Opinion: Why the Freemium Model Works
I just read this article on “Why the Freemium Model Doesn’t Work“, and while he makes some good points, he wraps up the article by saying “The reality is, the freemium model doesn’t work for the majority of companies who try it.” No shit Sherlock! The reality is, no model works for the majority of companies who try anything. The majority of companies fail within 5 years.1
The 4th Type of Freemium
In his examples of successful freemium models he mentions Evernote, Dropbox, and Spotify. He also suggests that fremium models are limited to only 3 scenarios, egregiously missing my favorite type of freemium: pay for additional features. One of my favorite services that follows this model, Instapaper, is conspicuously absent from his list due to this oversight. (Yes, they removed their free app from the apps store, but the basic feature of Instagram, saving stuff for reading later, is still free and you only pay if you want the mobile experience and offline reading. Sounds like freemium to me.) Disclaimer: I have a personal interest in this model working. It’s one of our strategies for Netmarks.
It’s a good idea not to endorse stupid opinions.
Some Startups Fail, Some Succeed. That’s Just What Happens
In addition to missing a large part of the freemium market, the stats just aren’t that compelling. Over half a million new businesses start each year according to the Small Business Association.2 If 52% will fail within five years, that means that 1.25 million new businesses that opened their doors/websites in 2007, Evernote and Dropbox among them, still exist today (500k/year * 5 years * 50% failure rate = 1.25 million). That’s across all industries.
Let’s say that 15% of those companies are in the information/technology industry, and 20% of info/tech industry startups are consumer Internet/mobile. That’s 37,500 new companies in 5 years, way more time than the 3 years between Dropbox/Evernote and Spotify. Now, let’s assume that 25% of those companies decided to go freemium and forego any of the other models: free, paid, retail, subscription, deal of the day, or God help them, advertising *shudders*. That’s 9,375companies in five years with three incredibly notable successes and hundreds of lesser successes, acquisitions, and companies still breaking-even. As far as startups go, that’s about the percentage I expect.
If you add in the fourth, very popular type of freemium, the percentage is even higher. All in all, it sounds like freemium is working just fine. Feel free to disagree in the comments below.
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