The Emergence of the ‘Freemium’ Market
From a business perspective, competition in providing freemium products will eventually drive the price of such products to zero (marginal revenues will equal marginal costs). Targeting niche value sources for this free product customer base will allow firms to extract profits from sales of premium products. The existence of the free version effectively provides consumers with an opportunity to sample offerings in a product category with no purchase risk — i.e., no transaction costs, no substitution costs in switching from incumbent services, no training costs and no significant time investment in this sampling process.
The ideal situation for freemium marketers is to introduce consumers to their products, then use those relationships to educate them about the additional value available from premium offerings, encouraging a fraction of the consumer base to pay for this added value.
The evolution of the freemium market assumes that technology will drive competition and erode excessive profit areas. This process is already happening pervasively across many information-based products and services. As more and more consumer product areas comingle with the internet, the freemium market structure will increasingly become the norm for technology-delivered services.
Companies will need to adjust quickly to selling in a freemium market in ways that don’t apply in any other single economic market structure. Here are two factors to consider:
- product switching costs become zero, creating the potential for high customer churn rates; and
- consumers will shun transactions that aren't effortless.
Amazon Kindle owners buy more books than they would otherwise despite little or no price advantage over hard copy equivalents ostensibly because the transaction costs of buying a book — time, effort and confidentiality — have been dramatically reduced.
A constant process of product innovation will be required. Today’s differentiating feature will either be fleeting in value or absorbed into the next product generation’s standard (free) offerings.