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.

#VC & Technology

Comments (Archived):

  1. AndyFinkle

    I have been monetizing software for over 10 years (I specialize in the consumer space not enterprise, but it makes no difference), though back we simply called the model shareware. Social media (as it pertains to marketing and selling one’s products and services) is all about people (your customers) selling your products for you – recommending it to others. If I can not try your service out, your sale to me is already dead. It is not worth my time or effort to fill out a form, and take something for a spin if it will simply stop working in two weeks. Great you say (Since I am not someone you would expect to pay for your product) right? Wrong, as someone in the social media space I have followeres on Twitter (95% of my followers are PR & SoME people). I have a social media blog . I have a network on LinkedIn. I speak and attend conferances and events. Occasionally I am also quoted often in the press. Were I to have tried your service out (even as a non-paying individual), and I liked it. Do you think that I might have influenced sales of your product going forward? Do you think I would have told others (who ARE your target customers) about this great new tool they should try? If only one person I influence ended up as a sale for you, you’re a big winner. Now multiple this factor by Millions of people just like me… There should ALWAYS be a free version of your product. Especially when it’s not a mature product, and there are lots of competitors – GET YOURS out there as much as possible. And if you absolutely insist you should use Trialware it should never be *time based* (most get this wrong), they should be usage

    1. fredwilson

      amen. freemium is just the new shareware. it’s the same business model. the only difference is that web services are way more viral.

      1. AndyFinkle

        Yes, and I actually like that phrase which I understand that you coined (Freemium), because it encompasses any payment model, not just software. BTW, really diggin your portfolio companies Twitter, Disqus and Zemanta …homeruns!Andy

        1. fredwilson

          Just to be clear, I did not coin freemium. Jarid Lukin did in a comment on this blog. But I sure get a lot of credit for it!

          1. Gonzalo Arzuaga

            Fred, Taking Andy’s mention of your portfolio companies (great companies by the way, or should i say great services?) I was wondering if given the current economic conditions you, as an investor in these 3 (twitter, disqus, zemanta) are “suggesting” them (should i say forcing them?) to get a revenue model right away? As far as i’m concerned these 3 services are awesome, and gaining popularity by the second, but what about the bottom line? Just curious.

          2. fredwilson

            Yes, we’d like to see them become sustainable businesses but we are notforcing anyone to do anything. At best we can advise.

          3. Gonzalo Arzuaga

            I know you can’t force them but you can STRONGLY SUGGEST which is pretty much the same thing 😉 Anyways, i wonder what a savvy investor advises in these economic times to the companies he invested in: focus on revenue, revenue, revenue, or just cut, cut, cut costs. I know they can do both, but focus is a “one thing only”.

          4. fredwilson

            I like to focus on costs because they are more under your controlThis sort of sums up my thinking…Of course you can’t be sustainable without revenue, but if you keep yourcosts down, you can be sustainable on a pretty small amount of revenue andgrow from there

    2. leigh

      I love this comment Andy – if you think about it, traditional companies would spend on average over 10 million dollars (if not a lot more) to build a new brand. Freemium is as much an experiential marketing strategy as it is a business approach. Particular with new products that see their product development, product marketing, advertising/communications and customer service as all networked together, the value of freemium is huge.As for Howard L….maybe he’s just a good old Canadian boy after all. Canadian VCs are notoriously conservative and are more about helping successful businesses expand vs. market leader/innovators. But I have confidence that once the markets turn for the better (which they always eventually do) Howard will be back to his old ex-Pat self. 😉

    3. Ted Murphy

      I’ve used TextPad on a lot of machines (certainly over 20), and I’ve never paid a dime. Every half an hour for five years, I’ve simply continued to click on the “Continue Evaluation” button. At some point, you have to insist on a sale.

      1. vanderleun

        At some point one might become ashamed at being such a cheap SOB.

      2. btoc007

        I tend to agree

  2. andyswan

    I agree with……both. I think that “ad-based” is going to have a really tough time in the future. I think *most* companies need to have a service or product that the end-user will pay for. But having a free version, or free products, or free samples….well that’s just good marketing.

    1. Emil Sotirov

      Andy… ad-based will get even more important in the foreseeable future I think. Attention markets (media) do not just mediate between production and consumption as many believe. They are the space where wants and needs are created, defined, and re-defined. Material consumption is instrumental to the attention economy… not the other way around.So, I think the economic role of advertising – as pure attention play – will not diminish. However, it will have to change dramatically in order to participate in the new person-centric media (I’m sure Google is working on this very hard).

  3. Mukund Mohan

    FredThe oldest models of freemium I can think of are the Baskin Robbins taste spoon or the small stick of toothpaste from the dentist’s office. But they are both quantity bound. In the case of BR, the conversion rate from free to premium DOES NOT matter, since trying a few flavor vs. something the customer already likes is non revenue / expense impacting (or negligible). I like time bound better.Dont you think with the relatively fewer companies that might get funded in the next few years we will see fewer companies that are wiling to give something for free if one of their competitors charges for it?The premise of free is that its funded “elsewhere” – either by ads or by the VC. Now that VC as a source of underwriting that “free” is going to reduce, I believe companies will get smarter about what they give away as a teaser vs. free.I believe in freemium, but I think products will be given free for a “period of time” versus always having a free version and charging for the premium version. At least in the next few years.

