Trying to get your head around the idea of freemium? Just think cloud storage service Dropbox and note-taking and archiving application Evernote, both of which have been phenomenally successful. The word ‘freemium’ combines the two aspects of the business model: ‘free’ and ’premium‘. It’s a business model that works by offering a basic product or service free of charge (typically software, content, games, web services), and a fancier version that costs money. Fancy can mean more features, more functionality, more space, more usage, more seats, more time, or no advertisements.
The business model was first defined by prominent New York-based venture capitalist and blogger Fred Wilson in 2006: “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.”
Wilson offers these examples:
- Skype – basic in network voice is free. Voice mail and calling plans that allow users to dial landline phones require a monthly fee.
- Flickr – a handful of pictures a month is free, heavy users convert to Pro
- LinkedIn – reeled in users with free content, but has boosted sales by adding features that customers have to pay for, such as recruitment services.
Wilson points out that this business model has been around for a long time. Shareware always used a similar model, and many successful software companies have been built on it. The customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently.
Wilson points out that it’s important to ask as little as possible in the initial customer acquisition process. Asking for a credit card even though you won’t charge anything to it is not a good idea. Nor is forced registration. You may want to do some of this once you’ve acquired the customer, but not in the initial interaction.
He offers this advice: “Don’t require any downloads to start. Don’t require plugins. Support every browser with any material market share. Make sure your service works on various flavours of Windows, OSX, and Linux. In short, eliminate all barriers to the initial customer acquisition. And make sure that whatever the customer gets day one for free, they are always going to get for free. Nothing is more irritating to a potential customer than a ‘bait and switch’ or a retrade of the value proposition.”
The big idea is to make sure your free service is loved by customers. Only then do you communicate the value that comes with the paid service and that will have you converting to paying users. The best examples of this business model are when the customer understands why the paid service has to cost money. More storage costs for photos, virtual storage, or termination costs on other carrier networks in the Skype model, are good examples.
What you gain on the swings
Much has been written about the psychology of free. Among the most instructive texts are Free: The Future of a Radical Price by Chris Anderson and Predictably Irrational by Dan Ariely. Both authors note that free immediately reduces the mental barriers for the customer. Free makes people think that they have “nothing to lose.” That makes free a huge accelerator of adoption. The flip side of this is that after using the product for free, it is very hard to get the customer to start paying for it. This is why it is so critical to choose your premium features wisely.
But is it for you?
Freemium expert Uzi Shmilovici, CEO and founder of Future Simple, which creates online software for small businesses, cautions that before you think free (or rather freemium) is the best model for your business, you need to answer a few difficult questions:
- How big do I want my company to be? If you are looking to build a lifestyle business that’ll make you R80 000 a month and you have a good product, you can probably do without freemium. If you want to build a dominant company that has a substantial market share, Freemium can help you accelerate adoption.
- What is the value of the free users? Across all successful freemium companies, there is a way of making money or saving money from the free users. Either by saving on marketing costs (Dropbox) or by making money from ads or data (Pandora, Evernote, Mint) or both. Figure out how to turn your free users into savings in marketing costs or revenues from third parties.
- What is the cost to serve free users? This is a critical aspect of the model. If you spend a lot of money or time servicing free users, you are going to lose money. The cost of servicing free users must be lower than the rand value they provide.
- How big is my market? “The easiest way to get one million people paying is to get one billion people using,” says Phil Libin, the CEO of Evernote. Free adds another conversion step on your way to revenues. You need a big market to have enough people who will pay you at the end of the day.
- Is there value to one customer from other customers using the product? This will determine how many new users the free users will refer. There are three levels of value:
- Inherent value – You can use Skype only if the person you talk to uses it. The same is true of Dropbox. In this case, freemium can be a powerful strategy.
- Added value – You derive the value of Linkedin from other people using it. In this case, freemium can help you gain traction if you use an effective invitation mechanism.
- No value – You don’t care if someone is using Evernote or not. The only reason to tell another about the product or service is if they think it’s awesome.
Freemium and your business
Still wondering whether you can use freemium to your business’s advantage? Writing on Freemium Blog, freemium business model expert Peter Froberg has isolated a few characteristics of freemium success:
Quality free products
The most important condition for creating a successful freemium model is that you have a great product that people want. It will be the engine that drives your freemium-based business. Without inherent value your freemium will not get off the ground.
So instead of giving away a sample track of the music, let people download the whole album. Instead of letting people take a look at your worksheets, let them have all your tools for free.
