My friend Howard was
visiting me a few weeks ago and he said to me “free is over, I am only
investing in services that customers pay for”. He said “freemium is
dead”. I reminded him that freemium is a paid model, but he wasn’t
buying it.
There’s a movement afoot by investors to back web services with a
real business model instead of the pervasive “give it away for free and
hope for the best” approach that’s been in favor for the past four
years. Don’t count me in that camp, but the movement is happening with
or without me.
Roger Ehrenberg, another angel investor friend, says in a post about how he’s changing his investment approach:
I have added a few criteria to my check-list:
- Initially sells to the enterprise for branding, credibility, awareness and early revenues
- Can get to revenues within 6 months, tops
- Is sold on the basis of ROI, e.g., helps generate revenues or reduce headcount/costs
As
I noted in the comments to Roger’s post, we’ve struggled with early
stage investments in enterprise oriented web services. Sales to
enterprises often require expensive sales teams and it’s much harder to
know if you’ve nailed the product/service with feedback from a limited
number of enterprise customers.
It’s much better, in my opinion, to go with the freemium model, give
a version of the service away for free to all comers, get a lot of
users, get good market feedback, then develop a premium version of the
product/service for sale to enterprise customers. If your free version
is popular with a lot of users, your customer base is the target for
the upsell and you might be able to live without an expensive sales
force initially. And, of course, keep your costs really low until you
start to get revenues.
In summary, freemium is far from dead, in fact it may be the business model de rigueur.
(To read more from Fred, visit his blog)
(Image source: Rebuildingmedia.corante.com)