  4. Phanio

    I personally think it has to do with what type of software or services that are being offered. There are a lot of early adopters out there that will pay for your services before they are proven. Many will pay a lot to get in on the ground floor. This revenue stream could then allow you or your firm the ability to finance new versions or add additional services. Further, monetizing even basic services can help ensure that these services remain in play and are continually improved upon.But, I really think it has to do with what the service is. Web based services may need to be free with advanced or popular items being commercialized. Free, in the beginning may help increase your market share. But, if your service or product can create market share by itself, then monetize it from the get go.I just fear that giving away stuff free does not allow proper support for the service from the firm that creates it nor does it allow the firm the ability to improve upon it. I for one do not like paying for something later that I use to get for free.I am also in favor of open source products. These are free for those who don’t want to pay and are willing to put the time in to modify the service for their own needs. This also creates opportunities for people and companies to bundle these open source products and services or to customize them for the consumer who are either to lazy to do so themselves or who just do not have the time or knowledge to modify them to their own benefit.Just my thoughts.

  5. Dan Cornish

    About number of years ago I was selling an enterprise solution into a large firm >1000 employees. The then IT manager and I were talking about why they selected MS Outlook for an email client. His answer was that Outlook was free, it came with every computer. Of course it is not free and it creates lockin and the company had to buy an Exchange Server, etc… MS perfected using the freemium model 20 years ago selling into the enterprise. They were competing with IBM so they had to.

  6. Farhan Lalji

    Think at the same time you need to have some incentive for launch and capitalizing on a premium model. Seems like a lot of consumer web products have been going for a while without introducing a premium model. How much time do you go from free model, win costumers and base, introduce premium model? Surely there should be some point where you ask – where’s that premium model already?

  7. CoryS

    Roger and Howard are ahead of the curve here.I’ve noticed, while working at a major consumer and industrial Fortune 500 company that is known as a leading marketer, that our industrial businesses are the ones that are actually closer to the market and create sustainable advantages in the products they are developing. Not that our consumer businesses don’t interact with consumers or create USP’s, but in a way, our industrial businesses are the ones that are more able to keep competitors at bay longer (as their markets are more opaque), the problems that need solving are harder and the solutions, as Roger notes, create tangible value in headcount or cost reductions.Fred, I won’t say Freemium is dead, maybe just on ice for a while. I would add that given the pending US & EU consumer market meltdown, most companies are going to be forced to seek out cost improvements over innovations that continue to push the entertainment envelope. Start ups seeking to survive in the next 2-4 years are going to need to cater to this. Ad spend will be down, consumer spend will continue to be down and a focus on corporate costs will gain traction.Very insightful of you to push this forward for discussion as I think it marks a turning point of consumer sentiment over the next two years.

    1. Sam Huleatt

      Too funny. I wrote about this this morning as well: don’t think freemium is dead per se but I think we need to rethink our approach. Doubtful you’d ever see a freemium IPO (aside from Google, sort of) and thus the issue is a business model that can’t scale

  8. jrh

    The key for software companies is to lower the costs of sales, and freemium is a great way to do it.The standard enterprise model is expensive and time consuming. It requires that you stuff as much as you can down the channel once you’ve carved it out. The natural ecosystem is a few companies with strong sales relationships buying up lots of smaller companies with strong products. The big guys need more product for the channel. Most of the small guys are focused on technology, not sales. They don’t have the time, money, inclination, or talent to get big on their own with mainstream enterprise sales.With freemium and web services, there’s a real chance that smaller, technology-focused software companies can survive and thrive permanently. Instead of stuffing the channel with everything you can grab, you just do one or two things in an elegant, low-cost way, and you make real profits doing it. For me, this puts a lot of fun and excitement back into being an entrepreneur.The bigger guys do have some advantages still — liquidity, customer relationships, brand-based trust, etc. I think the natural ecosystem with the new software model will be looser cooperative associations of web-based services. A league of web service providers can provide the kind of help that small companies need — financial, branding, cross-promotion, etc. Nick Denton is doing this with blogs. There’s no reason it can’t be done with web services as well.The ability to try the live service before you buy it is key to the whole model. It’s a cost of sales. You can’t think of it just as giving away a free product. You have to remember what an enterprise sales funnel looks like, and how much money gets poured into keeping it going. The vast majority of enterprise leads don’t become sales. The vast majority of free users don’t become paid users. That’s not a dire situation in either case.With freemium, you’re paying your future customer in kind instead of paying an expensive sales force. It makes perfect economic sense.

  9. shareme

    I have a question. What do you think about mixed models where most of the features are free and a few premium sets of features are paid? Specifically, if the premium features were popular it might be a way to boot strap.

    1. fredwilson

      It can work. There are lots of variations on this model

  10. lazerow

    Let’s retire the name freemium. It makes no sense. Freemium implies that companies give away the products or services for free hoping to be able to charge for a premium version. But free isn’t free for the company providing the service. It costs money to run the service, to host the service, to employ people. So you actually have a negative cost to get users to try it in hopes that someone, anyone, will pay down the road. This was made possible and popular by (a) easy access to capital; and (b) lack of choices. Capital is no longer easy or cheap. And choice is abundant so assume you’re not the only free guy in town. The “free” as a price model isn’t dead by any stretch of the imagination. But the companies that will succeed with this strategy are limited and few and far between, specially in this market of tighter ad budgets, which have funded free for years.