Only a small percentage of free users will usually buy something. In order for this to make financial sense, the expense of distributing the free product should be very minimal. Digital duplication ensures virtually no cost for copying and distribution. If you want to distribute one million pieces of something, R1 as a unit price is quite a substantial amount.
Freemium depends on generating attention with the free product; then to sell premium products or services to some of the free users. In most cases only a small percentage of the free users will buy something. This is fine if it is a small percentage of a large number.
Creating a successful business
Froberg says his research has shown that there are two methods that should be incorporated to ensure freemium success:
Adapting the business model
If your free product is a quality product that people want, it will generate attention. You need complementary products to generate revenue from this attention.
Ensuring a wide distribution
The economic logic behind freemium is that, “When the supply of a product increases, the demand for its complementary products also increases.” The free product drives off the revenue-creating products and more free users means more paying users. Since additional distribution of a free product costs close to nothing, the success of a freemium business will increase with the number of people using it.
Helping This Along
- Actively promote the product
Making sure that more people get to know about it will lead to more users.
The generous nature of freemium fits very well with the emerging field of social media, and social media marketing has proved to be a good way of promoting a freemium product.
- Remove barriers for people to access the product
If it is hard to access your free product, some people will stop before they get to it. Not only will these people not be exposed to your thoughts, they will also have wasted time.
The cost of customer acquisition
Some people argue that freemium significantly increases the customer acquisition cost. The argument is that it costs money to acquire every new user, while only a few end up paying. Shmilovici says it’s important to consider what happens to the total amount of premium users in the case of freemium.
The total amount of premium users depends on three factors:
- Traffic – the amount of people visiting your site. People like to recommend them to their friends. With a freemium model, you will most certainly see an increase in traffic for the same marketing spend, since people will spread the word. You can further enhance the social media benefit by giving people easy ways to share their excitement and implementing a smart referral programme.
- Sign-up conversion – how many of them sign up. It’s likely that you’ll increase your conversion to users with a free offering, since users don’t need to enter their credit card details up-front. Unlike limited trial periods, your users don’t have to worry that their trial will end before they have a chance to try the product. Also, “Zero is a hot emotional button,” as Dan Ariely mentions in his book Predictably Irrational.
- Premium conversion – how many of those who signed up become paying members. Conversion to premium may drop since you might get a higher proportion of low-quality sign-ups. However, this is not the only factor at work. With freemium, people have a chance to use the product long enough to see the value in upgrading. At the same time, while they are using the free product, they build up switching costs. Eventually, they might be more likely to pay. Here’s Evernote CEO Phil Libin’s approach to this subject: “We’ve got the rest of your life to make money off you.”
To succeed in freemium, you need the increases in traffic and sign-up conversion to compensate for the drop in premium conversion rate, if any. In successful freemium companies, the boost to traffic and adoption significantly reduced the customer acquisition cost, which in turn led to great results.
SA’s first freemium HR and payroll software for business
Control your HR and payroll costs with free software that lets you choose additional premium functionality,
on a pay-as-you-use basis.
In September last year, employee management software developer PeoplePlus released the first HR and payroll software built on the freemium model in South Africa. Since then, almost 2 000 users have registered, with an additional 300 signing up every month.
“The cost of developing the software was high, but the cost of distributing it to users is relatively low,” says Rodney de Villiers, CEO of PeoplePlus. “We offer modules, such as disciplinary procedures and the ability to print payslips free. Users pay only for premium modules, and for what they use. There are no contracts, no big upfront payments, and no expensive consultants.”
De Villiers says the freemium model has been used widely for consumers, but less so in business applications. “The offering enables the business customer to select any high-value or efficiency functionality, in a modular manner. That means they can directly control their costs.”
The PeoplePlus offering is targeted at businesses with between one and 200 employees, but companies of all sizes can use the application.
Benefits for users include the sizeable reduction of the total cost of funding and operating your HR and Payroll IT, such as power, security, updates, back-ups, anti-virus, lost data, stolen equipment, staffing and consultants, not to mention your time and stress. When it comes to support for free users, De Villiers says telephone support is offered as a premium service. “The application is easy to use, and comes with a number of practical ‘how to’ guides. If users need support, they’ll only pay for it when they want it.”
PeoplePlus was developed by Talenger Holdings, a company that De Villiers launched in 1998, and which specialises in human resource technology for large businesses. “PeoplePlus is basically a scaled-down version of the proven solutions that Talenger has been developing for years. We analysed the local market and saw that more than 90% of businesses employ up to 200 people. That was how we identified a gap in the market for PeoplePlus. The freemium model has been proven and we are confident that the application will become increasingly popular because of its pricing and functionality.”
