Could the freemium model be the one to save struggling web businesses?
Remember those free AOL CDs?
Bundled with magazines, posted through letterboxes, in special
dispensers in shops - they were everywhere. In an era when dial-up
modems meant you were charged for a local call as well as by the
ISP each time you wanted to use the internet - and you couldn't
even make phone calls at the same time! - AOL had decided to offer
anyone who could get their hands on a disk (and given the number
that were handed out, there were very few people who couldn't) a
Whatever your opinion of the disks, there's no doubt AOL's
strategy, which offered subscribers anything between 50 hours and
two months of free use, was a success. By 2002, the provider had
almost 27 million users. By the time the company stopped
distributing the free disks in 2006, over a billion had been sent
out and an estimated 4,000 different designs - aimed variously at
children, fashionistas, business owners, travellers, comic book
fans and even ethnic markets - had been produced.
Although the company's user base has tailed off hugely since the
halcyon days of 2002 (it's now declined to around 5.8m, with little
sign of levelling off), AOL had cottoned on to a model used by
businesses ranging from cosmetics brands to drug dealers for
centuries: Get someone hooked on your service, and you'll have a
paying customer for life.
The rise of freemium
But the new wave of internet businesses are
increasingly realising just giving away their content for free
doesn't always work - even if it's ad-supported. YouTube is a case in point: since
Google bought the video-sharing
website for a reported $1.65bn (£883m) in 2006, the search company
has been struggling to monetise it, reportedly losing half a
billion dollars a year.
Even Google's chief executive, Eric Schmidt, is evasive about
how the company plans to monetise it: "[The website] attracts an
enormous, extremely large set of people who are basically spending
an awful lot of time there," he told Wired magazine last month. "We
will eventually figure out a very successful business."
Freemium, though, works differently. Like those AOL disks -and
like websites such as YouTube and even Facebook, its premise is
providing a service for free and getting users hooked. But that's
where the similarity ends. Unlike AOL, though, there's no catch to
websites built on a freemium model - no limited trial or hidden
costs. What's presented as free stays free - instead, it's added,
or premium features which are charged for. The majority of people
who use freemium services never pay a penny.
US Wired editor Chris
Anderson explains freemium in his new book '
Free: The Future of a Radical Price'. "A typical [freemium]
site follows the 5% Rule," he writes. "5% of users support all the
rest. In the freemium model, that means for every user who pays for
the premium version of the site, 19 others get the basic free
The term was first coined not, as many people (Anderson
included) believe, by US venture capitalist Fred Wilson; but by one
of his readers, Jarid Lukin, after Wilson wrote a
blog post in March 2006 which outlined the model. "A customer
is only a click away and if you can convert them without forcing
them into into a price/value decision you can build a customer base
fairly rapidly and efficiently," he explained.
Too cheap to meter
The model has proven itself tremendously popular: services such
as Skype, where you get free
computer-to-computer calls but pay for computer-to-phone calls; Flickr, where you can upload a
certain number of photographs but have to pay if you want to go
over the limit; and current European tech scene darling Spotify, where you pay to stream
ad-free music, all operate a freemium model.
The reason it's so popular, according to Anderson, is because
for websites, the cost of supporting a free user is 'too cheap to
meter'. With the cost of bandwidth, processing and storage all
halving every 18 months according to Moore's law, there's no point
charging everyone. The cost per user would just be too
Instead, web entrepreneurs are using the many - the non-paying
members - to attract the few: those who will pay. Which is
precisely what Michael Smith, whose games development company Mind Candy launched children's
online cyberpet sensation Moshi Monsters in 2007,
decided to do.
"[Non-paying users] serve a value to us in a number of ways," he
says. "One is that they tell their friends, so they help pull new
people into the game, and secondly they increase the value of our
network - they make the game more valuable to our paying members so
there are more people to chat to and play games with and so
Smith makes it no secret he set out to cash in on the success of
Club Penguin, the kids'
social network which was sold to Disney for 'at least' $350m in
2007. The site is touted as one of the most successful examples of
freemium, which charges $5 a month for added features and has a 25%
conversion rate among its users - a level almost unheard of among
other freemium businesses.