Before the brave new world of cloud computing, selling and buying software was a pretty straightforward thing. It’d either be shareware, in which case you’d download and walk away, or there would be some kind of time- or function-limited demo which you’d (if you liked it) upgrade at some point in the future.
Since stuff went cloudy, life has got a little bit more complicated in the world of the software business model. Recently, I’ve happened across a number of services that approach their business models in different ways, and I thought it’d be interesting to compare and contrast.
One of the models that has now become popular carries the buzzword “Freemium”. It’s essentially not a whole lot different from a downloaded bit of software which is functionally crippled in some way. In the Freemium model, something is provided which allows the end user access to free stuff, but a lack ultimately convinces them to upgrade to some kind of paid – “premium” – service. A classic example is the widely-lauded hosted project management software by 37 Signals, Basecamp. You’re encouraged to sign up for free. Your account then gives you access to a limited version of the software. In this particular instance, you get a single project and no file uploads, but apart from that everything is the same as the paid version. The unpaid version gives you enough of a glimpse into the functionality and usefulness of the tool to realise that the additional functionality provided by the paid version is likely to be useful.
Another example is SugarSync, the cloud file-syncing service. Interestingly, while they used to have a “get 2Gb free” freemium model, they have now reverted to “10Gb for 45 days” on their free plan. We’ll examine why in a moment.
The Freemium model is based around something I’m going to call limiting addiction. The service provider is attempting to find a fine balance between provision and lack of provision of service. In the Basecamp example, 37 Signals are looking for users to find the service useful enough that they see the value, but not so useful that they’ve got enough with the free version. In this particular example, they’ve got things right: a single user without file upload ability gets you far enough to see the value of the service, but it isn’t enough that you can actually run any projects usefully. Net result? You upgrade to premium.
Let’s examine SugarSync now. When they first launched, they offered a time-unlimited 2Gb of storage space under a free account. I don’t know the inside track, but I’m betting that users found the service too useful – 2Gb is after all a fair amount of synced disk space – and I’ll bet that not enough of them were upgrading to the premium editions. The Freemium model in this case offered too much for nothing.
In the last couple of days I’ve signed up for a service called Spotify. It’s a downloadable app which lets you stream pretty much any music on demand to your desktop. I love the service, possibly more than anything I’ve come across this year – I’m an avid last.fm and Seeqpod fan, but Spotify goes a step further – it is fast, reliable, content rich. It is pretty much the perfect music application for me. The Spotify business model is interesting: you can get music for free, but it is ad supported: every 3-4 songs there is an audio advert. To remove this you can either pay 99p a day or £9.99 a month.
All well and good. But (and I hate to say this in case they’re reading..), Spotify is offering too much for free. The ads just aren’t annoying enough or frequent enough for me to bother paying the premium. The value is – like with the original SugarSync model – too high. I’m addicted, but not limited by the free version of the software. I’m a customer waiting to happen: If those ads were more in my face – if the software was more limiting – I’d almost definitely pay to get rid of them. I’m sure Spotify will get this right in the end: they’re currently still in closed beta and are very early into their market, and I’m delighted that I get so much value for nothing for the time being. If they’re savvy, though, they’ll continuously tweak their business plan as time goes on until they have the perfect freemium balance. And what is that balance? Well, a high addiction -> limitation -> upgrade rate.
There’s one more example that I’d like to look at, and this one fails for reasons that I’ll highlight in a minute. This example is a web prototyping tool called Protoshare. Rather than opting for a Freemium / functionally limited model, they’ve gone for a 30 day free trial. During that 30 days, you get full access to all the functionality – but after that you have to pay.
Again, all well and good. However, there’s a subtlety here which I think Protoshare have missed. It’s this: People like me who do IA work for a living tend to do stuff on a client/project basis. This means I have two options when it comes to Protoshare: I either start the 30 day trial at an arbitrary (between projects) time – this is fine, and pressure-free, but like most people if I’m not using a tool for a specific purpose, I don’t fully evaluate it under real-life conditions. The second option is to use Protoshare for a specific project. In this scenario, however, I’m putting myself way out on a limb – I haven’t had a chance to test the software before committing to it, and there’s no way I’m going to do a bit of paid (and timetabled..) work for a client without using a tool that I know and trust. Net result? I walk away from a product which could be exactly what I need – and would pay for. If Protoshare had a limiting addiction model, I’d probably have signed up by now.