    1. fredwilson

      I don’t agree MikeOur portfolio company Tumblr built and launched the service with two people working part time. They now work full time on it. It reaches 30mm uvs/month. And it’s free. And it costs them almost nothing to support and improve it.Same is true of disqus, delicious (pre yahoo), etc, etcFreemium is alive and well if you keep your costs down

      1. lazerow

        Tumblr, Disqus and Delicious are companies that I would put in the “few and far between” bucket. They are great products that have figured out the distribution piece of the puzzle and are now working on monetization. These are the exceptions and not the rule and there will always be companies that profit from free. Media companies have done it since Guttenberg invented the printing press.

  11. andrewbaron

    For our web show Rocketboom, I always wanted to have the audience pay instead of running ads. I always imagined a dream of having a very small percentage of the total audience pay for the content in micro payments. I remember an experiment done by blogger Jason Kotke who conducted a PBS style week long drive to gain earning for a year of writing his blog. He made enough to live but just barely – it was a struggle I think – and he was not satisfied with the anticipated outcome. I still think there is something to this model, but it’s hard to imagine it working for most.

    1. fredwilson

      Check out tipjoy

  12. Simon Cast

    Freemium is still a good model but I think when a service company launches it needs to have more of an idea about what is free and what is paid. Launching without a fair idea of what is going to be paid for and what is not is going to make the company harder to push through to having paid aspects. In fact I think unless you are in alpha the service should have both have free aspects and paid from aspects right out of the gate.Interestingly, I noticed in Roger’s post that he doesn’t really cover the Gillette model nor two sided markets…. Both of these strike me as good models for web startups.

    1. infoarbitrage

      i have written about the gillette model before as it relates to the gaming industry (http://www.informationarbit…. my post wasn’t meant to be all-encompassing, just some guideposts for the current environment.

      1. Simon Cast

        Fair enough.I wasn’t thinking gaming though. More generally web services. I like the point in your article being reasonable with the gillete model. If you can find the right combination of razor/blades it works.

  13. andrewparker

    I always have trouble coming up with examples when people ask me what consumer-facing services have been big winners using Freemium. Flickr reportedly breaks even on Freemium, which is underwhelming given their mindshare. 37 Signals products do well, but I’m not certain it’s a venture-scale business, and it’s not true Freemium because most of their products are completely useless if you don’t pay for them.Any thoughts on examples to back the model? Geocities? Don’t know if they ever won big on revenue, but they certainly were a big win for everyone involved (except maybe Yahoo). They were Freemium, right? Perhaps Hotmail? Were they Freemium before being acquired?

    1. Sam Huleatt

      Can Google be considered freemium?

      1. andrewparker

        IMHO, Google does something different that I find to be more interestingthan Freemium. They monetize a small piece of their service in order tosubsidize many other services that in aggregate allow them to amass a veryvaluable data asset. It’s like how Microsoft used their Office/Windows cashcows to subsidize a free version of IE that ended up crush Netscape. It’sslightly anti-competitive, but in the end consumers during the battle. Ofcourse, IE won that battle for many other VERY anti-competitive reasons thatI don’t support, so this isn’t an apples-to-apples comparison (such aslocking up faster API calls for M$ devs only).Anyway, I wouldn’t call this practice Freemium because the people that payaren’t getting a free taste and then ramping up to a paid version overtime. All AdWords/AdSense accounts pay from day one. And being an end-userof Google doesn’t flow into becoming an advertiser of Google… the worldsare pretty separate.Also, I’m more interested in consumer-facing example of Freemium reallyworking. Google’s paying customers are all small-businesses/enterprise.

        1. Sam Huleatt

          Hey Andrew….true but people do “pay” in the form of attention anddata (they just don’t realize what currency Google is really after).But yes, it is not an apple to apples comparison

        2. leigh

          I’m pretty sure we could consider Google a full blown Free service when they started- they didn’t put ads on their service i think (someone can tell me if i’m wrong) until i think 2000 even though they had their beta version out for about 4 years or so. Free doesn’t assume never monetize, but it’s a strategy not only to more easily build up equity in your brand and users but understand behaviour before developing a full blow business model.

      2. Ted Murphy

        Google is not freemium, its free. But you gotta realize how spectacularly lucky they were. Who knew that search page views (2% of total page views) would be worth $40 CPM while the other 98% of page views would be worth less than $1 CPM? Not the “do no evil” folk, I guarantee.

    2. fredwilson

      Geocities was free from day one

  14. pierreloic

    The issue of freemium stems from the fact that a free product or service is too often associated with the absence of a clear business model. See Techcrunch’s idiotic article from a few weeks back describing Yammer as “Twitter with a business model”.No question that showing revenue is a very good way to demonstrate that your startup has a clear idea about generating money. The problem, as Fred rightly highlights, is that many times offering a service for free now is the best way to get feedback from a wider user base. It helps underfunded early stage startups focus on bettering their product rather than spend a lot of time trying to sell something not always not ready for prime time to a handful of customers.I’ve been working on a web service called for about 18 months now. We launched the free version 8 months ago and we’re only starting to generate revenue now. There is no way we would have gotten where we are without these 8 months of trial and error.

