Michiel . van Vlaardingen

These last few years the Freemium business model has gotten lot of attention and examples.  Basically it’s to offer free accounts to your service with an option to upgrade to a paid pro account. Key is to create enough benefit and goodwill to get those upgraded members.

Another interesting development is the notion of ‘Bootstrapping a company’. Which comes down to  starting a company self-funded, with minimum means. This is nothing new, most businesses in the past centuries have probably been started this way.

What I am interested in is the combination of using a freemium model for a bootstrapped (online) business.  It seems natural to create a free site first, as a side project, and add the paying part later, when it gets some traction. You would think that’s perfect for bootstrapping, as at first you can just focus on the idea itself, instead of building the whole business. It’s just going to cost you some time as there is no need to invest heavily in sales: free sells itself.

However, I believe this is generally a bad idea. First of all, free accounts create volume. This means your costs will grow and development will become more complicated with the larger scale.  Furthermore, it’s hard to pay for promotion,  when you are unable to determine returns on the extra users you gain. What if those expensive clicks just lead to more free money-draining signups?  This disconnection between scale and revenue involves risk, that you may not be able to take without an outside investment. It could take a while before you find the right balance to turn a freemium business into a profitable one.

A perceived advantage of a free version is that lots of users will get you a lot of feedback to improve your product.  However, feedback from users that don’t pay, does not necessarily say anything about the reasons users are not upgrading.

If you are going with a freemium model, I do have some advice:

• Put very strict limits on the free account from the very start. If you have to put up limits afterwards, this will only get you angry users;
• Add new features to your paid version first. Make sure that those members that are paying feel valued;
• Think very hard about the cost of a free user, especially over time. For example, starting a freemium video site is probably not a very good idea without a stack of money;
• If possible, make sure free accounts generate content  (unique content can potentially get you traffic)
• Develop the paid version first, make sure it is worth the money and only after that add a free version to help promotion and to convince new customers.

All in all, using a freemium model complicates things in a way that makes it hard for a bootstrapped company to really follow it through.  In the end you are partly creating your own competitor, available for free.

This entry was posted on Thursday, January 6th, 2011 at 9:01 pm and is filed under business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.