Bootstrapping a Business in the Freemium Model

On the Austin Bootstrap messaging boards, there was recently a discussion of free and “freemium” business models. Richard MacKinnon of LessNetworks had a very thoughtful response based on five years of running this type of business model. We asked Richard for permission to re-publish here.

Thoughts on the Free Model

  1. In the early days of free WiFi (over 5 years ago!), we bent over backwards to give away hardware, labor, and services for free. This seemed noble, community-oriented, business-friendly, and philosophically right-on. The reality is that many “customers” took us for granted and
    didn’t properly value our time, our stuff, or our services.
  2. We learned the story of the old sofa set on the curb: When the sign on it said “free couch,” it just sat there. When the sign was changed to “$25 couch,” the sofa was stolen within an hour. We also read the study where patients who paid $10 for a placebo were more satisfied than those who got it for free.
  3. Giving away stuff for free makes people suspicious of your ulterior motives and also brings the viability of your business model into question. You find yourself in the odd position of not only persuading people to take your stuff for free, but offering guarantees that you’ll continue to do it indefinitely! Yuck.
  4. In contrast to the “customers” who don’t value your good will, there are the super-leeches who not only want what you’ve got for free, they consume it voraciously, and they want more, but they’ll resist any effort to upsell them on “freemium” services.

What To Do?

First of all, the customers in Point #1 either disappeared anyway or have managed to linger-on but not really knowing what we do for them because we don’t have a billing relationship that legitimizes us in their eyes. It’s also incredibly hard to suddenly start asking them for money for stuff (or different stuff) they didn’t value in the first place.

The customers in Point #4 are obviously still with us and provide us with plenty of material for case studies, R&D, and marketing.

We’ve stopped wasting our time on customers in Point #3–my mantra: “I’ve gotten out of the business of twisting your arm to provide services to you for free.”

We’ve developed a dramatically tiered set of service plans designed for the customer psychological profile and/or budgets categories we’ve encountered:

Cheapskates/Skeptics/Barely Surviving Businesses/Non-Profits/Charities

Still essentially free. You get our basic set of services for free for a year. If after a whole year you decide that you value what we do for you, then you continue to use the services for next-to-nothing (but not free!). The key is to assign value with a dollar amount. If the customer is not willing to meet this number, then you should probably chuck them unless you get some other indirect benefit from the customer. We’ve found that most of these folks don’t last the year anyway, so there’s no point in trying to upsell them prematurely. If they self-select and stick around, chances are you’ll have an easier time upselling them. Although Non-Profits and Charities fit into this group, they’re typically here for budgetary reasons, not psychological. Why a whole year? Because we’re softies and deep in our hearts, we still want to give stuff away for free. Our stats show that we could vet this group with just 90 days.

Prudent-Spenders/Value-Shoppers

These are the customers that are willing to pay for freemium services, but only to a point…and they’re likely to bail if the competition comes out with something cheaper, or if you in any way tick them off. The key here is to be willing to match on price (if it makes sense) and offer satisfaction guarantees. Because they’ve paid you (and they know that most customers haven’t), some of them will expect Red Carpet treatment, which can get costly–so beware. Most of freemium business comes from this group and they also supply lots of launch points into the next group.

Quality-Conscious/Branding-Controllers

These are the big ticket customers. They heard about you via word of mouth or they may have even used your service personally as an end-user. They have decent budgets and they want the world. While they are not as interested in cutting corners to save money, they will dangle the potential deal size to reduce your margins. They have lots of concerns about whether a company that gives away stuff for free or sells it relatively inexpensively can provide them with a quality service that they are willing to pay for. You’ll end up encountering a few of these a year. They’ll take up lots of time with conference calls, presentations, and pilot projects. Some talks will go on for years. A single closed deal of this type will boost revenues by 1000% because most of your customers pay nothing, next to nothing, or pay a little something but want a lot.

So to answer the question, does the Almost Free model work in the bootstrap world? It’s been working for us. We’ve had to become masters of efficiency. Clearly we’ve had to develop a service model that must cost next to nothing to operate. In many ways, that may end up being exactly what our exit is–a commercial-grade WiFi network that’s robust and gets a lot of mileage. Compared to the operations of our cash-guzzling competitors, you’d think our way of doing WiFi would look pretty interesting in cost-conscious times.

About Bryan Menell

Bryan is the Managing Editor for AustinStartup and the CEO of Mahana. He is a co-founder of Capital Factory, an investor and advisor, and runs the popular Austin Tech Happy Hour with his wife.

Comments

  1. Josh Kopelman, the founder of Half.com, First Round Capital, and a Bazaarvoice investor, wrote a very interesting post about this last year:
    http://redeye.firstround.com/2007/03/the_first_penny.html

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