Getting "Freemium" to work (and why sometimes it wont)

Uzi Shmilovici (of Future Simple fame) has a post up on GigaOm about making Freemium work for your business. He addresses two main issues, Customer Cost, and Free/Premium Segmentation, and addresses them well.  Go read it - it may belabor the obvious a bit, but that is worth belaboring since most people actually don't get this.

While perusing this, a point that struck me was that people rarely quantify the reasons people upgrade. Of course, you need to have a product that everybody likes, etc., etc., but as Tyler found out at Letters From Santa (in this article), people aren't going to pay you just because they thought you are doing a good job. In any sort of product - Freemium or otherwise - people will only upgrade if there is something in it for them.  Oh yes, some might do so as a Thank You, but that is remarkably rare.

In particular, when it comes to Freemium products, people will (happily) upgrade for one of the following reasons

1. Eliminating Advertising:  You basically pay to not see (or hear, in Pandora / Spotify's case) the ads.
2. Adding Resources: Usage is free, but you eventually run into a capacity limit of some kind (Storage on Box /  DropBox, concurrent users on Blitz.io)
3. Removing Paywalls : You can only use the product 'n' times a day before it prevents access till the next day (Financial TImes)
4. Support/Customization : In effect, you pay to speak to someone, and or for any Customization of the product (Chargify)

Its worth repeating though, the product needs to be so good that it draws you in and hooks you.  Each of the examples above definitely falls into the "crack" category off apps - once you start using them, you can't stop, and you gladly pay for the upgrade.  

However, and this is a big "However", if the application is good enough as it is, so that people don't feel the need to upgrade, well, there really is going to be no conversion, and your model is dead in the water.

LettersFromSanta pretty much failed all the Why Upgrade tests.  It was perfectly good enough as it was, and there was really no need to upgrade.  That was Tyler's main problem - there was no incentive on anybody's part to pay him (except for goodwill, and that really tends to not get you all that far, unfortunately)

Or to put this quite differently, you will find plenty of examples of successful and failed Freemium plays.  Then again, you will find plenty of examples of successful and failed restaurants.  In either case, success and/or failure have precious little to tell us about the inherent value of Freemium (or the Restaurant!) business. 

If your service fails, either you have the wrong service, or you are doing it wrong :-)

In closing, I'll use Uzi's words

The last thing I’d like to remind you is that the entry ticket for success in freemium is having an amazing product that creates value for people — one that people love and use. If you don’t have that, the smartest pricing model in the universe can’t help you.