  15. Daniel Gibbons

    I’d love to buy in to the idea that freemium has a long way to go, and I’m sure it does, but it’s really hard to think of any examples of businesses generating really substantial revenues and earnings on this model. There are lots of large exits everyone can reference, but those days are probably over for a while.37signals is the only one I can think of (I’d guess their revenues are $10MM+??), but time and time again they have indicated that they aren’t interested in building a huge business; rather just one that gives them exactly the lifestyle they want.But I think one of the bigger issues might be that many developers of freemium applications think their marketing strategy is nothing more than having a free version. Particularly in the enterprise, having a free version is of little or no help with adoption, since the product has to pass all kinds of other tests (risk, entrenched bias in the IT department, politics — all of the things a great enterprise sales force can deal with). So, free or paid, the problem is still sales, marketing and distribution…

  16. jv998

    Free is not dead. Web services are. The world does not need another cool application to do something on the web. Yawn. The world has enough software.

    1. Ted Murphy

      Hah! That is so wrong. Web services are the brightest spot on the web. “The world has enough software.” Oh man, that is hilarious. Technology is a never-ending pain in the butt for 95% of the population. No wonder “cloud software” is the rage — its the rare user who would not rather have their computing performed off-planet. The opportunities for good, “person-centric” software (thank you Emil Sotirov) are huge right now.

  17. MartinEdic

    We have Freemium version that is fully functional and has no expiration. It is limited to a certain amount of data you can acquire.The purpose of Freemium is twofold, IMHO: To build an active user-community and to generate solid, qualified leads. We are converting a significant number of Freemium users into customers and our service is not cheap (starts at $500/month). The reason is that it is a professional tool, not a widget or aggregator.The community aspect is invaluable in product development and utilizing collective wisdom for QA. This is a definite value add.

  18. ethomaz

    Lots of interesting points in this discussion. My intuition tells me that freemium is a good idea. It makes sense to me from a business/market research/product development point of view. But others may perceive it differently.I agree that it would be really useful to see a list of companies employing this approach TODAY and see how they are doing. There are many companies experimenting, including our own, and it would be beneficial to share more knowledge around this business model (and variations thereof)

  19. vanelsas

    Fred, I fully agree (but you know that already 😉 ). I also think that advertisement models often lure us away from answering First Use questions.These models are mostly growth or network oriented, not user-value oriented. Growth is something that will occur naturally because you create user value. It shouldn’t be the other way around.Freemium is the best way to do that. It builds a fanatic customer base that will help you to improve your service and it allows revenue stream that directly monetize user value. The simplest and best business model there is.

  20. John Caddell

    Fred, I favor your approach to start with consumer-based “freemium” products, then move them into the enterprise space, for one main reason: products that are engineered for the enterprise right away typically start with the IT folks’ priorities—security and compatibility with other apps–and then bolt user applications onto that. Consumer freemium apps focus on the user experience first.As a result of this, most enterprise-engineered products are hard (at best) to use. Therefore, they aren’t used and just sit there. One example: a client of mine uses both Lotus notes and a document-management system, neither of which can be accessed easily if you’re not on the company LAN. For remote workers like me, they simply don’t work. So I don’t use them. They certainly won’t change the world.

  21. Scott

    I totally agree with you. No offense to angels, but the fact is, most of them are old. They don’t understand technology. Giving away something for free initially appears foreign to them. And, they just are too prideful to admit it.Freemium is not dead; investors who understand the model

  22. Don Jones

    Freemium works for our venture capital database It has a limited free version for two weeks and costs $25 per month for a full access subscription.The business and model are proving to be recession resistant…

  23. Ed French

    Surely “Freemium” makes more or less sense as an investor dependent on your position. If I was an angel investor, with limited personal bandwidth and capital, then it never made as much sense as a more organic growth model. In Europe at least, I wouldn’t expect many angel investors have ever been very comfortable with anything where significant revenues lagged behind the costs and user base. When one of our portfolio, with a Freemium model and a decent and rapidly growing user-base, was fundraising last year it became very clear that there was a binary distinction between two classes of investors: I’d say that about 2/3rds of the institutional investors (actually tending to be those who were more generalist), would only buy in when the revenue conversion was fully proven and the company was approaching break-even. The other third were equally vociferous in their belief that you should “build-the-user-base-first-and-monetize-later”.I suspect that your friend is in the minority in actually “switching” his investment model, others may simply feel that in the current climate they can speak their conservatism more stridently.Maybe, if a company has a low burn rate, a decent capital base and supportive investors, it might be better not to scale the sales model during a fiscal winter. Instead some companies may want to conserve their cash, build their user base cheaply, ready to emerge butterfly-like when the ice has melted in the fiscal spring?

  24. bloggrsmosaic

    depends on what are you looking for, but free is always gonna be

  25. danhau

    If this come to fruition, people are going to start paying too much for paid models and too little for no models.