There are infinite ways of cutting the Freemium business model: you can do it around paid support, functionality, disk space, speed, look and feel, etc. The extent to which various facets of the software are measured and valued is key, and – as the Protoshare example shows – really quite subtle as well. It’s not a case of “X has value Y, do Z” – it is more about considering the software against the likely market, users, use scenarios and so on. Ultimately, though, all these approaches are about giving a taste of something which tempts to an extent that you want more, but doesn’t satisfy. If you fail to tempt enough (Protoshare) or satisfy too much (Spotify), it’s very likely that you’ll either miss markets, or revenue, or both.
Great to see the discussion grow from what we were discussing yesterday. I think you are right about whispering about Spotify. You could be held responsible by hundreds of thousands of freeloaders if they find out it was YOU who led to the icreased advertising.
But its an interesting dilemna. What do you do? If you and the others (note I haven’t yet received my beta invite. Boo) continue to tolerate tolerable advertising the model folds for want of commercial effectiveness and you have nothing.
I think there is a game theory model right there isn’t there? Do you confess? Should you all confess? By doing so you induce the punishment, ie subscription, but by sucking up that subscription, you ensure that there is an enduring utility for all, after all?
Interesting.
I think you are confusing two different approaches here under the ‘Freemium’ label. Offering a service with/without advertising is not the same as offering a set of limited functionality, or full functionality for a limited time. (excuse the below if it is too obvious, but I’m exploring as much as ‘explaining’)
Commerical radio stations have an advertising based business model – the value they can put on advertising spots depends on the listener base they can build (size and demographics) – they don’t have a ‘subcriber’ model. Many people listen to commercial radio, and are happy with the adverts. On this basis it seems a reasonable assumption that a service like Spotify has the potential to run on a similar basis, paid for entirely by advertising.
Some people however don’t like to listen to commercial radio, and so will go to the BBC (in the UK at any rate) to avoid the adverts.
This is where Spotify has a huge advantage over traditional radio – it can mix the model. You can subscribe and avoid the adverts, or not subscribe and have the adverts – either way Spotify makes money.
If Spotify has its sums right (and of course, can build the right audience) there seems to be no reason in theory why it can’t make money whether people subscribe or not. I think you assume that the ad model doesn’t work because you don’t mind the ads, and you don’t feel you make purchasing decisions based on them – you could well be right, but it doesn’t matter as long as the advertisers believe they are getting value out of the arrangement.
There are some other web services that work in a similar way – ning.com allows a payment to remove ads from your ning site. However, the Spotify model seems sligthly more viable to me, as it is essentially a linear medium, so avoiding the ads takes more effort on your part, and you probably won’t do it. I find it pretty easy to ignore the adverts on web pages, and I can even remove them completely with a browser plugin. Again, it is easy to make the assumption that the ad model can never work because I ignore them – but presumably Google simply wouldn’t the beast it is today if we all ignored the adverts it is used to serve up on huge numbers of websites?
Thinking about the BBC for a moment, recent discussions about the license fee renewal in 2012 suggest that the current model might not survive. I wonder whether by moving delivery online the BBC could support a dual revenue model – one with adverts for those who choose not to pay a ‘license’ (or subscription) and an ad-free stream for those with a valid license? It certainly raises some interesting possibilities in my mind. It has also been suggested recently that ITV will move to showing more ads more frequently (moving towards the US TV experience) – and again, an online approach like Spotify’s might offer a way of balancing subs against ads – the more sub you pay, the lower the rate of ads?
Of course, there could be some problems with the sub/ad dual revenue model. Presumably the demographics that the advertisers will pay the most to reach are also the most likely to buy the sub (being able to afford it), so your ad model suffers the more people take out subs (at least, up to a point).
@Neil – good points. It is essentially a circular model in which the value of the service needs to continually match or outpace the value of the “punishment” as you put it. The obvious case study right now is Twitter. What happens when they burn through their VC cash? Would us Twitter addicts cope with ads? Would we pay for the service? What would “premium” Twitter look like? What if a free version opened shortly after the paid-for version – would we jump across to that one? etc etc.
Under this of course is the enduring question: who the **** clicks on the ads anyway? Where did we get the notion that (online) advertising has any inherent value – and is this (apart from physical “thing drops through your door”) the only way to make serious money online? Google seem to think so.