For more information, visit www.peopleplus.co.za
How freemium is changing industries.
In recent years, several industries have applied the freemium model with great success. This is particularly true in music and publishing. A great example is the rock band Nine Inch Nails. Fans could download their latest album Ghost l-lV for free and buy a range of other products from the extended $5 download, to a $300 limited deluxe boxed CD.
Flat World Knowledge is a company that publishes university textbooks. Where it differs from competitors is in its business model. Instead of only selling expensive paper versions that change every two years, Flat World Knowledge releases the books online for free download. Students and professors have access to quality textbooks at no cost. The publisher makes money from selling a range of other products, such as a printed textbook, audio books, e-book for a device, individual chapters to print, or study aids.
Free-to-play online games, often overlooked in the hype around social and casual games, are growing just as fast as their counterparts. Much of this has to do with the industry’s transition from paid to freemium models – not only in online gaming, but for web and mobile apps on the whole.
Free: The Future of a Radical
Price, by Chris Anderson
Predictably Irrational: The Hidden Forces that Shape our Decisions, by Dan Ariely
Your Organisation’s Values Must Generate Value – Otherwise Why Have Them?
Your values have to be the foundation of your organisation’s present AND its future if you are going to ensure sustainable value for your stakeholders.
In the modern world of business, where social media compels organisations to tell the truth, transparency and ethics have become essential. Consumers no longer only care about getting value for money, but also about what your company values and how that transpires in what you offer.
Defining a set of values that describes your organisation’s heart, i.e. your organisational culture, is immensely personal and, if lived, immensely powerful. Successful leaders realise that an important factor in building brand loyalty is getting their organisations to wear their proverbial hearts on their sleeves and to authentically honour it in the way they do business. Sadly, many organisations define their values as a tick-box exercise that serves as mere decorations for their website.
Just think of infamous examples like KPMG, SAP and Steinhoff as well as more recent culprits like Bain and Gartner: Besides the millions many of them had to pay back, their severely tarnished brands are still costing them dearly. It is clear that if the values you proclaim to espouse are not overt in your client-facing staff and the way you do business; this lack of integrity will eventually catch up with you. As what happened with KPMG, this not only leaves you with less clients, but with a diminished team too. High potential employees do not want to be associated with leaders who don’t honour the organisation’s values.
Related: Here’s How To Value Your Business
For the organisation’s values to truly become visible in how they engage and do business, it has to start with the leaders and their message. Those we lead must see it in our example on a daily basis. Our organisation’s values serve as a moral compass, but if the leaders responsible for steering the ship do not abide by this compass, our crew can’t get us to where we want to go. Our team members either follow us, become disengaged or abandon ship. They will not make an effort to uphold the values within a business where the leaders themselves disown it.
As a business, we make a certain promise or commitment to our clients. However, if our values do not underpin this promise and if we, as the leaders, don’t role-model our values to achieve this, it remains an empty promise. Therefore, it is important to keep the following aspects in mind when selecting or re-viewing your organisation’s values:
- Before defining your values, you should ideally define what kind of culture you want your values to underpin. Consider what is important to you and what is important to your customers: Is your organisation’s culture customer-centric, as it aims to exceed customer expectations, or quality-centric because of its strong focus on excellence? Perhaps your organisational culture leans more toward being cost-centric, as providing real value for money is important to you. A service orientated organisational culture, on the other hand, implies that providing your customers with the best possible experience is top of mind for you. Your organisation’s culture could be one of the above, or your culture could consist of a bit of an eclectic mix.
- Once you have defined the above, choose values that will help your desired culture become a reality and that your team members and customers will buy into. Again, ensure that it captures the heart of your organisation.
- Values are personal and we all interpret them in our own way. Although we don’t want to promote a homogeneous culture, we do have to communicate what we mean by our values. Therefore, the next step is to craft a set of behaviours that describe how the individuals in your organisation will live these values. Again, it is important to emphasise that the example must be set by the leaders but that it is the responsibility of every team member to role-model these behaviours.
- Finally, your organisation’s values must come alive and inspire, as they are intended to, and it is your responsibility as a leader to make this happen. Ask your team and your customers to tell you how they will feel if these values are lived authentically, and then measure the organisation against their feedback. If your team and your customers do not experience your values in this way on a daily basis, chances are your values are probably still dormant.
It is the responsibility off all leaders to inspire hope and trust in the organisation’s future in good times as well as bad times. To keep your team engaged, you constantly have to paint an emotive picture of what the future looks like for your organisation. If you connect this picture to your values and role-model them as a leader, they become a powerful tool for fostering the emotions and engagement that will help your team members buy into your vision.
