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From Ad-Based to "Freemium"

Posted by: Today's Tip Contributor on October 4, 2010

When you’re the owner of a business you worked very hard to build, giving away anything for free can make your heart skip a beat—but that doesn’t have to be the case. Even before venture capitalist Fred Wilson articulated the "freemium" business model, companies had adopted it with enormous success. "Freemium" is a combination of "free" and "premium," and the model is based on giving away your basic service for free, acquiring as many customers as possible, and then offering an enhanced version of your service for a fee.

One of the most difficult aspects of moving from an ad-based revenue model to a freemium model is determining the services that can be given away for free vs. the ones that can be offered at a price. Here are a few tips to help provide some clarity on shifting gears and running a freemium business.

1. It’s all in the mind. You can change the business model of your company, and your team can keep working as hard as ever, but if their mindsets don’t change, nothing will. If you’re thinking of a shift, make it happen quickly. It’s like pulling off a Band-Aid—the faster you do it, the less it’ll hurt.

2. The pricing of your service is always dicey. It’s never easy to decide what exactly to give away for free, and putting a price on your premium product is equally difficult. Don’t let that psyche you out, however. Try offering at least two tiers of pricing—one at the bottom level, driven by volume, and one at the top end, driven by value. Observe conversion, re-price, and repeat.

3. Change is the only thing that’s constant. The business model you choose to adopt is the basis of your business. Once that changes, everything will shift, including the way you measure your success. Acquisition costs, cost-to-serve, and lifetime value start to rear their ugly heads—if you want to fully understand your freemium business, learn to love all of the above.

There is no greater validation than actually seeing that people are willing to pay for your service.

Ranjith Kumaran
Founder and chief technology officer
Campbell, Calif.

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