In a recent Wall Street Journal article, the writer highlighted the risks of a freemium business model. Freemium is when a start-up venture offers it service for free for a Basic level service package and charges a fee for service levels above Basic. For example, an online billing company may offer a free online billing system for up to five billable customers and then charge $25 per month for 6-10 billable customers and so on. The strategy is to get customers in the door to try the product and hopefully the customer will upgrade to a fee based plan because (1) the product fits their needs and (2) the fee based plans offers something worth paying for in the customer's mind.
As noted in the WSJ article, it is critical to not give too much away at the Basic level and make it worthwhile for customers to switch to a fee-based service level. The bottom line, when developing a Freemium strategy the conversion rate of non-paying customers to paying customers is critical to the long-term success of the business. If customers are not converting fast enough for the business to become profitable before it burns through its cash it is critical to change the business model immediately until it is right. Here is the link to the full WSJ article.
