Freemium is the new free

Free to access, advertising supported pages are the Internet’s oldest business model. Advertising is the blood of the web. It sits on billions of pages and pays for the efforts of millions of publishers worldwide, who in turn enrich our lives with all manner of useful content, applications, games and widgets. The Net would be a very different place without it.

But now advertising is under threat. Advertising has grown exponentially, formats have become more aggressive and the user experience has been degraded as a result. People have reacted by creating ad blockers like Adblock Plus for Firefox, which make it a breeze to remove all traces of ads from all sites, updating frequently to address advertisers’ workaround attempts. Ad networks have grown large, slow and inefficient. They seem powerless to address the rise of the ad blocker. This is no small threat – the very nature of the net depends on site owners’ ability to provide free access to their services as well as generate a revenue stream to make it worth their while. It doesn’t look good.

The good news is, a new model is available, and it’s better than advertising. Way better. Chris Anderson, of Long Tail fame, has coined the term Freemium to describe it. In essence, Freemium is the ability to offer basic access free and introduce a (small) charge for access to premium features. Freemium works because it takes advantage of 2 key properties.

1. The Web is large. Very large. So even if only a tiny fraction of visitors pay for your services, the size of that tiny fraction is still big. Very big indeed. Get that large base to open their wallets just a little and your revenue can be quite large indeed.
2. Value is subjective. People attach very different value to different services. By designing your free and premium services correctly, you’re likely to offer enough value to the majority in the free band to get reach, yet to offer sufficiently added value on your premium band to ensure premium users perceive the benefits as worth the money.

Anderson has done the math and suggests to aim for 5{acc93bc4c50d705b6582df8463c6e78eab363e734bea58beb26f7f541e3e6037} paying users, with a ceiling of 10{acc93bc4c50d705b6582df8463c6e78eab363e734bea58beb26f7f541e3e6037}. Fewer than 5{acc93bc4c50d705b6582df8463c6e78eab363e734bea58beb26f7f541e3e6037} mean you’re giving away too much, or your premium offering is not strong enough. More than 10{acc93bc4c50d705b6582df8463c6e78eab363e734bea58beb26f7f541e3e6037} and your free offering is weak, meaning you’re not getting the reach and therefore your opportunity space is reduced.

Examples of Freemium abound, from Flickr and Dropbox -where free space is capped- to Remember the Milk -where premium users pay mostly to support the service’s creators. Freemium thrives in the B2B space, with Basecamp a great exponent of it.

Do you know a good Freemium site? Do you think Freemium is just a fad and real world economics will thrash it, as music sales figures seem to have done recently to its long tail cousin? Let me know in the comments!