    1. Mark Evans

      Freemium – and paid – work if you’ve got a service people want to use. In other words, if you build and they come, then getting people to pay for something such as premium services is a lot easier.

  26. Peter Tennis

    Completely agree. The minute you throw the word “Enterprise” into the mix, the mix changes. Its a different game, not as sexy and not as fast, and the “free” model does’nt hold respect from the Enterprise like it does from the solitary consumer.

  27. Mrinal

    I couldn’t agree more with you, Fred – its all about failing fast and keeping that cost low! Specifically in the consumer space, its about URL – Ubiquity first, revenue later :)I do have some baggage since I have seen it work at my alma mater – LinkedIn.

  28. Rex Hammock

    Didn’t VCs learn post bust that opportunities come in many different flavors? Oh, well. If I were a VC, I’d look forward to times when my competition headed for the hills.

  29. Ed Anuff

    I think that launching freemium only is a big problem. I’d require any startup to launch from day one with both a free and premium offering, to force the thinking in advance of what premium might consist of and to start test marketing those features. If you don’t start getting the feedback and data on what people pay for and what they don’t, it’s very hard to “flip the switch” later on and introduce the premium features just by trying to poll the community for what they’d pay for, since once the expectation is set for a free service, users tend to expect they’re entitled to it. I don’t actually think that the first set of premium features will actually work out, but working on it will become part of the company’s execution plan and DNA. Secondly, I’m uncomfortable in general with the way that “enterprise customer” is used to equate with “paying customer”. Few startups are actually going to, or even want to, engage in a true enterprise sales process. Individuals, small business, and departments are generally who the true paying customers for a web service, and they can all be 90% addressed through self-service online e-commerce. I’m not sure that freemium is dead, but “we’ll cross that bridge when we get there” sure as hell should be.

  30. karls

    I agree with your observation. That’s the same feedback I got from people familiar with enterprise sales. Unless you have deep tentacular connections within the enterprise that you are trying to sell to, it’ll be a tough battle. You may end up spending 1 year trying to clinch that one enterprise deal without any headway.I would argue that freemium would be the optimal business model in this business climate. With enterprise spending expected to go down, it would a harder sell now than before. Rather than twiddling your thumbs awaiting for your enterprise sales breakthrough, it would be better to throw a crippled free version to consumers out there and let them provide valuable feedback to you. And if you managed to get 1% of these consumers to upgrade to premium versions, consider it as a bonus.Having said that, ad-based businesses will be the most vulnerable in the quarters ahead. Ad spending is always the most expendable expense during downturns.

  31. Eric

    I would add, based on my experience in consumer online services, that even if you have a freemium service, it’s best to offer (and charge for) the premium part from day one. that way, you can set real micro-scale revenue targets, and make sure your early adopters are validating the business model as well as the feature set.

  32. Udo Szabo

    Great discussions. Might be we are mixing two very different things here – starting from the difference between free and payed, then consumer vs business, then direct vs indirect business model. All of them work and need to be fit the individual service and value you promise to your customers. One reason new service venture are directed t either of these options and choose too often the free route, risking further premium business is the web is lacking a popper micro payment system – like mobile offers. You know any innovative, valuable mobile service that is free and has problems finding a sustainable business model? Attention will always be of value, but i hope we will find another way to profits for small and innovative services.

  33. Mark_Richards

    Perfecting a web app in the consumer market, and then launching into the enterprise market, sounds great but I’ve done it, and ultimately the two markets are very different and you will get pulled in completely different directions.And it becomes a tough problem to have for an early stage startup because the capital requirements, sales and marketing models, and sales/marketing competencies are completely different. In short, it’s two different business models with a huge risk that you will do neither well.Even as a development model it’s tricky because I disagree somewhat with the post above. Yes, both consumers and enterprises love try before buy, but in the enterprise, they won’t even try it unless you really have the product dialed in, stable (don’t even think about trying the web 2.0 tradition of launching as beta), and most importantly – solve a real business problem with felt pain. It costs way too much money for a business to even try something, largely because it has to be checked out for security, compatibility, run on a test server, employee time, etc, etc.In my case, the consumer version helped us get some of the scalability issues out before we launched into the enterprise. And that was good – we probably closed a huge deal at Boeing on that fact alone. But new scalability issues arose because it was a different environment (SaaS models may elude this problem), and most of all, what was important to a business user eventually became different from a consumer user.Out of all that, I now preach a product definition and launch methodology for B2B’s that helps you do all the experimenting and tweaking well before development. I think you have to do that so much more than in consumer because the adoption and selling models are just so different, and that difference needs to ripple all the way back into product development if you want to succeed.

    1. Ted Murphy

      The other difference between consumer-oriented products and business-oriented products is that the B2B products have to be quite difficult to replicate. The consumer oriented products do not. In my old company, we had 4 award winning (as in web awards from guys like Money, BusinessWeek or Fortune) consumer products, but only one that was interesting to partners (ie big media companies).They are very different market places, and the B2B market demands a lot more in terms of replacement value. I’m just adding to what I think is a good comment.

