The Freemium Business Model and Viral Product Management

Have you ever asked yourself, how the „free“ business model works, which you often find in the internet? Or why some vendors sometimes allow you to choose between a free product, and a product with a fee?

Interesting Article

My collegues from Pragmatic Marketing have published an interesting article about this topic. The article →The Freemium Business Model and Viral Product Management, written by Scott Sehlhorst from the →Tyner Blain blog presents a model. This model consists of a product made to be wanted by customers, and it includes a mechanism that helps to attract customers. I recommend you to open above link, and to read it by yourself.

Managing the Conversion

In a side discussion Scott/I have added the aspect that your own freemium business model should also manage the conversion of free customers to fee customers strategically. To understand the idea behind this aspect, consider the following cases:

• Case A) Assume you offer a perfectly fitting product (for free), and you create a perfect marketing wave. In this case your customer base grows exponentially. However, the inbound customer stream consists of _free-seekers_.
• Case B) Assume you offer the same as in A, and have the same wave. You further offer the paid alternative A-plus. Now, your inbound customer stream needs to consist of free-seekers, people who convert, and A-plus seekers.

From the customer perspective both models work if the entire wave goes into to the free product, from the vendor perspective you need some extra arguments for some of them to go for A-plus, without having the feeling that they pay the party for the rest. That means the following:

• You need to make sure that there is a difference between the products, which is valued by customers,
• Both products need to satisfy different (non-competing) needs.

As far as I understand the complete model, it is important to pave these roads right from the beginning. To do so, you need to think about two products with a certain functional difference, and you need to understand both products, and their interrelations from the customer’s intrinsic motivation to select them.

Conversion Processes

In the comments to the article you find information from Scott about interesting research made by Dan Heath (http://www.predictablyirrational.com/). Dan has studied the differences between a product, which is given for free to some customers, and which is sold to others at a very low price. His research suggests that customers use entirely different decision processes, when they get something for „free“, or when they have to pay (even) a very low price for the same product.

To extend the freemium model to your particular situation, you can also look into studies from economists. If you design for instance social systems, or if you try to manage public goods, such as “clean air”, you face the “free-rider” problem. To avoid this effect, you need to impose a price to this public good. On the other hand, the social system should bring benefit to those in need, which means that the conditions needs to be designed.

Methods and models are available, which help to identify the _optimum condition_. In the SSRN network you should find them under the mentioned term _free-rider_.

Weiterführende Informationen

Das Original dieses Artikels ist auf →Der Produktmanager erschienen (©Andreas Rudolph). Regelmäßige Artikel gibt es über die (→Mailingliste), oder indem Sie →mir auf Twitter folgen. In der Online Version finden Sie hier die versprochenen weiterführenden Links:

This entry was posted on Donnerstag, September 10th, 2009 at 8:21 pm. It is filed under Thema des Tages and tagged with Beispiele, Business-Model, Cash Generation, Corporate Strategy, English Content, Strategie. You can follow any responses to this entry through the RSS 2.0 feed.