The Emergence of the ‘Freemium’ Market
A new type of market structure is needed to explain a zero or marginal cost, technology-delivered services market. The answer is a freemium market structure. As the name suggests, services offered via a freemium model are segmented into “free” and “premium” offerings. With essentially zero costs for serving additional customers, there can be a significant amount of entry into a freemium market once technology and programming costs have been met. The successful freemium product seller survives by offering free products and services that create a sufficiently large market base. A fraction of that customer base is then upsold to premium products that contain differentiated value offerings.
The ability to sell internet-based products and services has made freemium markets more pervasive. For example, by using a PC, Skype users can make unlimited calls at no charge without buying a separate phone. Skype derives revenues largely from users making calls to non-PC-connected telephones. As of mid-2010, Skype had 560 million registered users, including about 8 million revenue-producing customers.
Skype was sold to Microsoft for $8.5 billion earlier this year, even though less than 2 percent of its users generate revenue for the company. It should be noted that Skype depends on network effects for its growth. Skype used the free offering to achieve critical mass, then relied on its premium offering to provide profitable services to its user base.
It's easy to see that service providers in a freemium market face a twofold challenge:
- to segment customers and services between the free offerings and those commanding a premium; and
- to establish alternative business models where a broad, free customer base is used to generate revenue from other customers.
For the enterprise, the vast majority of users will be satisfied with the value offered by products in the free part of the product continuum. The “art” will involve developing customer acquisition processes that encourage users to migrate into the premium portion of the project range. It's reasonable to expect that only a small portion of a company’s free product customer base will also buy its premium products.