Recently, while completing the Individual homework for the Technology based entrepreneurship class, one question kept popping up in my mind. Is the freemium model really a revenue model or just a marketing strategy?

According to Alexander Osterwalder & Yves Pigneur, Business Model Generation : A Handbook for Visionaries, Game Changers, and Challengers, the term “freemium” was coined by Jarid Lukin and popularized by venture capitalist Fred Wilson on his blog. It stands for business models, mainly Web-based, that blend free basic services with paid premium services. The freemium model is characterized by a large user base benefiting from a free, no-strings-attached offer. Most of these users never become paying customers; only a small portion, usually less than 10 percent of all users, subscribe to the paid premium services.

Now as I was doing the assignment, my focus was on the Internet software and services industry and for the question, “What companies are most likely to disappear in the nearest future within that industry?” I noticed that most of the companies at risk of failure had one thing in common, freemium as a revenue model.

For example, one at risk company I identified was Evernote – a service that lets you take notes of everything, which in my opinion has lost it’s focus. Instead of focusing on its core note-taking product and on converting users to the paid service, they instead spent more time pumping out new releases that often don’t live up to expectations in order to gain as much interaction with potential paying users. Freemium will widen your customer segment, potentially leading to a flood, but if your customer and business development strategy aren’t guiding your existing customers to premium users with little or no customer acquisition costs, you simply have a disaster of support, hosting, and frustration costs for customers that don’t want to upgrade. Another company I found that could be at risk is Spotify, simply because in this generation where we are not willing to pay market value for music, I won’t lie I am also among these stubborn few, pushing a customer up to a premium subscription takes an extraordinary amount of intimate knowledge about their behaviour and incentives, let alone who that customer is out of the different personas you could be targeting. Hopefully in the future generations, people will be more willing to pay for music, who knows…

Another company is Flickr – a platform for sharing photos and videos which was already acquired back in 2005 for around $25 million by Yahoo, I know Flickr can’t be compared to the unicorns mentioned above, but this is just another example to prove my point. Now Yahoo is trying to sell it off again, the photo service that was once poised to take on the the world has now become an afterthought. This one’s main problem I believe is because they sold out to Yahoo, which didn’t share the same vision as the original founders of the photo sharing service. On acquisition, the Flickr team was forced to focus on integration, not innovation. All Yahoo cared about was the database its users had built and tagged, it didn’t care about the community that had created it and like I said before about how knowing your customer is key to higher conversion rates, this was just another recipe for disaster.

I could go on and on with examples of companies struggling with the freemium model but the question still remains, is it really a revenue model or just a marketing strategy? Successful companies like MailChimp – a mailing list service, were around for 10 years before they launched a free plan. Essentially, freemium didn’t lead them to being a good business. Being a good business drove them to freemium.

With that thought, what do you think, revenue model or just marketing strategy?

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