How would you justify/defend the freemium payment model to potential investors and stake holders?

Question

We are gearing up for a release of a web application that offers both a limited free plan as well as a collection of more feature filled paid plans.

It seems that a common question we are getting from people such as investors is "Why on Earth do you have a free plan?"

To me it seems evident that the success of many popular web applications (Basecamp, Lighthouse, GitHub, etc) have been powered by this model that makes people not hesitate to give it a try, then come to love it so much they realise they need to have the features in the paid plan and start paying.

Certainly most, if not all, the online apps I pay for attracted me via this approach and I know happily pay for the services I love and need.

How would you pitch the usefulness of this approach to those who don't immediately see the merit?

Answer 1

A crucial element of all of the successful freemium applications is that they create a dependency between the user and the application. If the usage/benefit level is high enough, the user will naturally want to become a subscriber to the premium services and gain access to additional features.

If your stakeholders are still unconvinced, nothing succeeds like success. Show them some past examples of applications that have done an excellent job of having people make the transition -- GitHub and iShoot, for starters.

Answer 2

Succesful software, infact success for any product is getting good market penetration. With software there's simply no way you can get users by selling up front, unless you have a dedicated sales force, and/or a massive marketing budget.

Hence the freemium route that you understand, when talking to investors the approach I've used is to go through the costings of a couple of sales people, long lead times etc and make it into a risk/reward pitch. You can spend x on people/marketing in order to get y customers. Or you get many more customers, who pay nothing, and y customers anyway who go premium, but without the head count expense. If your figures make sense it's a strong arguement.

Answer 3

I would refer them to Joel's post on Excellent Customer Service. An adjunct to that is getting people to try your product; and I'm not going to try your product if I have to pay for it and have no idea what I'm getting in return.

The less risk for me to try it, the more likely I am to try it. My company wouldn't have purchased SQL Compare if we couldn't have at least tried it and seen its usefulness. Why would any other piece of software or Web 2.0 application be any different?

Answer 4

Free samples of anything else. Crack cocaine comes to mind. But free food products are a standard thing in the grocery industry.

Also, be very clear that you're simply following the Gillette model: cheap/free razors, lifetime annuity buying replacement blades.

http://en.wikipedia.org/wiki/Razor_and_blades_business_model