Freemium Marketing Strategy (and Business Model)

Our assignment for this week's StratMktg class was to define one of our favorite marketing strategies, which would then be aggregated by Dr.Narus and put into a single "book" for us to take away from class. I selected "Freemium", which is sort of a hybrid between a Business model and a Marketing strategy. Below is a copy of the paper I submitted.

I used Google's various free applications (Search, GMail, Maps, News, Reader) as an example of using "free" to drive other aspects of their business (AdWords). Perfectly valid example that people can easily understand. If I had this project 6-12 months from now, I probably would have used a Twitter example.

Freemium

Contributor: Brian Gracely

Source of Strategy: Chris Anderson, Free: The Future of a Radical Price, (Hyperion; July 2009). ISBN-10: 1401322905

Type of Strategy: Market Growth

Description of Strategy: With the growth of Internet devices and users, the demand for online services continues to rapidly expand. Due to the relatively low cost of entry into the marketplace, online services must growth their customer acquisition counts at tremendous rates to avoid users switching to another service. Initially offering the service free ensures that the user does not have to make an initial value decision before joining. Once a large population of users become active and perceives value, the opportunity to offer premium (paid) services becomes a possibility. In addition to user-paid revenues, additional partnership opportunities are available to online companies that provide a service that allow adjunct services (advertising) to be created around the user community.

When to Use This Strategy: Freemium is a marketing strategy that has been deployed by Internet-based companies since 2004, and is synonymous with the term “Web 2.0”. The primary concepts of Freemium are:

• Extremely low customer acquisition and transaction costs due to web-only assets. These low costs allow the strategy to address both mass markets and niche markets under the same cost structure.

• Basic services are provided free to customers.

• The company allows numerous opportunities for the services to be expanded by the users, allowing viral growth through user-centric marketing.

• The company allows numerous opportunities for the services to be interlinked with partners to create “mashed up” new services that can be co-branded and cross-promoted.

• Revenues can be generated through premium versions of the basic service, through online advertising, or through various types of partnership programs.

In most successful Freemium models, only 2-3% of the users need to engage in revenue services in order to break-even or become profitable.

Example(s): In 2009, Twitter has become the poster child for Freemium. Having grown it’s user count 1900% over the past year to 10M, with a staff of just 35 people, it is now beginning to introduce revenue models targeted at advertisers, business users and local media. A private company, Twitter has gotten buyout offers of $500M from Facebook and $1B from Google.

From 2006-2009, Google was the best example of a Freemium and Reverse-Freemium model. Google initially offered their search without ads (free to users, no revenues), but soon added AdWords to generate tremendous revenues. They then added free services (GMail, Maps, News, Reader) to generate more content that could be monetized through advertising revenues.