The Tension at the Heart of a Freemium Business

Image courtesy of See-ming Lee

Giving something away for free can be a fantastic way to achieve adoption, but it raises a permanent conflict. The conflict is even greater when the free products are open source.

Driving adoption is a key requirement for any product business, and a popular tactic for doing so is hooking people with something free in order to sell them products once they’re invested. The most famous example is Gilette “giving away” razors, but this model is now widely adopted by software companies striving to grow quickly but cheaply. Splunk and New Relic are examples of fantastic businesses who allow their products to be used for free in some circumstances in order to drive long-term adoption and revenue.

Success with this tactic requires mastering the tension that it introduces: The thing you give away must be valuable enough that it drives adoption, but not so valuable that people don’t eventually need to upgrade.

If it is insufficiently valuable on its own, no one will use it, but if it is so valuable that people can succeed without ever paying, then you have users but not customers.

The goal of a freemium business is to separate the commitment from the buying decision. I want you to become so successful with my product that you become committed to it, which means when I finally ask you to pay the sale is both easier and more valuable.

For you to become committed, you must be successful. You must achieve whatever goal caused you to download my software in the first place. However, in your success, you must also hit some wall that requires you to upgrade.

Managing that balance is crucial to success with freemium. Give too little away and you don’t get any adoption, but give too much away and you have a passionate community but no money to pay for building the software.

This balance is complicated by the fact that the best communities are built around authentic identities, so changing what you give away involves changing who identifies with your company and why, which is much more fraught than tuning your business model. It’s a sufficiently complex operation that it’s one of the key dials that a freemium business will manage throughout its existence.

As difficult as this balance is in a proprietary software business, it’s much harder when dealing with open source. After all, when you decide to open source something, you’re not just choosing to make something free, you’re giving your community permanent rights to something you own. While you technically have the right to keep private any further updates, in practice once you open something up you have to either keep that project free forever or let it die.

Your community considers the opening of your code a permanent commitment to maintain this software for free forever, and anything less than that will generally be considered betrayal. They didn’t adopt you, or your revenue streams; they adopted this free thing that you promised would work well for them, and they’re going to raise hell when it doesn’t. They don’t care that your business model requires that you charge for analytics, or for clustering. They need those features to be successful, you implicitly promised them success, and now you’ve got blood coming out of your ears.

In some sense, successful open source software companies require lightning to strike twice: They need to free something that it is so great you’ll adopt it without paying, then they need something else that’s also so great you’ll pay them. Most OSS companies try to provide this extra value at the margins, because getting that second lightning strike is so hard. Proprietary software companies can provide hard limits on how you take advantage of their most useful features, but if those features are open source, then of course you can’t limit them in any way. You’ve got to develop additional features instead.

It’s not a coincidence that we’ve seen so few open source software companies build large revenue streams. Most end up shifting their focus from the open source that started everything to proprietary software that drives their business. The best companies remain community-oriented, but that is by no means a given.

If you’re considering building a freemium business, you must treat the success of this balance as a key business metric. It underpins the unit economics of your business, determining how big the funnel is based on adoption and how many convert based on the willingness to pay.

Getting it right is worth it because it enables a fantastic company with low marketing and sales costs, an engaged community, and easy upgrade paths for your best users.

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