@Owen – thanks, great comment. I wasn’t suggesting that all these models are Freemium models, but different slants on how to move people from being free users to paid users.
re. ads – you’re right, I ignored the revenue that the service will get from the people placing the ads, instead focussing on the click value. You’re also probably right that greater minds than mine have probably done the maths. The “big 4” deal that Spotify has done (http://tinyurl.com/6nfzjs) will undoubtedly have been the result of months of negotiation….although I suppose it could just be another last-ditch attempt by a broken industry to rescue at least some revenue from nothing…
mike
another way to look at the spotify model is to look at the cost of the service and the annoyance level of the ads, is there not a relationship between the two.?
the balance should be struck between the level of noise created, and how much it costs to ge rid of that noise. @ £120 year, ill keep the ads but at £50 a year, it may be worth it.
but as mentioned above, either way spotify get revenue, what they miss out on IMO is customer (read user) satisfaction. of course i haven’t got an invite yet (cough cough). so cant speak with any authority.
last.fm is an intersting one, i did not eve know they had a subscription model until very recently, i like the free version and see no incentive to pay for it.
or is that just me?
@john there was a Guardian Tech Weekly podcast about online music a couple of weeks ago, and mention of the last.fm model. When it was suggested that the ad model wasn’t goint to work as people just listen to the stream, and don’t use the site they argued there that the information available on last.fm led people to browse the site and therefore see the ads. However, I can easily see this going to ads inserted into the stream – why not? And with the social network information they can target the ads as well? If this happened you’d have to decide if you still felt the same, whether you’d pay to avoid the ads, or just go elsewhere.
@mike you are right that anyone relying on advertising has probably got some tough times ahead. Presumably we’ll see some substantial consolidation – which means that a service like last.fm which has a more established customer base is more likely to survive than newer startups who are building at the moment. Coming back to the point above – you only have the choice to go elsewhere while there are plenty of startups not bothered about making money. If there is last.fm or nothing (or trad radio) – which will you choose?
@Owen, @John – the thing I like about last.fm is also the thing I don’t like… When I’m in the mood, I love the fact that it chucks random(ish) music at me – I get to listen to new stuff I didn’t know I liked. However, I frequently know what it is I’d like to listen to, which is where Seeqpod (to date) and Spotify (the future?) answers my needs.
One of the most important factors in the Freemium model is to make it very simple and obvious to know the different between the Free version and the paid for model. Seems obvious but many companies don’t. One of them is, you guessed it, Microsoft. I’ve been using the free version of their visual studio tools for over 6 months now and I’ve still no idea what the paid for versions do which is better. I know some things don’t work that well with the free version but I can’t be certain they’re any better with the paid for versions so I haven’t upgraded.
Correction: SugarSync has never offered a 2GB free forever package. We did drop the pricing around 50% soon after launch in response to market feedback, but the free offering has always been time limited to 45 days.
Sharpcast Photos, our previous product which synced only photos, did have a free package. This product has been discontinued (it is still live for existing paid customers for a limited time). I’d say your analysis may well be correct for Sharpcast Photos – the free version was so good there was little incentive to upgrade to the paid version.
SugarSync is a quality service built on quality infrastructure by smart people who get paychecks. As the product is not smothered with advertising the cash has to come from satisfied customers continuing to want to use the product. This is a great incentive for us to focus on providing a quality product rather than just spreading it around to as many eyeballs as possible. Rather than limiting addiction, the free trial/full function introductory period allows users enough time to get addicted enough to sacrifice the price of a cup of coffee every month to feed their SugarSync habit.
(disclaimer: I am a Sharpcast employee, but not in Marketing)
@Alastair – thanks for the clarification – appreciated. Perhaps I mixed up my trial beta period with freeness.
Interesting, though, that the previous product fitted into the “too good at free” model that I describe.
Actually, SugarSync is a good example of a product that needs to asymptote towards being *invisible* technology: from personal experience, I loved SugarSync up until the point when I found it slowed down / froze my machine. From that point onwards, my quest for value followed a much steeper curve. It’s another layer of complexity on the business model – here, for example, I’m looking for stability and efficiency rather than features. Having said that, the “play synced mp3’s” feature on SugarSync is genius 🙂
Interesting stuff..