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Thursday, March 17, 2011

Why your startup should not start with a Freemium biz model

I'm reading Ash Maurya's book Running Lean that I picked up from AppSumo's Lean Startup bundle [The bundle gives you $6000 worth of ebooks and web app subscriptions for only $99. Its a total bargain, but only 3 days to go before the offer expires, so get it soon - use this link and I'll get a $10 credit :)].

There is a section on the freemium pricing model and why startups should not start with freemium. This part really resonated with me because we fell into many of these problems early on. The reasons against freemium are:
  • Low or no conversions: Startups often give away too much in the free plan, leaving users with no need to upgrade
  • Long validation cycle: Conversion rates on upgrades are low, so its hard to validate the pricing model
  • Focusing on the wrong metric: Causes a premature shift in focus from building the right product for paying customers to new user sign up
  • Low signal to noise ratio: Free users may give feedback that paying users dont care about
  • Free user's aren't free: It costs time and money to support free users
Do you think freemium works? What are your thoughts?

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Jagat Iyer said...

agree....Also relevant is Tim Ferris talk with Loic Le Meur of seesmic...

Ariel Nieto said...

Great Advise!! Thanks

stacy@singlemom said...

Freemium does work. The biggest examples are facebook and google! That shows that freemium is a working type of business model.

sunnyoraish said...

Yes i think freemium works, but it requires carefull execution....there are some good startups who survived solely on freemium (dropbox, lastpass)....depends on how much u are giving away for free and the quality of service...normally, stuff that an average user would just use once does not do well with freemium model