07 Jun 2010
Are We Seeing the Death of Freemium Model?
This past April, popular social networking site Ning announced that it would no longer be able to offer its services for free. In an e-mail to his 40-percent-reduced employees, Ning CEO Jason Rosenthal wrote:
Our premium Ning networks like Friends or Enemies, Linkin Park, Shred or Die, Pickens Plan, and tens of thousands of others … drive 75 percent of our monthly U.S. traffic, and those network creators need and will pay for many more services and features from us.”
It shouldn’t be surprising that Rosenthal’s tone was rife with hope. But what if some or even most of Ning’s networks do not opt to pay for previously free services? I personally have been sent emails from soon-to-be-former Ning networks about their plans to move to a different platform rather than pony up.
Dissecting the Ning Decision
Those unfamiliar with Ning might think that the company is the brainchild of a few crazy kids without a great deal of business acumen. Think Chat Roulette. That’s hardly the case. One of the company’s primary visionaries and investors is Marc Andreessen, a man who has made billions from successful technology-based ventures.
Perhaps you’re thinking that Ning never gained any traction? Wrong again. At the time of the announcement, the company’s Alexa rank was 126 and the number of Ning networks in existence was in the hundreds of thousands. Many popular Ning networks had tens of thousands of users, putting the company’s reach easily into the millions. The bottom line is that Ning could not sustain the Freemium model outlined in Chris Anderson’s popular book Free: The Future of a Radical Price.
The History of Freemium and a Possible Domino Effect?
For those of you not familiar with the Freemium model, it boils down to this definition from Wikipedia:
“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”
Now, if Ning were one of few companies attempting to grow its business via Freemium, then it could be dismissed as an aberration. It can’t. The model is pervasive. In fact, most firms these days receiving venture capital (VC) funding operate under some type of Freemium model.
Consider the fact that open source (OS) software companies are utilizing Freemium. For example, in April of 2010, OS data solutions company Talend received an additional $8M in VC funding. Talend allows anyone to download its software for free and use many of its bells and whistles. To unlock advanced features, however, clients have to pay.
What if the vast majority of Talend clients decide that 70 percent of a product’s functionality for free trumps all functionality with a bill? Would the Talend business model crumble? Based on what happened to Ning, will VCs ultimately become skeptical of the Freemium model and refuse to fund companies that rely upon it? As David Heinemeier Hansson wrote in a post on 37signals.com, “Eyeballs still don’t pay the bills.”
Feedback
This begs the question: Is the Freemium model ultimately sustainable? Remember that open source does not mean free. As Heather Meeker wrote in my second book about open souce and the nature of free, “Think free speech, not free beer.”
What do you think?
June 8th, 2010 at 3:16 am
This is a pretty tricky problem… I’ve been involved in a case where the “freemium” thing included too much with the free, and the upsell is really hard. The key is that “70% of a product’s functionality” number. I think that doesn’t work– maybe 40% would work, or “a month free with full features, then revert to lite only”… or “sign up and use the base service for free, see the utility, then click here to try the full features for 30 days…” ease people up the upsell slope one step at a time. There really does need to be something essential missing in the free version, though.
June 8th, 2010 at 11:26 am
No argument here. I think that “tricky” is the key word.
June 9th, 2010 at 1:02 am
[...] Are We Seeing the Death of Freemium Model? [...]
June 12th, 2010 at 12:47 am
[...] Are We Seeing the Death of the Freemium Model? [...]
June 12th, 2010 at 8:31 pm
I think that for most big shareholder companies the freemium model is *not* sustainable. Web-apps need to be absolutely huge to pay for a big company via freemium models.
However… companies don’t actually need to be huge. I co-run a startup (http://yoomoot.com) and I really wonder what the big companies do with all their money. Because we’re able to self-finance we’re not beholden to shareholders so we’ll never be forced to change our freemium model. Ning’s huddled masses yearning to breathe free are very welcome with us
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June 12th, 2010 at 8:33 pm
Well, one person’s chaos is another’s opportunity. That was kind of the point of the subtitle of my second book.
June 18th, 2010 at 9:47 am
I think that ‘Freemium’ has been taken too literally in a world of long tails. Yes, a company like Google can afford to have Freemium within the boundaries of its most restrictive meaning; yet other companies (like Ning) need to adjust the definition more liberally to make it work. At the core of this argument, the issue is that FREE implies “I pay nothing and get something in return”. But it can mean other things. For example:
- “free” is no longer “free” but “nearly free” (ie. charge a nominal amount like a few bucks – enough to deterr VERY unprofitable customers, but not enough to turn away good leads)
- “free” continues to be “free” as in “I don’t pay anything for it”, but the value I get is reduced (the 70% / 40% functionality discussion)
- “free” has a time dimension to it (the shareware model – try before you buy, or “free now, pay later”)
- “free” means “no money” but involves other currencies (ie. “to get the service you must give your time to contribute to the maintenance of the platform”, or something like it)
Thoughts?
June 18th, 2010 at 11:39 am
Thanks for the comment. It’s surely an interesting topic. I don’t know if it’s been taken too literally. It’s tough for a company to go “unfree”, as Ning seems to be discovering.