  34. Mike Su

    There are also a lot of very real challenges of being an early stage company trying to sell to the enterprise. It’s not as easy as just saying you’re looking for companies that have an enterprise offering. As if early stage companies didn’t have enough challenges already, here are a few I can think of based on my experiences building products for the enterprise:- Enterprise buying cycles take FOREVER. Is the startup ready to go through a 6 month RFP process and multiple bake-offs?- This changes the makeup of your team. Whereas most startups can run on a lean model with 90% developers, a startup targeting the enterprise must build and manage a sales staff (VERY different than managing a development staff)- Enterprise customers do not like buying from startups. They like to know whatever solution they go with will be around for years. They are conservative. They are risk averse, and buying from a startup is an incredibly risky proposition. An IT guy can’t get slammed for buying from Cisco or Oracle, but if he buys from and things don’t work out, he may be looking for a new job.- Enterprises love them some roadmap. If you can’t provide at least an 18 month roadmap, they don’t want to hear it. Again, stability stability stability is what Enterprises want, which is not a word commonly associated with early stage companies.- In my experience there’s no such thing as a single Enterprise customer. It has to be segmented into Pro-sumer/Home Office, SMB, and large enterprises, which all have very different characteristicsAll this being said, there is still room for startups to play in the enterprise – there are a lot of systemic issues in companies like Oracle and Cisco that prevent them from innovating (cannibalization, sales incentives, massive organization structure etc.) and therefore create opportunities for innovative startups. But it’s hard. Very hard. And so if your friend Howard is focusing exclusively on paying customers, his deal flow and deal flow quality will drop dramatically.

    1. Ted Murphy

      As a startup, you need a CEO and/or CMO who can sell into the big guys. And it takes a year. The Enterprise will first try to replicate the product internally. Then they they will try to get IBM and AT&T to replicate the product (at your cost point). If they all fail, you’ll have a shot. Simple.

  35. HermannM

    What is missing from this analysis is a view of the consumer. I am a big fan of generational dynamics and, as such, warn against applying business models for Echo-Boomers that mirror successful ones for Gen X’ers and Baby Boomers. In my humble opinion, Echo-boomers (born 1980 to 1999) are more savvy consumers. For them, the freemium model is and will be the ONLY viable method of getting them to induce trial.So who are these Echo-Boomers and why are they more savvy? They are the Reagan babies who were born after the US won the Cold War. They came of age during the longest peacetime economic expansion in US history (1991-2001). They are the “me” generation and it was for them that technology shifted towards consumer centrism.Before 1980, television penetration was between 1.0x and 2.0x per household, usually the living room and parents’ bedrooms. But when we transitioned from broadcast to cable programming, TV’s started showing up in kids’ bedrooms. It makes sense, parents didn’t want to watch music videos or Nickelodeon. Advertisers took notice and started delivering advertising directly to children via those channels. Mini-van advertising did not originate on NBC, its commercials were shown on Nick-at-Night and other children’s media. Chrysler and Ford made a bet that educating children was a better means of influencing parents’ purchase behavior than educating the parents’ themselves. For the first time in modern history, children were listened to, they were “driving” the economy and they knew it. Silicon Valley heard the call and everything now is geared towards giving those darn Echo-Boomers, what they want, when they want it.I am a Gen Xer and I would have never thought to pirate music. But then again, the marriage of Rio and Napster wasn’t arranged for me. Soon everybody got into the act. Tivo is the poster child for how not to market to Echo-Boomers. I paid $250 for the box and another $250 for an add on service. The add-on service turned out to be an essential function, forcing Tivo to make it a standard feature. But by then it was too late. The Echo-boomers figured out how to hack a Tivo box, forcing Tivo to launch the free TivoToGo service. Tivo turned out to be the Elmer Fudd of innovation. As bugs bunny would say, “What a Maroon!” Within months, every industry was turned on its head. Bittorrent did for movies what Napster did for music. Linux is doing the same to Microsoft. YouTube is doing the same to cable television. And the fremium model has made its way into the financial arena. When I bought my car, I made a huge down payment, kept the payments low and paid if off early from the proceeds of a year end bonus. Echo-boomers have a different view on financial literacy. Today they get pissed when they can’t buy a car or furniture without a zero-zero-zero deal (zero down, zero interest for twelve months, zero payments for 2 years).Nothing lasts forever but I am not so confidant that Echo-boomers understand the concept of TOO GOOD TO BE TRUE. They’ve had it good for a long time. The oldest group of Echo-boomers just turned age 28; they are about to get married, buy a home and have kids. As their disposable income increases, they will become the dominant force in our economy. So fellow entrepreneurs and the vc’s that back us, we are going to need to keep catering to them. They want it all, they want it now and they want it free.I am with Fred on this one… Fremium is and will be alive and kicking for a good long time. Sorry Roger, Trix aren’t even for kids anymore.

