Misunderstanding Freemium

Gartner reported today that there will likely be 46 billion app downloads, 89% of which are free (via TechCrunch). The trends are clear, and I don’t think there is any turning back.

David Barnard, founder of AppCubby software development house, is seeing the same thing: “The future of sustainable app development is to give away as much value as possible and empower those who receive more value to pay more for it.” It is an excellent article and well worth a read. He even includes an interesting graph that I haven’t seen before. The chart, inspired by Evernote, was created by the founder of Pocket:

In short, if you create more value over time for your customers then you can charge money over time for that created value. Things that decrease in value over time, like food (left), should have a one-time cost.  Items that maintain value over time (center) or increase value over time (right) have the potential of being repeat revenue opportunities for the company creating them. In the second, content must be changing. In the third, content must be growing or value must be improving. David Barnard and Pocket CEO Nate Weiner see a freemium only future.

Freemium — the combination of a free product with paid premium features — is a term invented by Fred Wilson in 2006 but the concept has been around a long time. The term ‘freemium’ is also a problem.

Why a problem? Because it is misinterpreted. There is more than one way to implement a freemium model. One way — the way most technologists think of freemium these days — is to release a totally free app, one that functions free forever, and then sell premium features on top of it. This is exactly what Evernote, DropBox and a few other companies do successfully. It is, however, a very hard road to be successful with and there are very few large successes. Another possibility is to offer a free product with time-limited use. Many web services, like 37signals, have now switched to time-limited models. Of course this model has been around forever in software. We used to call them trials. A third model is to give away functionally limited products and charge for more features. Infinity Softworks has always done function-limited free products, whether that free product was available in an App Store or bundled with a device. Again, this model has been around since the dawn of software. We used to call them Lite versions.

I don’t think I’d advise a company to develop a paid app today. Instead, I’d focus them on finding a freemium model (or another model altogether) that works. The key is remembering that there is more than one way to implement a freemium model, and any of these might work better than any others.