How You Can Achieve Growth Through Access To Markets
If your goal is to scale your business, you need to increase your sales and access to markets. We found the best way to do that was through key strategic partners whose existing clients were our target market.
Many sales-led organisations have come to the same conclusion at some stage in their business growth life-cycle: In order to build a sales-led business for scale, you need to adopt a multi-channel sales distribution strategy. In our world, this means a combination of direct sales (boots on the ground), digital marketing and strategic partnerships.
After five years we had grown Merchant Capital as far as we could organically. We needed a much larger sales distribution channel. Understanding the need for a multi-channel sales distribution strategy is one thing, execution is something else entirely. After paying significant school fees, our strategic partnership distribution strategy was crystallised, and off we went to bring our chosen partners on board.
1. Finding strategic partners
Re-calibrating our sales strategy led us to the conclusion that we needed a strategic partner who could bring us ‘one-to-many’. In other words, we needed to identify potential partners (‘one’) who have ‘many’ sweet spot clients who are also our target clients, and whom they are already servicing with other products daily.
The end result of this three-year process has been strategic partnerships with Standard Bank and Discovery Insure. In the case of Standard Bank, every business that utilises a Standard Bank point of sale (POS) system can apply for a cash advance from Merchant Capital. Thanks to the partnership, Standard Bank POS merchants can access a cash advance within less than 24 hours of application.
It sounds incredibly simple and straightforward, but the process of identifying the right partner, creating the value proposition and then building a relationship that can result in such a partnership is anything but.
The most crucial element in this process was identifying partners who could benefit as much from a relationship with us as we could from them — in other words, ensuring a strong mutual value proposition.
When you have a business need, it’s easy to convince yourself that your prospect or potential partner needs you as much as you need them. Unless you are absolutely sure that this is the case however, there’s a strong possibility that you end up having a life-changing initial meeting and then never hear from them again.
This can happen for one of two reasons: Either you haven’t found the right partner who will also benefit from a partnership with you, or you haven’t been able to adequately distil that value. If this happens, very often you’ve missed your opportunity and won’t get a second chance.
We therefore had to be extremely disciplined in identifying which partners we wanted to approach. We focused on removing any subjectivity from the process by building an objective ‘partner scorecard’ that allowed us to weight certain attributes of the partner (such as a large client base, deep client relationship and mutual value proposition) with what we could offer them. This empowered us to make educated decisions.
2. Making first connections
Identifying the right partners is only the first step — now you need to make contact. By design, the partners we had identified were behemoth corporates with much larger priorities than meeting us, and convincing them on the upside of a strategic partnership needed to be robust and well-articulated.
Step one is getting your foot in the door. We began the process by identifying ‘champions’ within the partner organisation. This process takes time. We were able to secure meetings and found that running pilots was a good way to provide demonstrable evidence of the proposed ‘win-win’ proposition.
Early on in a business life-cycle (before any traction and brand equity exist), we found that leveraging off our network of shareholders and mentors to make introductions to the appropriate decision-makers within the organisation was of great assistance.
When we signed our previous investment deals, this was actually a key consideration for us. For obvious reasons, growth funding holds value, but the network and mentorship that the right board and shareholders bring to the table can be much more valuable.
Until you’re able to build brand equity and gain traction with a partner (or client), the right networks, introductions and referrals help you secure the meetings you need to prove yourself. And then you need to start small. Don’t expect a meeting with the CEO. Start with someone who could be your champion within the organisation.
3. Finding your champion
Finding a business sponsor to champion the partnership within the corporate partner is fundamental to your overall success. They will understand the internal friction and potential hurdles in navigating the naysayers within the organisation.
There will always be people, and rightly so, who challenge the partnership and ask why they can’t just do it themselves. If you don’t have an internal champion who is engaged and passionately buys into the partnership, then the initiative will most likely fall over and die.
Being the first mover in a partnership with an innovative start-up has many advantages if the product takes off. Often, these people want to be involved on the ground floor.
That said, big corporations are still taking a chance teaming up with young companies (brand risk and financial losses, to name a few). The upside of having already landed a smaller partner where significant traction can be demonstrated goes a long way in softening the initial concerns and risks from the large corporate’s perspective.
4. Nothing worth having can be rushed
The one word that comes to mind when thinking about this journey and the past three years is grit. In our experience, landing great partnerships takes many years of relationship-building and demonstrating solid business metrics and track record.
