There are 7 Types of Freemium and Why That Matters…

There are 7 Types of Freemium and Why That MattersYou think you know Freemium in SaaS? Think again!

In 2009 I released the version of “The Reality of Freemium in SaaS” PDF and since then the “Freemium” landscape in SaaS has continued to evolve rapidly.

Freemium use in B2B technology / software / SaaS / Web Apps / Cloud (whatever) is evolving and I wanted to take note of where we are at today… where we’ll be tomorrow I can’t tell you, but I guarantee it will be different.

I wanted to also call attention to the fact that the use of “Classical Freemium” – the idea of a free version of a premium product – is losing popularity as the go-to method for adopting Freemium, with other types of Freemium coming into play.

This is with both pure-play startups and established companies moving to Freemium.

I’ve made a list of the 7 different types of Freemium below, but this isn’t meant to be an exhaustive list… if you have other ideas, please share them in the comments.

Further, few companies will tell you they conform to any of these, which is great… they shouldn’t be trying to conform to these “types” but instead do what is best for their market, users, customers and their company.

I even had a hard time deciding where to put certain companies – like Evernote and SolarWinds – because they don’t nicely fit in one “type”. But I don’t think that makes these “types” any less relevant.

In fact, many of these “types” of Freemium aren’t exclusive within a single company. The most successful models use a hybrid approach, for instance using the Freeware 2.0 & Ecosystem models together.

What I’ve tried to do here – more than anything – is indicate that there isn’t just one way of doing “Freemium” and maybe to a larger extent show the term “Freemium” is used even when there isn’t a clear Free > Premium path.

Pretty much, if there is a “free” component to a marketing strategy these days, it is called “Freemium.”

Where most companies go wrong is when they confuse “Free Trials” with “Freemium.” If you think Freemium is just an extended “try before you buy”… you’re in for a serious rude awakening.

There are MASSIVE psychological differences between “Free Trials” and “Freemium” that you need to understand. But for now, just understand what I am listing here are “Freemium” and not “Free Trials” and that confusing the two will cause massive issues and probably not give you the results you’re looking for.

The 7 Types of Freemium

1. Traditional/Classical Freemium

  • Free-forever feature-limited-but-usable version of a premium product
  • The one that started it all
  • The one that most people know
  • The one with the major penny-gap issues
  • Expectations that most users will never buy – by both the vendor AND user

Examples: OfficeDrop, Dropbox, LogMeIn
Notes: Read “Classical Freemium Doesn’t Exist at Scale” where I tell you why this type of Freemium rarely exists beyond early-stage (and heavily-funded) startups.

2. Land & Expand

  • The up-and-coming model
  • Free to acquire by users
  • Monetization at organization level
  • Adopters & Users are often kept out of buying process
  • Where the user & buyer are the same, the model uses a lock-in model to gain a foothold within an organization
  • Expectation by vendor is after x users in an org, they’ll pay

Examples: Yammer (Acquired by Microsoft in 2012 or $1.2B), Xobni, Amazon Web Services
Notes: Yammer is the most successful example of this model within pure-play Freemium organizations. Xobni uses this model to push their Enterprise-focused products. AWS uses this model a bit differently, offering their proprietary technologies as Freemium in an effort to get companies to invest in integration and thus make switching costs too high.

3. Unlimited “Free Trial”

  • Not really a “Free Trial” – the vendor likely doesn’t understand the true dynamics of Freemium (which will likely come back to haunt them)
  • Free-forever feature/usage/UX-crippled version of a premium product
  • Expectations by vendor are that they user will convert/upgrade
  • Expectations by user is continued-forever use for free
  • This seems like a risky type of Freemium to adopt since it is mixing the elements of a Free Trial with the psychological aspects of Freemium.

Examples: Echosign, Basecamp
Notes: WHAT? Basecamp is an Unlimited Free Trial? But they’re Freemium. Or maybe you said ” Yeah, they’re ‘Freemium’ but they hide their free plan.” Whatever… the idea is that their Free plan is so limited it just doesn’t make sense to even use it, and as Jason Fried has said many times, most of their paying customers STARTED as paying customers. Think about that for a second.

Now go back to the idea of why you would even have a FREE plan if you can just have a FREE TRIAL when you know MOST of your customers – those who pay – start out paying. I’m not even sure why they keep the free plan around except to appease those who would rip them to shreds on the interwebs if they ever got rid of it.

As for Echosign and others that have a very low usage-cap on their Freemium plan, this can work or it can cause work-arounds. You have to be very careful how you design your app and in-app marketing experience to draw users in and get them to use the product, selling them the whole way so when they hit that usage gap they’re ready to convert to paying today… rather than trying to game the system or put off some signatures for a few days to get into the next “billing cycle”…

4. Freeware 2.0

  • Free-forever, fully-functional product
  • This is their main product or a completely new stand-alone product line within a larger organization
  • No expectations of  conversion/cross-sell by MOST free users
  • Monetization is through add-ons for the free product created by the company itself

Examples: Evernote, Skype, AVG
Notes: I know someone will say Skype or Evernote are Freemium, not Freeware… and they are. All of these are examples of Freemium. I’m breaking down the different types of Freemium here. And why I say Evernote, for example, is Freeware 2.0 is that is 100% usable for free, forever, and the expectation – as noted by CEO Phil Libin – is that most people won’t pay.

Same goes for Skype.

When they do pay they are paying for extra storage and additional features/add-ons, but the base product is good-enough that few people percentage-wise will pay. Virus software, screen-sharing, video chat, etc. are also sectors made up of Freeware 2.0 plays.

5. Alternative Product Strategy

  • Similar to Freeware 2.0, but from a company with an existing premium product-line of which this is a discrete subset.
  • A Free-forever product with no direct up-sell path to “premium” version
  • Often used as a foot-in-the-door strategy
  • Goal is to cross-sell other offerings from the company

Examples: Autodesk’s SketchBook Pro for iPad, (a product of LogMeIn), SolarWinds
Notes: This is actually where many SaaS / Web App vendors are turning to Mobile apps for a distribution channel to new customers. Make sure you watch my interview with Healy Jones from OfficeDrop about their experiences extending their Web App with Mobile apps and how they were basically forced to go Freemium. This can be awesome, but it can also have unexpected consequences.

I also wrote extensively about Alternative Product Strategy in my 2009 work “The Reality of Freemium in SaaS” (PDF) which you can download for free.

6. Ecosystem

  • Free-forever base product
  • Monetization occurs through revenue share with 3rd parties, like add-ons by 3rd party developers

Examples: iTunes, Google Apps, many commercial open source vendors leverage this plus professional services for monetization
Notes: I mentioned iTunes because the software is free creating the base-platform which you can use forever to manage your own music without ever giving Apple a dime. Monetization occurs via a marketplace rev-share with 3rd party content creators. I didn’t mention the Apple AppStore because the base product – an iOS or MacOS device – is not free. Make sense?
Google Apps has a premium version, but monetization around the free version occurs through its ecosystem play.

7. Network Effect

  • Monetize eyeballs, aggregate behavioral data, etc.
  • This is the idea – to whom I cannot find original attribution – that if you aren’t paying for the product, then you ARE the product. Or you’re creating the product through your use of the system.

Examples: Wave, Spiceworks, Google (advertising), (revenue share from offers)
Notes: Spiceworks currently has 1.6M users, but only really has around 200 customers… those customers are the advertisers!

For immediate consultation and advice on leveraging Freemium in your SaaS business, schedule a 60-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.

– Lincoln

About Lincoln Murphy

I invented Customer Success. I focus primarily on Customer Engagement. Learn more about me here.