Does a “Free Model” Hurt the Industry?
I had a conversation last week where I was speaking with a current client. He asked,
Do you think your free business model hurts the industry?
It’s an interesting question and one that bears serious reflection. It’s no longer the 1980s. Unlike the 80’s we live in a world where massive scale can be reached as quickly as it takes to send an email. Couple quickly-recognized scale with expanded technology and you have the perfect mix for lower-cost products that greatly benefit the consumer. The poster-child for this type of model is the venerable Skype. Before Skype high cost phone services were the norm. Pay-by-the-minute costs were high even when compared to today’s inflated currency.
Enter VOIP and voila: the business models of the telecom behemoths disappeared overnight. It’s one of the reasons companies like WorldCom went belly-up in a very big way. If you ask the question again, it makes one think that the answer would be a resounding “yes!” An open model doesn’t work in every industry and only truly works when a company can hit scale very rapidly.
It’s not enough to be low cost. Any free product has to perform reliably and the features must be up-to-snuff with Enterprise-priced solutions. And, that solution needs to be somewhat of an early entrant to the market of free. First movers certainly have some advantage, but it has to be sustainable. Just ask the predecessors to America’s Favorite Cookie. There will always be a race to be better better and more efficient, but few companies truly make the bold jump to make things cheaper. Even fewer make it the whole aim of what they do.
When you can reach scale quickly, the freemium model works, and works well. If freemium is chased to soon, however, there can certainly be a great deal of money left on the table. Of late, this seems to be happening in a lot of industries more quickly than in the past. Some would argue that it creates a capital vacuum that can deter industry growth. Those with a holistic view tend to understand the supply-demand relationship. We have a lot of people using the free version of our software who most likely will never pay for it. The question is, would they have paid $1,500 for a box and content hosting of $80/month for a single display? I don’t think so.
There is no adoption trade-off when you lower prices. The only trade-off is margins. You only make up for them by selling more product. Back to the original question, “does freemium hurt?” Maybe, but it’s best to front-load the pain.
