Spencer Fry

A lot has been buzzing about the freemium business model lately. The idea is to give something away for free, but charge a nominal fee for extended service. It’s a proven model, but not as widely used as you’d think. David Heinemeier Hansson of 37Signals gave an inspiring presentation covering its benefits at last month’s Startup School. Discussions spread around the Internet entrepreneurial scene like wild fire from his talk, but while entrepreneurs hail it as a proven method of becoming profitable, few adopt it.

The freemium model is nothing new. It’s been around for a long time (think Flickr), but rarely gets much attention when the economy is doing well. Back in the first Internet boom, it was all about the numbers (user count and page impressions) and advertising was the major revenue stream. That failed. And in the last few years we’re seeing a resurgence of this old method with companies such as Facebook being valued at $15 billion with nearly $500 million invested with no proven revenue; revenue that doesn’t cover expenses, but with beloved numbers (high user count and high page impressions). (As an aside, I believe in Facebook, and while their numbers dipped in April, I think they’ll continue to grow and eventually churn out a good money making business model.)

However, Facebook is a diamond in the rough and there are far too many web companies out there trying to emulate them by growing their userbase and coming up with a business model later: Twitter comes to mind, but many larger and smaller companies as well. As I said before, there can definitely be success taking this approach, but the success rate is far smaller than simply setting up a freemium service.

If you plan to use the freemium method, you obviously need to design incentives for your free customers to upgrade, but that’s easily thought out in most cases. Simply removing advertisements for your paying customers is the simplest way, but adding additional features is the best way, in my mind. You can give certain benefits to intice people to sign up. For example, at Carbonmade we give additional projects, images, and allow people to upload video if they upgrade to our paying plan.

The freemium model is simple to employ and as your free customer base grows, so will your paying customer base. Even if a small percentage of your free customers upgrade to your paying plan (say, 1%), you’ll begin generating much needed revenue to pay your bills and do very well. Depending on the scale, but if you have 50,000 customers and 1% of them are paying at $15/month, that’s $7,500 in revenue a month, $90,000 a year. And with most Internet businesses, you’ll (hopefully) grow exponentially every month and begin seeing large returns. When coming up with your next business model, think freemium and not simply free.

Every few months, I come across a really cool website feature that gives me the “wow” feeling. The most recent one happened to me last week when using Flickr for the first time in over a year – so cool that I even upgraded to Pro. The feature is their image uploader. Here’s a screenshot:

Look how you can watch the progress of your upload. I love how it has two progress bars: one for the individual image and one for the total job. I equally love how it grays out finished images and adds a checkmark saying they’re finished. How cool is all that? I think Flickr is really coming along, although, I’m opposed to their recent video addition along with many other people. At least they restricted it to 90 seconds.