  36. Don MacAskill

    Freemium certainly has it’s place, but don’t discount the fully paid model, either. At SmugMug, we dipped our toes in the freemium waters after a few successful years of being fully paid – and ran screaming from the results. Going freemium would have killed our company – instead we’re thriving.The problem is that the “free” accounts bring an entirely different customer, and in turn, entirely different customer relationship, than a paid account does. And since the free accounts dominate, in terms of #s, the impression of your brand is shaped by these free accounts which have an awful lot of baggage and negative issues when compared to your paid accounts. They, in turn, can drive away your most lucrative paying customers because that baggage (porn, hate comments, boylove, whatever) kills the community you really want to foster – that of your paying customer.Which is why we’ve seen an awfully large number of free and freemium failures (and fairly low priced exits for those few successes) in the photo sharing space. The big brands (Adobe, Canon, Sony, Microsoft, HP, etc) find their brands being tarnished and damaged by these free account holders and are forced to shut those services down. And there are plenty of parallels in non-photo sharing spaces.Again, freemium has it’s place (and many people just won’t pay for services), but fully paid can be extremely lucrative and successful, too. 🙂

  37. Michael Masnick

    Hi Fred,I actually addressed this just last week in a post myself:…I think Freemium makes more sense than ever.

    1. fredwilson

      I am not surprised that you were ahead of me on this one!

  38. Riaz Kanani

    Freemium vs Paid is definitely a hot topic right now with the economic downturn happening all around us. One of the theories seems to be that due to the recessions/slowdown ad spending is going to decrease and so therefore ad funded models are going to suffer. The other side of the coin though is surely people have less money so they are less likely to pay for something..Either way – I think it really comes down to the type of service being offered.Disqus really would not be the leader in 3rd party commenting engines it is today if it was paid for – but then there does not seem to be any advertising anywhere in any case. In the case of disqus, they could make their money through licensing deals with blog providers or even news sites – leaving the cost to the user free.In each case, the company needs to do the analysis and work out the best methodology for them. Some will choose freemium while others will choose paid for.One bright note – ad spending online is due to increase not decrease in the next 12 months (though not as much as was initially hoped for). That tells me that freemium has a future for now.

  39. A2K

    Agreed. Freemium is FAR from dead. Or at least it should be. I can respect Angels wanting to invest cash into businesses with a more solid model however, in my experiences (especially in the National Advertising and Marketing space), businesses large and small are extremely slow to adopt technologies (new and old).Additionally, to lead a prospect from “opportunity” to a “win” requires a tremendous amount of time, resources and management from the product/service owner. (No to mention having to spend those on each and every lead–regardless if you win the biz or lose it). Not only does it take a lager sales force (as you pointed out) to win the business, it also requires more layers of “qualified” leadership to help manage the (often) painfully long sales cycle. Oh, and then a little thing called client training and ongoing support.When you look at most of the web models today that are “free” or “freemium” these extra layers don’t apply. And for the most part, users recognize this as simply part of the game. With a paid enterprise solution, the providers don’t have that luxury. And if they think they do –and don’t end up providing it (such as a few i have come across in the slice hosting dept.)– their client base will simply move on to the next organization who does.All in all, these are just tip of the ice-berg considerations. The real fun begins for these providers when they start seeing customers leave or request pricing discounts because Company X has a similar product for $5 bucks less a month. In a free/freemium world the focus turns to feature set and experience, not money. And If done well, this ultimately leads to solid level of Brand loyalty/evangelism–something that is hard to destroy with a few bucks difference here and there. WordPress is a perfect example of how this can work for you.As i said above, i can certainly respect the shift in position from some of these Angels. After all, it’s their money. That said, i think if these Angels start looking to focus heavily on enterprise solutions providers in hopes of mitigating some risk, they need to be prepared for two things: 1) is to invest a lot more of their cash (since chances are they will be the ones strapped with this “going to market” expense) to help those start-ups find, attract, and manage the talent they will need to sell and support their offerings early on, and 2) is sit on that investment a little (or a lot) longer than what they are accustomed to.Of course, i doubt that I am pointing out anything that they don’t already know.As always, thanks for a great post.Cheers,Alex

  40. Will Johnston

    I use Googles range of free services every day and then at the end of the day I tweak my Ads, which I’m paying for, to grow my business. I read the NYTimes each day for free online and occessionally, am drawn to an ad or have a brand impression reaffirm my confidence in a product or business. Freemium has it’s place and is a model that I believe is here to stay.

    1. A2K

      And yours is a perfect example of where we are in this age. This isn’t a “new” approach by any means. And it’s not just here on the web. I remember as kid (excuse me while i date myself a bit) subscribe to Random Houses “10 CD’s for a penny” promotion which then obligated you to buy more at regular (if not increased) prices. Mobile phones are a another great example of this model–free phone, 2 yr contract.Bottom line is: once you set a standard, its very hard to go backwards. While Web 2.0 hasn’t necessarily created the free/freemium standard of consumer/user expectation, it has definitely driven it to the forefront in a lot consumers minds. And even if you say “well we’ll just change the standard”, you need to keep in mind that there will always be someone out there who will give it away free to your customers (and make money from them in a more strategic, less obvious way).At the end of the day Angels & VC’s can choose the path they want. But if the web has taught us anything these past few years it’s the reality that the consumer will be the one to decide to who succeeds.

