“Freemium can be extremely successful, but is overly hyped” — Doug Caviness in Interview with FreemiumSFBay
The head of SaaS Solutions at cleverbridge, Doug Caviness, gave us an exclusive interview of his insights about “Freemium as a Business Model”.
“Freemium typically requires a bullish investment climate.” – Doug Caviness
FreemiumSFBay: What does the term Freemium mean to you?
Doug: Freemium is a marketing tactic used to acquire customers, whereby a product or service is offered at no cost; and for which the service provider offers (or intends to offer) additional services or products for a fee.
FreemiumSFBay: When did you first hear about Freemium?
Doug: It must have been around 2006/2007.
FreemiumSFBay: What was your first experience with the Freemium?
Doug: It’s hard to recall my “first” experience with Freemium, but in the software industry over the last twenty years I’ve had broad exposure to shareware and “lite” versions, which are similar tactics. Of cloud-based services employing Freemium, one of the more notable and successful examples for me, is LinkedIn, which I’ve used since 2004.
FreemiumSFBay: Do you think Freemium is a stable economic model?
Doug: For a company dependent upon outside investment or hoping for a “liquidity event”, economic stability requires a bullish investment climate that is willing to take on the risk of a company with a deferred revenue model. Without this bullish climate this economic model is highly unstable.
Many of the successful B2C companies that I’ve worked with who employed Freemium didn’t really make much money from their premium (paid) offerings, but rather by rapidly building large user communities and then selling themselves to acquirers that either believed they could monetize these communities or who were afraid these communities represented a risk to their own businesses unless they owned them.
“A company must be very persistent as this tactic can take a long time to pay off.” – Doug Caviness
FreemiumSFBay: Generally which works better: Freemium or a free trial? Why?
Doug: This really depends on factors like:
- the maturity of the product / service category you’re offering
- the benefit you might gain from rapidly building your user base vs. quickly identifying users who are more prepared to pay (e.g., LinkedIn and Facebook would still be small companies if they had used the free trial option)
- how you plan to monetize your business (e.g., advertising aligns better with Freemium than free trial)
- your target customer segment (e.g., business users that are already committed to the idea of using a type of product / service, are usually willing to pay, and probably align better with free trial)
FreemiumSFBay: When should a company offer Freemium?
Doug: Freemium can make sense for a company if at least a couple of these conditions are present:
- potential to scale to millions of users
- strong network effect
- ad / sponsorship model
- high switching costs for users
- range of features or products to induce non-paying customers to buy
- B2C or SMB focus
- Freemium is treated as a marketing cost
FreemiumSFBay: How persistent must a company be to succeed with Freemium?
Doug: A company must often be very persistent as this tactic can take a long time to pay off, both in terms of gradually building a user base and converting users to paying customers, and also figuring out the right features and pricing to offer these customers.
“Establish your metrics” – Doug Caviness
FreemiumSFBay: If you have a free and a premium product, how “extreme” should the difference be?
Doug: This really depends on things like the importance of driving the size of your user base (e.g., value from network effect, etc.), the additional value-add offered with your premium services and the switching costs for your users.
FreemiumSFBay: What is the one issue you find most troubling with Freemium?
Doug: Taking on the operational costs associated with large numbers of users that will never buy from you.
FreemiumSFBay: How can you accurately measure success with Freemium?
Doug: You’ve got to establish your metrics, looking at things like user growth, user behaviors that demonstrate their growing “investment” (time, effort, content, etc.) in your service, and purchases and retention over time.
FreemiumSFBay: To go Freemium or not to go Freemium–which way are you leaning?
Doug: I think Freemium can be extremely successful, but is overly hyped. To be successful with Freemium, a company needs to have the right conditions and be smart and/or lucky in its use.
As Head of SaaS Solutions at cleverbridge, Doug Caviness is responsible for the company’s recurring billing and commerce solutions for providers of SaaS and other cloud-based services. Furthermore he was one of our Freemium Meetup speakers in January 2013.
cleverbridge is a full-service e-commerce partner for companies that sell software and SaaS. Our flexible platform and unrivaled service fuel the performance of B2C and B2B businesses around the globe.
Drawing from years of experience and expertise, cleverbridge provides a customized, multi-channel e-business solution in record time. More than 300 clients count on cleverbridge to support their traditional, SaaS and subscription-based e-commerce needs.
Want to learn more about the Freemium Business Model for your business?
If you are in the Bay Area, join our monthly Freemium SF Bay Area Meetup for a chance to hear world-class speakers and make networking connections! If you can’t make it, you can always catch the summary, video and presentations.