Making free products or freemiums

If you want to be a bad product manager, give your product away for free without defined metrics or eventual business models. First you need to get people hooked. Get them interested in your product, get them addicted to your product, and then later on you can figure out how to make money off of it. In fact, once you get people hooked, it doesn’t matter what your business model is, since there’s probably a bunch of different ways to make money. With so many products out there, you need to get the attention of your potential customers with some sort of hook — and what better hook is there than “free”? Since you’re not charging anything just yet, there’s really nothing you can measure as far as revenue, so don’t worry about coming up with hard metrics until you start making money. Every user is a potential future paying customer, so as long as you know how many people are using your product overall, that’s good enough.

If you want to be a good product manager, make the decision about to give away your product for free as part of your overall product strategy. While many products have been successful with free samples, more technology products have adopted what is now being called a Freemium Business Model. Whether it’s giving away razors to sell razor blades, providing a free paper once a week to sell the daily subscription, or creating a subscription with limited storage space with hopes of upgrading customers to more space, the model is the same — the entire purpose of your free giveaway is to entice customers to upgrade.

One problem is that to have a successful freemium (free + premium) you need to have an appealing “premium.” This can be either overlooked or assumed to be a piece of cake once customers are hooked on the free product. Business 2.0 listed “nine tips from venture capitalists and entrepreneurs” to “make your freemium service soar” from their story Why It Pays to Give Away the Store, including:

Know your upselling plan from the beginning. Before you even go into beta, make sure you have at least one paid, add-on premium service up your sleeve. Better yet, have more than one.

In his original post that summarized the freemium concept, Fred Wilson described his Favorite Business Model:

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.

A big challenge with the freemium business model is that your goal is to move customers from the “free” option to the “premium” option, but you need to create a compelling reason to upgrade. This is made more difficult because it’s often difficult to know which free customers have the potential to upgrade to premium and which are likely to stay free and drain more of your resources. Ivaylo Lenkov, Founder and CEO of SiteKreator, a freemium web site building application with personal (free) and business (premium) versions, explains how he has been able to Make Freemiums Work:

…analyze user’s behavior and try to make the product less attractive for free users who have a very low probability of converting to paying (remember — it’s important to profile all potential visitors to maximize the service models for free users who can help grow and spread the word and also attract paying users.) For example with SiteKreator, we try to limit the “myspace” generation from using our service as they have a zero conversion ratio and very low probability to bring in paying customers. We noticed that 75% of our bandwidth was coming from swapping copyrighted materials like mp3s, games, music videos, etc. By making this very inconvenient, we significantly reduced our monthly bill without affecting the conversion ratio.

Lastly, freemiums need to have good “free” customers who may not ever upgrade but are helpful in spreading the word to customers who may upgrade, but also not too many free customers that take advantage of the free service and never intend to upgrade or actively spread the word to other customers who never intend to upgrade.

Whether you are considering making your product totally free or a freemium, you need to consider your goals and long-term strategy for the product, develop several different ways of promoting and distributing your product, and choose the business model that works best for your product, in your market, and in your timeframe.

Making an aspect of a product free can be incredibly effective (see Acrobat or Flash) or a disastrous failure (see CueCat). Ultimately, a great business model won’t make a bad product successful, though a bad business model can make a good product a failure. Product managers need to make sure that if their product is distributed for free there are specific metrics and objectives that are measured from the very beginning. Track usage, penetration, and likelihood of conversion. Providing free product is an investment in innovation, a marketing expense, and a strategy all rolled in to one and needs to be carefully measured and managed.