  41. Joseph Flaherty

    I think the “Web Meets World” trend creates tremendous opportunity for business model innovation. Youth focused companies have done a lot of inventing in this space, monetizing web services with physical goods, since most of their customers have don’t have credit cards. Some successful models are:- Virtual good gift cards for sites like Gaia, Zwinky, and Stardoll are now the fastest growing product category at Target.- WebKinz has a 6MM+ UU/M and to get access to their site you have to buy one of their stuffed animals with a special code on its collar. They have a great audience for advertising and a profitable customer acquisition strategy.- Rockband is making use of 3D Printing technology to allow you to print your avatar from the game, Figure Prints already does this for Warcraft and has a massive waiting list.- Disney has a sensor technology called “Clickables” that are embedded into consumer products and provide access to content online. e.g. If you buy a charm bracelet for their “Fairly Hollow” MMO you get special virtual goods. What is really neat is that if you swipe your bracelet against a friends in real life, you get to share each others virtual goods online. Brilliant virality.- Bella Sara is like Pokemon for girls and buying trading cards gets you access to special avatars and virtual goods.- Zazzle, Cafepress, Shutterfly, scrapblog, et al provide tools to put UGC onto tangible goods.These models certainly have challenges (manufacturing, distribution, etc.), but they offer companies a host of new ways to think about making money. They also provide some nice barriers to entry for competitors.I think all successful web-based companies are going to have to give something away for free as a way to “preview the merchandise”. The Apple store lets you send emails on an iMac and play with iPods before you buy and most other retail establishments give you a way to try before you buy. I don’t think web services will be much different so some “freemium” strategy is going to be required.

    1. Ted Murphy

      You’re 100% right — the youth focused web sites are beating the path. They have dedicated, loyal users and they are figuring out how to monetize them. My question — how many kids would pay for a one-on-one interaction with Barney? Enough to fill Radio City Music Hall, as a I know from experience.

  42. Benjamin Yoskovitz

    I’m not sure Fremium is dead, but I’m certain it’s not the model you should automatically use if you’re in the B2B web services space.Since we launched Standout Jobs in January ’08 our product has been free. Shortly we’ll be releasing a new version and that will change. It’s a combination of feedback from customers, knowing our market and learning a lot about what we have to do to meet our goals.Fred: I understand your concerns with the costs involved selling web services to businesses, but my answer to that is this: Distribution.B2B startups need distribution — they need to find the right channels and use those channels to sell their products, so they don’t need to build up a huge direct sales force to do it themselves. And in my experience with this, they need industry insiders on their team to help them get that channel / partner strategy roaring along. The challenge for B2B plays is that it’s very hard for two or three guys with a good (or great) product and some great ideas to build up those partnerships; most resellers won’t give them the time of day. That small startup team may also not have 20+ years industry experience and the right kind of rolodex. But those are solvable problems.Distribution. It’s not the only answer, but I think it’s often overlooked by many startups, and can really work to solidify your place in the market, customers and revenue.

    1. Jevon

      Building relationships with the right people, and then getting a distribution deal in front of them is a tough and often drawn out process.I think the important thing about what Fred is getting at, and the model I have been working on, is to use freemium to help develop the product in the mean time,. so while you are out building these relationships and finding partners, the product is out in the open, people are using it and you are learning from them.That, to me, is what you have done with StandoutJobs

      1. Derek

        I totally agree with Jevon. It’s a lot easier to attract resellers and partners if they (and their customers) can use the product first. Knocking on doors is a lot harder, especially in a recession when no one wants to risk new things (and may have already fired the people who would do them :).

  43. Charlie Crystle

    Freemium isn’t appropriate for all sectors (and it’s not going to die, no).We sell CircleDog (at for $99 for the standard license. No monthly recurring revenues, standard software license model. I’ll point to MSFT and their $40 billion of cash or Intuit or etc etc as validators of the model. Then there’s Pro at $249, and we’ll introduce a higher tier.Then we also sell web services into the desktop client (we’ve been hybrid from day 1). So that gets recurring revenue.Free doesn’t work in the small business market as much as it does in the consumer market, because people value what they pay for, and what they don’t pay for, they value less than the value they are getting. It’s possible we’ll do a consumer version with steps up, but I don’t know that removing the friction of a purchase will lead us to more revenue down the road.That said, I’d rather have 100,000 customers who haven’t paid than 10,000 who have.

  44. howardlindzon

    i am tired and just disagree with every comment made today. anywhere. i only agree with cramer. he is never wrong nor am I

  45. Kevin

    No one has commented on this statement yet (per my quick skim):”There’s a movement afoot by investors to back web services with a real business model…”It’s more than a movement. It’s a capital-allocation decision. The current (since June, acutally) economic environment has taken away the luxury of TIME. If you are 2 guys in a garage with some old stock options in the bank, good for you, you can stretch out the payback time. The rest of us have to find money to be able to eat next week.I think we’ll see the “fifth” model of free more often – the free forever model. I’ll take that 2-week trial subscription to the venture cap newsletter, then at the end sign up again for another trial using a different (infinite and free) e-mail address.

  46. Derek

    Obligatory shameless self-promotion for a successful freemium business: http://www.SurveyGizmo.comI think he’s dead wrong about getting credibility via early enterprise sales. Enterprise sales is hellishly difficult and time-consuming in the best case. It’s even harder for a startup. But it’s a lot easier if the enterprise finds you via Google (they use it too, far more often than trade shows and trade rags) and you can truthfully tell them you have over a XXX free users and YYY paying.They still have their hoops to jump through, but you’ll be jumping from a position of strength rather than desperation.