The Evolution of the Freemium Model

The freemium model is proving to be a highly discussed topic in modern SaaS (software as a service) strategies, attracting increasing attention as time goes by. While it has gained mainstream acceptance as a bona fide business model, it has still not gained full acceptance. It’s more common to see a purely ad funded or subscription-based system in play, mainly because they’re less risky, and less complex to get at least to a functional level.

But, while freemium has its proponents and opponents, it deserves our respect, because were it not for it, our advertising and marketing practices would still be firmly entrenched in the ways of the 1930s.

While it’s easy to think that freemium is a new idea that came along with SaaS, and that SaaS is the only industry in which this hybrid billing and marketing model could actually work, this actually isn’t true, as freemium has a long and deep tradition that starts with the dawn of the free sample.

Though demos are often available in non-freemium models, a scalable ‘try before you buy’ concept has been widely employed by services and products since the 1950s. When software became a highly profitable industry with the dawn of the computer age, there were models quickly being devised to encourage purchases, while getting user communities established without cost prohibition.

This is a tricky problem to solve, but a critical one. New software requires some level of trial in order for customers to be willing to make the commitment to buy it. A traditional, limited demo would not allow for the level of study and established user base needed for launch. Therefore, some long-term but conversion-encouraging model needed to be devised that would allow customers to try it indefinitely on a limited level, and then purchase something that worked in a superior way once satisfied it worked the way they liked.

This model was put into play almost immediately, originally under the name shareware, software that encouraged a purchase, or required a purchase for full functionality. Shareware also came in the forms of “free versions,” still famously available for a lot of retail software. This model of course required limitations to what lines defined the free or paid software, and it wasn’t until SaaS that the model was able to become more flexible, and allow for a wider spectrum of demonstration and paid versions of software.

Originally, it was pretty black and white, echoing the shareware model of traditional software, but as different scales of business and personal user budgets began to require a wide gradient of functionality over price, freemium became something of a rainbow.

At this point, a lot of SaaS companies with a freemium background offer a completely free and mostly functional ad platform, with very minimal ads, and a pay per trial version of the fully functional software. This pay per access plan is actually costlier than a subscription, but gives users the chance to pay only for the amount of use they need.

Of course, subscription services are present, and are the meat of the revenue. The problem here is that conversion rates are slower and multi-staged, meaning that there is a chance that it will be too slow of a process to meet calculated required monthly revenue. This is in fact why it has its detractors. It’s great for customers, but really risky for the businesses.

Mark Tluszcz is the co-founder and CEO of Mangrove Mangrove Capital Partners. Mark is currently serving on the boards of FreedomPop, Nimbuzz, and Wix and had the privilege of being involved with Skype until the company was sold to eBay. He has been named by Forbes Midas List in 2007, 2008 and 2009 as one of the top 100 global deal makers in technology and selected in 2010 as one of the 30 most influential persons in Luxembourg.”

Mark Tluszcz