Santa card layouts.)
Anyways, non-story, yada yada.
I will not engage in the this freemium model anymore either. Not only do the freeloaders ask for more support than do customers, they bad mouth your product more as well. I believe the process of transferring money from customer to merchant gives the customer a sense of "buy-in" in the product. The customers value it more because they are invested in it. Invested customers then feel MORE willing to invest time figuring out how to use it than do those who get it for free. It sounds counter-intuitive certainly, but I have lots of anecdotal evidence to support this in my career experience. The proof is in the pudding though. The higher I set the price of software in the app store, the happier my customers are with the product. Go figure!?!?
Google don't have a freemium business model they have an ad-supported business model.
Freemium means you have a large user base of users who pay nothing and a smaller number of paying users who pay for a premium version of whatever you are offering. Free + Premium = Freemium.
Google don't offer premium version of their services they make their money by showing ads to their free users. The only paid for services they do offer are business versions of some products like Gmail and Google docs but this is a completely different market.
You never offer tech support to free customers. Spell that out.
"Free customers get ZERO tech support, your questions will go unanswered, you will have access to the WiKi for common answers."
Do not look at laser with remaining good eye.
Send non-paying customer questions to a queue that you look at "if you feel like it" and give paying customers a different address (or mechanism!) for support, maybe even a unique one so you know if they've given it away. Problem solved! You can glance over the queue to see if there's any improvements you should make, without having to actually respond to any of that email.
Hilariously, ITworld registered me but I still don't know if they took my comment. When a site is even more incompetent than slashdot you wonder WTF.
"You're right," Fisheye says. "I should have set it on 'whip' or 'chop.'"
Poor people are stingy and mean. In the Western society, divorced from any sensible unsociopathic ideology, that's the rule.
There is no intrinsic good quality in being poor. All the good qualities associated with people in financial struggle come with conjuction with their non-materialistic beliefs - mainly, religion, education, upbringing.
The job ALWAYS has to be paid. You can right a piece of software and put it out on sourceforge for free - that's personal entertainment. Support, bug fixing - ain't entertainment, it's hard work, and it should be paid.
That's how open software works - code is free, but support is not.
I do not believe in karma. "Funny"=-6. Do good and forbid evil. Yours, Oft-Offtopic Flamebaiting Troll.
I've seen Freemium work, but as a model you have to truly understand the up and down points. It tends to work best where socialization is part of the service you're selling. IE if it's easier to send cards to someone else that's also a free member, then there's an inherent value to having someone as a free member even if they never spend a dime: they attract and create loyalty in other potential paying customers.
This is why so many MMOs have latched onto the concept, and why it works for farmville and such. People only engage in these games because their friends also play: as solo experiences they are terrible and will quickly bleed customers.
In short, freemium probably isn't a good model for his service if he's looking to make money, but the model should not be altogether disregarded. In some markets, it's very useful, and those ignoring it will be quickly undercut and eliminated by those employing it successfully.
You can get 15 minutes of fame, but you can go down in history for infamy.
Never... ever suggest they don’t have to pay you. What they pay for they’ll value. What they get for free they’ll take for granted and then demand as a right. Hold them up for all the market will bear. -Lois McMaster Bujold
Skype is Freemium. You can make free calls from user to user, but if you want to call traditional phones you need to pay extra. If you want a traditional phone number you also pay. Seems to work.
Zynga's revenue for 2011 was roughly 1 billion:
http://blogs.wsj.com/venturecapital/2011/12/15/so-whats-zynga-going-to-do-with-all-its-cash/
EA's revenue for 2010 was roughly 3.65 billion, with roughly 800 million in 'digital revenues':
http://en.wikipedia.org/wiki/Electronic_Arts
So Zynga took in less than 1/3 what EA did this past year, still impressive, but quite far from beating EA so far.
Freemium doesn't work? Better tell the music industry.
Joking aside...
No one has figured out yet that the viability of the freemium model is dependent on the "size" and "slope" of the "wall" between free and paid customers. That wall, folks, is *price*.
If you put up a simple, tall "wall" - an entry price point that is unusually high with no graduated options for consumer buy-in, then you will absolutely keep free users on their side of that "wall".
Zynga has shown that with small, repeated purchase opportunities - basically a *series* of tiny *walls* to step over - you can convert a freeloader into a paying customer (and in some cases the customer won't even realize what they've done).
Paying attention to my own behavior, I've noticed that the more reliable conversions to paid come from a low-grade but high-unit-cost pay-as-you-go option among a menu of options. See SimpleGEO and Zencoder for examples that apply to me specifically over this last month. Both have pricing plans that fit what I've described here.
Makin' money, makin' friends, makin' whoopee and wearin' Depends
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.".
It seem like an oxymoron but in a sense, attaching a cost to something adds value to it. If somebody get's something for nothing, they will always expect it for free, regardless of anything you add to it that can be considered to increase it's value because it had no value to begin with. It's the old saying of why buy the cow when you get the milk for free. Now if you take that same service and start out by charging for it, you are building in a perceived value that the consumer psychologically attaches to it.
Consumers who get something for free are always the most demanding, in my experience, because they possess a sense of entitlement. You (the merchant) OWE it to them. These types of consumers tend to fall into one of two categories (or maybe both):
1. They don't understand the cost of doing business. For instance, I sell postage stamps which I have to pay face value for which is currently 44 cents. I charge 50 cents for a stamp and I have had a few cases of people accusing me of ripping them off. What they fail to understand is that not only am I offering them the convenience of not having to go to the post office, but the cost of that postage stamp isn't my only cost associated with operating my brick and mortar store. They tend to see it as I'm making a 6 cent profit when in reality, I'm probably actually losing money on it when you factor in rent, utilities and so on. This is a situation where convenience has become less and less costly almost to the point of being free (if not already) so people no longer perceive value in convenience.
2. They think because I own my own business that I must be filthy rich. I wish that were the case, but much like many other people out there, I struggle financially in this economy, as do many other self-employed folks that I talk to. I also probably chose the wrong line of business to go into, but it seemed like a good idea at the time.
In my 2 years of business, I've found subtle ways to weed these people out and built a solid core of regular customers but the entitlement folks still pop in from time to time and when they see that I won't give them anything for free, I tend not to see them ever again.
[spam removed]
Is it free to play?
I have a long-term experience to relate. I'm already in an area that doesn't pay -- I'm a composer.
My Bathory Opera site has been around a very long time and gathered lots of goth, vampire, and opera fans. Over the years I'd diligently answered their emails, provided research, and generally made it a useful site. So when it was finally time to produce the opera for about $25,000, I began fundraising. Of the 1,700 on my email list for the site, exactly five made contributions. The funds were raised from about 140 others (plus out-of-pocket) and the opera was eventually produced for about $27,500 (October 2011).
Many others then said, oh, yes, as soon as the DVD comes out, I'll get one (add lots of "!!!!!!!"). It's been available for two weeks as a physical copy with an opening night souvenir book or as a download. Sales: 1.
Yet these same folks continue to write, ask for information, photos, evaluations of their latest Bathory plays, etc. As long as their entertainment costs nothing, they're happy to play along.
Dennis