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Making Freemium Work

Remember back when software was simple? It was either home-grown or licensed from an external vendor who billed you on a regular basis.

Things have become more complicated over the last decade. These days, there's a wide spectrum of choices: from software you can download, customize, and use for free (open source) to packages you buy on perpetual license and install on-premises. In the middle of this spectrum is software you can rent with a recurring subscription (Software-as-a-Service or SaaS), as well as an ever-growing list of "freemium" software including Dropbox, LinkedIn, Yammer, Skype, Heroku, Microsoft Visual Studio, developer tools from Atlassian, and clouds from Amazon, Google, Microsoft, Heroku, and so on that offer both free and paid-subscription functionality.

The principle behind the freemium model is nothing new. Although the term was first used in 2009, it is simply the latest revision of the popular 1980s and 1990s idea of shareware. A freemium pricing strategy carves up a product or service's capabilities (often on the basis of features or capacity) and offers a subset of that capability set free-of-charge, while offering a superset to paying customers.

Today, freemium is everywhere in the consumer IT space. But freemium is being employed in an enterprise software context, too — with freemium pricing strategies increasingly being taken up in marketing by vendors who see it as an effective way to build an audience of potentially paying enterprise customers.

A principal accelerator for the freemium model is the present Internet- and Web-centric universe: Social networks and platforms mean that word-of-mouth marketing/peer-developer buzz has become the most effective way to build a community of users. With no up-front costs, it's easy for users to jump in and try the freemium products their peers are raving about.

At a commercial level, the cloud and SaaS — two of the major drivers towards this new IT procurement and consumption model — provide opportunities for the freemium model to flourish.

The Vendor Perspective

So freemium makes sense if I am an enterprise developer and potentially an IT purchaser. What about from the supplier side? It stands to reason that freemium makes good sense for vendors with an existing user base in place (such as an open source community), but with the no-cost entry point, it's also an excellent strategy for creating initial interest and building a community when it doesn't already exist.

It's worth noting that freemium and open source are not identical. Although freemium is related genetically to open source, it requires an entirely different go-to-market strategy. Open source software provides open-door access to the actual underlying code for developers to look at and extend in the creation of their own apps. Freemium offerings don't.

It's also important to realize that the power of community isn't just about the size of the potential audience for a freemium product or service. Service developers have the potential to draw on the collective knowledge of a user community to get feedback on their current offering and steer future service or product development. It's equivalent to a "free" R&D function on your virtual porch.

Once the freemium app has secured initial interest, the freemium vendor needs to look carefully at how to ease the pathway to a paid version by making it attractive to the entry-level user by providing clear value without giving too much away. This is a critical balance and it should be carefully considered and monitored. The specific balance, as well as the pricing of the premium versions, are the two biggest factors in determining user willingness to pay for the greater capabilities. 

Ensuring Good User Experience and Value (As Quickly As Possible)

In 1968, Andy Warhol predicted, "In the future, everybody will be world famous for 15 minutes." His point nowadays can be read to mean that you don't have very long to make an impression — literally minutes.

The same principle applies to enterprise IT freemium products. Only software that helps enterprise developers, giving them the ability to produce results quickly without extensive training or a long procurement and set-up, will succeed in the freemium market. Developers want software that does meaningful things quickly, and if they can't do that in those first 15 minutes or so, then their experiment with a freemium product could end there.

For the CIO who wants to see development teams working well with other teams and building apps that truly serve the needs of the business, a good freemium product designed to offer high levels of useful functionality will be worth its weight in gold. It will allow her/him to deliver initial results quickly — a result that dovetails well with modern Agile development.

Freemium: Worth a Careful Look

As a result, there are some clear takeaways for all the stakeholders in enterprise IT development and procurement coming out of the freemium trend.

For ISVs looking to extend their go-to-market spread via freemium, the message to their development teams has to be that if a new user can't deliver something great in the first 15 minutes, go back to the drawing board.

For the enterprise developer, the message is equally blunt: Look for freemium apps you can start using immediately, being aware that if it works for a small project, it could also be useful for bigger challenges. However, if it looks like it would require a huge learning curve, move on. A better freemium offering could be a click away — keep looking, as the chances are very high you will find something better.

Michael Williams is BIRT Product Evangelist & Forums Manager at reporting and business analytics software specialist Actuate Corporation. Actuate offers some freemium products, whose delivery was closely driven by the factors discussed here.

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