As I’ve already mentioned, our discussions with Standard Bank began three years before doing the deal. What we found useful in the early days of the partner discussions was communicating that in the next quarter we were going to achieve certain results and then coming back the following quarter and presenting the fact that we had hit our milestones, or hopefully exceeded them.
Just as you would do with an investor, this built a track record and credibility. The rhythm of checking in every few months and reporting back on progress is a great way to build the relationship over time without being too pushy as well.
Pulling it all together
There are two types of growth: Organic growth and scale. We’re an organisation that wants to scale. We’re aiming for exponential growth. This wouldn’t be possible without exponentially increasing our access to market.
We identified that the best way to do this was through the right strategic partner, but there are many channels that business owners can consider.
The important thing is not to just do what you’ve always done, unless you’re comfortable with organic growth. Evaluate your current model, and critically examine what you need to do to increase your sales, distribution and access to market. There is no one right way to do this. It took us time, and we needed to learn a few tough lessons before we were confident in the direction we wanted to take.
Related: My Business Is Growing… What Now?
5 Lessons On Scaling Up Your Company From An EOY Winner
It takes a combination of grit, hard work and the right strategies to navigate the challenges of the scale up journey. What do some entrepreneurs do differently to make it to the top?
Building a successful company is really hard. Even when you have made it through the start-up phase – product development, market fit, building a team, earning first traction – the process of scaling up remains a challenging road.
Louw Barnardt CA(SA), recently named the Emerging Entrepreneur of the Year at the Sanlam/Business Partners Entrepreneur of the Year® Awards, shared his five top lessons learnt from fast-growing clients and from their own journey of scaling up Outsourced CFO to twenty five full time professionals.
“There are many stumbling blocks that hinder exponential growth at the scale up phase. Successful start-up founders do not always have the right skill set and experience to build a business from five to fifty people or from twenty to two hundred.”
Louw and his team have taken the concept of an ‘Outsourced CFO’ – a go-to finance person for emerging companies – and built a very exciting business from it. “There are hundreds of lessons one learns on the journey of building a scale-up company. These five stand out among all of the biggest lessons learnt.
1. Invest in People
Doing business is all about people. In start-up phase, founders are able to manage almost everything. From the social media post to the invoicing to the recruitment – it all falls on you. One founder can manage this for a short while and a founder team for a bit longer, but somewhere between five and twenty people this changes. The founders can no longer make every call, have every meeting, answer every client query.
It’s critical to build a solid leadership team and then to equip them with enough autonomy and authority to run with the various portfolio’s within the company. Put a head of HR, head of sales, head of client engagements, head of operation and head of finance in place as soon as you can and keep investing in them – it’s the only way to scale out of start-up mode.
2. Manage Cash Flow
The finance function sits at the heart of every business. If the numbers don’t add up, everything comes to nothing quite fast. Founders need to make sure that they have a firm eye fixed on financials. New cloud systems enable entrepreneurs to have access to every detail of revenue, profitability, debtors and cash flow in real time.
That’s right – exact live financial information at your fingertips for decision-making. Foreseeing cash crunches ahead of time and actively being able to navigate to avoid them makes all the difference in the scale-up process. Growth eats cash, so be sure to manage yours on the way up.
3. Streamline and Automate
A start-up can afford to do what needs to be done in the moment. Scale-ups cannot. Automation of company processes is key to enable scale in various company functions.
Automate your sales process with a tool like Sales Force or HubSpot. Automate your marketing with a tool like Hootsuite. Automate your finance with a tool like Xero. Automate your company culture input with a tool like Hi5. Putting a good system in place and investing in the understanding and utilisation of all of its functions is a prerequisite for high growth.
4. Prioritise Strategy
As execution becomes a bigger and bigger part of your company, the strategy that directs that execution plays an ever-increasing role. The most successful management teams set and stick to good habits around strategy: Annual breakaways to direct long term strategy. Quarterly strategy days to cement key strategic priorities for the next 90 days and the likes.
It may seem counterintuitive to have your full management team out of action for so many full days of work, but putting the right strategy in place to execute is the real deep work required to scale.
5. Brand and Awareness is key
The value of owning a top brand and of being top of mind with all your stakeholders cannot be overstated. A stronger brand lifts the market’s perceived value of your offering. Continuously starting conversations and finding ways of reminding your networks and target market of who you are and what amazing things you are doing opens up ever-bigger opportunities that play a huge part in creating scale for our top entrepreneurs.
“Building a company is hard work. But if you do it smartly, the juice is worth the squeeze many times over. Make these five lessons your own to hack the scale up journey as you build the business of your dreams.”
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