Free Vs Paid

My friend Howard was visiting me a few weeks ago and he said to me "free is over, I am only investing in services that customers pay for". He said "freemium is dead". I reminded him that freemium is a paid model, but he wasn’t buying it.

There’s a movement afoot by investors to back web services with a real business model instead of the pervasive "give it away for free and hope for the best" approach that’s been in favor for the past four years. Don’t count me in that camp, but the movement is happening with or without me.

Roger Ehrenberg, another angel investor friend, says in a post about how he’s changing his investment approach:

I have added a few criteria to my check-list:

  • Initially sells to the enterprise for branding, credibility, awareness and early revenues
  • Can get to revenues within 6 months, tops
  • Is sold on the basis of ROI, e.g., helps generate revenues or reduce headcount/costs

As I noted in the comments to Roger’s post, we’ve struggled with early stage investments in enterprise oriented web services. Sales to enterprises often require expensive sales teams and it’s much harder to know if you’ve nailed the product/service with feedback from a limited number of enterprise customers.

It’s much better, in my opinion, to go with the freemium model, give a version of the service away for free to all comers, get a lot of users, get good market feedback, then develop a premium version of the product/service for sale to enterprise customers. If your free version is popular with a lot of users, your customer base is the target for the upsell and you might be able to live without an expensive sales force initially. And, of course, keep your costs really low until you start to get revenues.

In summary, freemium is far from dead, in fact it may be the business model de rigueur.