Is Freemium Dead?

With the tectonic shift going on over at Ning, there seems to be some sentiment growing that the Freemium model is dead.  I tend to disagree.

I think what’s happened is that too many start-ups are falling into the trap of giving too much away and not having enough “quality” in reserve to make people want to pay.  It is certainly a delicate balance.  Take Posterous which is providing this blog – everything is free and there are no ads.  I love it, its so easy to use, but how do they make money?  I assume at some point in time they are going to try and hit me up for a “Premium” service, but what will it include?  They already let me have custom domains and the thing is ad-free now, so are we going to see a situation where rather than “Premium” services, I’m going to get reduced functionality?

Take a look at who Posterous are competing against, WordPress, Six Apart, Tumblr and others.  Wordpress and Six Apart have a number of revenue earning things going on and WordPress keep coming up with more great ideas.  Tumblr have their custom themes – which I get, but I wouldn’t pay for.  Posterous – its all free!  You want to have an easy time like me, pick a theme.  Want some modifications, no problem some advanced functionality is available to make that easy (and free).  Want total control, no worries just create your own CSS – free again.  I can’t see any dry powder here?  I hope these guys are uber creative because I LOVE Posterous.

The delicate part with Freemium is making sure you keep back the things that people will pay for and don’t just give them away because you’ve already built them.  I think this is where the immaturity of some start-ups becomes apparent.  Look at 37Signals – go to the Basecamp page and find the “Freemium” piece.  Its in the very small 11px Verdana under the Pricing Boxes.  You can use the product and wet your beak, but if you want to use the real features of the product you pay for it.  I think that’s the way it has to go much more selectivity about feature value.

Ultimately, I think “Freemium” is going to continue to be a very worthwhile business model for start-ups.  The key piece of the puzzle is that you need to remember you’re running a business and that free equates to no revenue but certainly some cost.  It is also important not to focus too much on what the “other guy” is doing and giving away for free.  Sure, there are certain features people won’t pay for, but if you start matching what everyone else you compete with is doing, eventually it all becomes free.  Focus on your game plan, execute and if a feature is worth doing, its worth charging someone for.  You can always make it free later, but it is much harder to put the genie back in the bottle.

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