Excerpt from Subscription Business Models Are Great for Some Businesses and Terrible for Others by Robbie Kellman Baxter:
I love freemium, the idea of combining a premium paid membership with a free membership that provides value forever. But freemium needs to work in service to a larger business strategy. Freemium works best in three scenarios:
– As a means of trial. Many people who have a free subscription to Dropbox get all of the online storage they need. But for others, as they make Dropbox part of their daily routine, they find they need more storage and greater functionality. As a result, they upgrade to the premium service.
– To create a networked effect. Each new member that joins LinkedIn for free creates additional value for the recruiters, salespeople and jobseekers paying for LinkedIn subscriptions. And if no one used the free version of LinkedIn, there’d be little reason for those people to pay at all.
– To serve as a marketing channel. Some people never pay for a SurveyMonkey subscription, because they only need small surveys sent to a few people, with limited analytics. But when those people send out their surveys, they are advertising for SurveyMonkey to everyone who receives the survey. If one of those survey recipients subscribes to the premium offering, the sender (who’s a free member) becomes a marketing channel for attracting and converting new members.
Notes:
(1) Thank you Daniel Shvartsman for the article recommendation.
(2) Note the similarities with Tom Tunguz’ The 3 strategies of freemium companies.
(3) Cf. The 3 conditions of a great freemium business.
A Founder's Notebook 