Is Quality the new Freemium?

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When we talk of freemium, our mental model is that we provide a limited functionality free of cost to a large number of users and provide premium features on paid basis that only a few people (will) buy. In this model, the quality is a non-negotiable factor - free doesn't mean poor quality. However, what if there was a business case for delivering all the functionality to everyone but differentiate based on quality? While the idea might sound strange, if not entirely unacceptable, you might be surprised to find that we already consume several such services (check out the deck!). In this talk, I explored this subject further and would like to hear back from you on this idea further - does it make sense, is there a business case with this thinking, and so on?

Transcript of Is Quality the new Freemium?

  • + Is Quality the new Fremium? Tathagat Varma
  • + Why this topic? n This is meant to be a provocative talk! n The idea is to explore how agile thinking could be applied to such an idea. n This is also a work in progressdont construe as a fixed and final position. n It is possible that the whole idea might be a false start after allor maybe not J
  • + Freemium? n Free + Premium = Freemium n A business model in which you give away a core product free to a large group of users and sell premium products to a smaller fraction of this user base. n All industries in which a quality, free product can be duplicated with virtually no marginal cost can successfully utilize a freemium business model. n Examples: n B2C: Skype, LinkedIn, DropBox, Google Drive, SurveyMonkey n B2B: Box, Splunk,Yammer
  • + Origins of Freemium n Popular since 80s by distributing shareware through floppy disks, but really took off in the internet-era due to very low marginal cost of production and distribution. n In 1983, the Economist Carl Shapiro wrote afascinating paperabout this subject. His conclusion was that since customers tend to underestimate the value of a product, the optimal pricing for an experience good is a low introductory price which is then increased when the customer realizes the value of the product. n Ester Dyson in 1994 envisioned a world where intellectual property would cost nearly nothing to distribute in the paper Intellectual Property on the Net. n 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. --- Jarid Lukin,My Favorite Business Model, 2006 n Fred Wilson coined the term Freemium in response to Jarids blog post.
  • + Freemium Free Trial n A common misconception is that freemium consists of a free trial, especially when it comes to software.This is not correct. n A free trial allows users to try out a product or service for limited time, after which the user must pay to continue using the product or service. n A freemium model, on the other hand, provides a free product that is always free, generating value in itself. Some users may purchase one or more premium products, but typically only a small percentage will do so.
  • + Free is Not Always Freemium n Another common misconception is that all business models that involve the use of free products are freemium models. n freemium is not the same as advertising (even though the two business models are often combined) n freemium is not the same as cross subsidizing (e.g., getting a phone for a dollar and then paying for it through a subscription) n freemium is not the same as a gift economy
  • + Does it work? Google Play Revenue Came From Freemium Apps in May 98%
  • + Why it works? n Free = Nothing to Lo$e in a customers mind n Though time invested it often ignored! n Free features are a great marketing tool n Network effect, e.g. Skype or Facebook, etc. n Reciprocity Principle
  • + Where it works? n Markets that already exist with n paying customers (as opposed to unpaid hobby or passion) n but yet there are gaps in existing service n Compelling reason to upgrade, i.e. where n Value provided by free product isnt considered too much or too little n Exceptional value in the paid version compared to the free n Cost of servicing free users < Dollar value they provide
  • + Challenges n The Penny Gap: n How to get users to sign-up for the paid services, especially when they dont perceive any difference in CX? n Which feature to give away free and which to price?
  • + Existing Model Quality Features Paid by few Free to all
  • + What If? Quality Features Also Free to all? Paid by few Free to all
  • + Why (if at all) would that make sense? n Say, the customers want to see, touch, feel and try 100% of product features before buying it? n After all, current hypothesis is based on just the reverse, i.e., people will not like to obtain low-quality goods even when offered free n What if there was a merit in the counter argument, and a market to support it?
  • + What would it mean? n A fully-functional but perceived to be low quality product or service available to all for free (or small fee) n The fully-functional and high quality upgrade available as paid version (maybe based on grades of quality?) n The low quality could be? n Unstable software, e.g. hangs or crashes frequently n Slow software, e.g. low-bandwidth servers n Unreliable software, effort availability n Poor User Experience, i.e. not a highly usable software n UnPortable Software, i.e., not supported on all platforms n Isnt that already happening???
  • + Google services: Free but Not always available and
  • + Yahoo! Web Domain Services
  • + Open source model? n All features free to install and use (DIY) n Pay companies for better support (not mandatory)
  • + Cities? The municipal tax (kommunalskatt) varies depending where you live from 29% to 36%.
  • + And perhaps many many more n Free water Tap Water Bottled Water n Free Healthcare Paid Healthcare n Free Primary Education Private School Elite Schools
  • + What does it mean to design, deploy and deliver? n Understand what people want n Give them the features they want n In shortest time and cheapest manner n Without worrying about a lot of quality n Perhaps MVQ Minimum Viable Quality? n in short, treat everyone as your earlyvangalist? n And involve them in your product evolution process J n Those who want a better user experience / quality, pay for it!
  • + Incremental / Agile n Delivering 100% requirements in a single-pass release is not a good idea n Stagger the functionality n E.g. n MVP: 30% functionality, 100% Done n Rel1: 60% functionality 100%,Done n Rel 2: 80% functionality, 100% Done n Rel 3: 100% functionality, 100% Done
  • + What if? n We stagger quality instead of functionality? n Probably deliver 100% functionality? n E.g. n MVQ: 100% Features, 20% Done n Rel 1: 100% Features, 40% Done n Rel 2: 100% Features, 70% Done n Rel 3: 100% Features, 100% Done
  • + Why this might not be such a dumb idea? n Finally, its all about economics of software development n If everything else being equal, and n Cost of downstream quality >> cost of upstream quality, then it makes sense to build that first n Cost of downstream quality cost of upstream quality, then it might make sense to work on other variables?
  • + Recap n Current freemium is a smart trade-off of features over time with the quality being non-negotiable n What if quality was traded over time with the features being non-negotiable n In many walks of life, there are examples. Certainly for the Bottom of the Pyramid segments. n In software development, there *might* be an opportunity to create a true level-playing field among all users n Can you think of some examples?
  • + References n What is freemium?, n Makin FreemiumWork, n The Freemium Model:Top Flaws and Potent Fixes, freemium-model-top-flaws-and-potent-fixes/ n The Complete Guide to Freemium Business Models, freemium/