Investors are abuzz about ‘freemiums’ – services that lure users in with a basic product, then charge for more features.
But free didn’t become a serious option until the Internet gave us low-cost online distribution. Adobe did it with its PDF Reader in 1994, Macromedia with its Shockwave Player in 1995. Both became the industry standard, and those companies were able to make money by selling the products’ authoring software.
In these days of Web 2.0 services that rely on quick customer adoption, the strategy has become so common that VCs have coined a term for it: freemium.
When the service is free, word spreads
Danny Rimer, the London-based venture capitalist with Index Ventures, has been an enthusiastic investor in freemium–type businesses since 1999. His firm led an $18.8 million investment in Skype, which resulted in a handsome return after the $2.6 billion buyout by eBay.
Freemium works because “you reduce the main stumbling blocks of product adoption,” Rimer says. “Web-based users who don’t have to pay for it will often start evangelizing the benefits to others.”
How can you make your freemium service soar? Here are nine tips from venture capitalists and entrepreneurs:
- Have a product or service that truly stands out
- Know your up selling plan from the beginning
- Once you’ve decided that a product will be given away for free, don’t change your mind
- Access to your product should be just one click away
- Make sure the major bugs have been exterminated
- Harness the collective intelligence of your users
- Keep improving the product to give users more reasons to stick with it
- Identify a range of revenue sources
- Timing is everything.