The ‘freemium’ model: Making money by giving the product away

These days digital media are causing so many shockwaves through the world of on-line content that it seems like every time we turn around there’s a story about a paywall going up here, or publishers raising the prices for e-books there. Content providers are seeing their sources of revenue dry up, and the instinctive reaction is to try to grasp whatever revenue source they can as tightly as possible.

But there’s another business model that can work, at exactly the opposite end of the spectrum: the “freemium” model. Under freemium, the basic service is made available absolutely free, with “premium” perks available for purchase.

It’s not that the basic service is crippled in any way, like shareware software demos; many basic users can get by without ever buying a thing. But some nice extras are for sale at reasonable prices, and frequently power users will find that upgrading is a good thing.

This isn’t quite what Baen does, with its free e-books, sample chapters and pack-in CDs. They give away a considerable amount, but not everything. If you were to make a book comparison, it would be more like what Cory Doctorow does, giving away the e-book versions of all his works for free as an inducement to people to pay for the printed versions.

Several media and related companies have discovered that freemium is a great way to build a business model.

Pandora

One of these is Pandora, the customized-radio-station streaming audio company. When they started out with a 10-hour “trial” followed by yearly subscription, it found that not many of its listeners were making the conversion to paying customers—they’d just stop listening.

But after Pandora went to ad-supported free with a higher-quality premium version, it discovered its growth skyrocketed. Now, even though less than 1% of Pandora listeners ever subscribe, Pandora took in $50 million in revenue in 2009.

Dropbox

Another is Dropbox, the on-line file-storage site, which I’ve covered as a means to create a personal on-line Stanza catalog or access a workspace from multiple computers simultaneously. Dropbox offers substantial amounts of on-line storage at a premium rate—but for those who just want an on-line jump drive that they don’t have to worry about misplacing, 2 gigabytes will often be plenty and they’re never asked to pay a cent.

Also, Dropbox offers a referral program that earns the referrer an extra quarter-gig of space for each referral who signs up for the free service (and gives the newly-referred user an extra quarter-gig to start out with, too), and is responsible for 30% of new Dropbox signups.

(I’m up to 8.25 gigs now (out of a 10-gig maximum), which is enough that I really don’t need any more, but I’m including my referral link anyway so that people who want to try it out can get the extra quarter-gig for themselves.)

Evernote

On-line note-keeping service Evernote (which I also mentioned in the shared-workspace article) provides a free low-bandwidth option (which I’ve never exhausted) and a premium high-bandwidth option for high-powered business users.

Evernote has found an interesting conversion metric: as time goes by, many free users stop using the service, but others will pay to upgrade. “It’s like our users are a fine stinky cheese or wine—it gets better with age,” Evernote’s CEO Phil Labin has said.

Dungeons & Dragons Online

The case of MMO Dungeons & Dragons Online is one you might not expect. There are a number of MMOs and other games that run on free-to-play, pay-for-extras models, of course, but ones that started out as paid-subscription versions and made the change to free are fairly rare. (Though this is only true for America; the European version is still run on a subscription basis according to Wikipedia.)

What really makes DDO stand out is that going from a subscription model to a freemium model actually increased the game’s user base by one million players, effectively doubling it, and grew its revenue by 500%. I find this remarkable given that the MMO I used to play, City of Heroes, never as far as I know even got near one million—or even half a million—total players.

Part of this may be due to game developer Turbine Inc.’s sensible philosophy of making sure that the game is perfectly playable for free and the store is “mainly for convenience”—a rarity given that most free-to-play games are nearly impossible to advance in without shelling out. With most MMOs, when you stop paying the monthly “rent” you lose access to the game entirely—but with DDO you’re always guaranteed a home.

Conclusion

It seems to me that there should be some way to apply the lessons learned from the “freemium” model to e-books. Cory Doctorow’s method of giving away his e-books for free works in terms of selling print books, but not really for e-books—you can’t exactly sell what you’re already giving away for free.

The only thing that comes to mind is some way of making e-books readable for free on the web, but requiring a purchase for actual ownership. It is uncertain how well this would work in practice, though, because making it work would probably require some form of DRM—and that runs afoul of the “no crippling” clause.

And given that DRM is by definition ineffective (as seen with DRM-locked e-book lending libraries), it probably wouldn’t work out very well from the publisher’s point of view anyway.

But on the whole, freemium done right is an interesting model, and great proof of the fact that you don’t always have to charge more to make more.

For more information, see:

• Pandora, Dropbox, Evernote: GigaOM
• Dungeons & Dragons Online: Wow.com, TechDirt