August 22, 2010

Thinking Freemium? The perils of decision anchoring

Freemium is a popular business / pricing model where your core product is free and instead users pay for add-on premium features (i.e. Skype, Gmail). The school against the freemium model discuss low conversions and the overheads of keeping free users whereas those who practice it claim higher than average user adoption and trial. If you were to ask me, freemium works best when you take on a complacent industry (i.e. e-mail) where users are generally locked in to one provider.

One flaw that we rarely consider is that a freemium model can give away too much for free. I’d probably pay for Google Docs if I had to but I can get by on the free edition. Likewise with my Gmail account.

The fatality here is that your product is probably worth the money, as are most free products. Skype to me is worth the $70 annual subscription as a tool, but I am not willing to pay $70 for the ability to use it on mobile. Instead of anchoring my decision on ‘is this product worth the money’ I am asking ‘is this worth $70 more than the free version?’. The answer is usually no.

On Tuesday the 17th of August 2010 I crossed a major item off my bucket list and saw Aerosmith play live in Toronto. I was right in the front rows too. I’ve always been a fan of Aerosmith and heard they were always incredible live. Not only was I willing to pay so much for something based on buzz and reputation but the mystery drove me mad, what was I missing out on? Because I was not used to getting the concerts for free my internal dialogue was not ‘is this better than the free version’ but ‘is this good?’. The answer was yes.

There is a fine art between restricting features on a freemium model so the upgrade is worthwhile and giving users a free taste. When pricing on a freemium model most companies make the mistake of basing their price on the tool, not the added premium features. You need to consider ‘what are these features worth as an addon?’, not ‘what is my overall product worth?’. You gave your product away for free, it is already worth nothing.

  • http://twitter.com/sproutqueen J. Berkeley

    Thanks for a great post Alex. Consider how to price (give away or not) is the same issue across many industries these days. Have a great week. :)

  • http://twitter.com/sproutqueen J. Berkeley

    Thanks for a great post Alex. Consider how to price (give away or not) is the same issue across many industries these days. Have a great week. :)

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  • http://assetebooks.com Thomas Retterbush

    Not only have I seen Aeorosmith for free, but I have gotten so used to the freemium model, that I am spoiled to the point I don’t want to pay for anything anymore.

    Now I have the excuse that I was nearly financially broke when I started my Internet Empire, having been forced to use free webhosting, apps, software, everything, I have come to expect everything to be free.

    Myself, I started an online ebookstore, only to find that everybody else wants everything fee too, particularly when it comes to ebooks.

    I have been forced to reevaluate the whole freemium concept, so that I have decided to start giving all my ebooks away and earning my money via Adsense and affiliate sales. I have even started considering actually buying some services, well at least some premium upgrades.

    Whoever started the freemium model sure opened a can of worms though. And now everybody is using these worms as bait. The problem is that the fish are starting not to want to bite on anything else.

  • http://assetebooks.com Thomas Retterbush

    Not only have I seen Aeorosmith for free, but I have gotten so used to the freemium model, that I am spoiled to the point I don’t want to pay for anything anymore.Now I have the excuse that I was nearly financially broke when I started my Internet Empire, having been forced to use free webhosting, apps, software, everything, I have come to expect everything to be free.Myself, I started an online ebookstore, only to find that everybody else wants everything fee too, particularly when it comes to ebooks.I have been forced to reevaluate the whole freemium concept, so that I have decided to start giving all my ebooks away and earning my money via Adsense and affiliate sales. I have even started considering actually buying some services, well at least some premium upgrades.Whoever started the freemium model sure opened a can of worms though. And now everybody is using these worms as bait. The problem is that the fish are starting not to want to bite on anything else.

    • http://www.twitter.com/alexblom AlexBlom

      Thomas,

      Thanks for dropping by and leaving a comment. The challenge is that everybody does want free, but I don’t think it means things have to be free. Stand firm and, in these cases, a customer not willing to pay is a customer not worth having.

  • http://www.twitter.com/alexblom AlexBlom

    Thomas,

    Thanks for dropping by and leaving a comment. The challenge is that everybody does want free, but I don’t think it means things have to be free. Stand firm and, in these cases, a customer not willing to pay is a customer not worth having.

  • Tonyataylor67

    Great post and priceless words of wisdom that ring true across any industry. I totally agree with your reply to Thomas “..a customer not willing to pay is a customer not worth having.” As a relatively new small business owner in the service industry, I work hard to build up clientele. In retrospect I can see now that I have been guilty of giving away far too much for free. No matter how great and valuable clients believe my services are some of them want me to provide them for free. They are under the misguided impression that I enjoy, can and want to work for free! Perhaps if I were extremely wealthy I would, but my wallet is currently informing me that I am neither Oprah nor a member of the Rockefeller family. Anyway thanks for a thought provoking post!

  • Tonyataylor67

    Great post and priceless words of wisdom that ring true across any industry. I totally agree with your reply to Thomas “..a customer not willing to pay is a customer not worth having.” As a relatively new small business owner in the service industry, I work hard to build up clientele. In retrospect I can see now that I have been guilty of giving away far too much for free. No matter how great and valuable clients believe my services are some of them want me to provide them for free. They are under the misguided impression that I enjoy, can and want to work for free! Perhaps if I were extremely wealthy I would, but my wallet is currently informing me that I am neither Oprah nor a member of the Rockefeller family. Anyway thanks for a thought provoking post!