To Know the Pro and Cons Freemium Business Model

ISOM 3310
Assignment 2
Due Date: 6 Oct

Purpose: to know the pro and cons freemium business model

Read the following two WSJ articles and answer the 3 questions.   Submit a softcopy of the assignment to canvas.  

When Freemium Beats Premium Mar 2013 WSJ

When Freemium Fails  Aug 2012 WSJ

1. Why freemium is a good business model for digital goods?  
2. What is the major problem of freemium revenue model?   Why?  
3. Use the four conditions stated by Mr. David Sacks (When freemium beats premium) to explain the failure of Chargifi and the success of Dropbox.  

1. Why freemium is a good business model for digital goods?

For Freemium, it means you give away a basic version of the product for free while charging for a premium level of service.  

Freemium is a good business model for digital goods is because of the following points:

1. Allow customers to try before they purchase
   As the cost of digital goods is relatively low compared than material goods, customers can eliminate the risk before they actually buy for the digital good. This is a way for customers to experience and choose the product they love and pay for it, thus the customers who really need the products will be more willing to buy for digital good.
   
2. Value of the product is created by the users themselves
   As users can contribute their own content like profile information, photos, videos, comments, likes and more, some users are more rely on the digital goods while some are not. It is a good way to allow both sides of users (those who are willing to pay for the digital good and those who aren’t) to decide the most suitable way of using the digital good. Freemium is a way not filtering out ant side of the users, but cater all the needs for users using digital goods.
   
3. Way to enjoy growth for company

Company can enjoy a growth in users and revenue, take PayPal, Geni and Yammer as an example, the company grew its users to many millions in a short time. Also for Yammer, it produced $1.2 billion exit in less than four years.

1. What is the major problem of freemium revenue model? Why?  

1. Turn out to be a costly trap
   Freemium will turn out to be a high operating costs and thousands of freeloaders, and cannot earn revenue at all.
   
2. Not obvious to divide free and paid features
   As there are many features or functions offered by freemium, it is not always obvious what features should be free and which should be paid. Besides, too many features in the free version risks “cannibalizing the paid customers”, while not offering enough might generate little interest all around.
   
3. Not enough users to use the freemium revenue model
   Since typically only 1% or 2% of users will upgrade to a paid product, some business cannot reach millions of users but keep using the freemium revenue model.
   
4. Not effective for business with limited scope of products
   As paid users generally expect to get better or different versions of what they have already received free of charge, it is rarely makes sense for companies that sell products or services mostly to large business. Enterprise clients typically have budgets for buying goods and services, thus, they are not as drawn to free products.

1. Use the four conditions stated by Mr. David Sacks (When freemium beats premium) to explain the failure of Chargify and the success of Dropbox.  

The four conditions stated by Mr. David Sacks are:

1. The population of free users enhances the value to those who pay.
2. The two types of users — those who have a willingness to pay and those who don’t — are easy to differentiate.
3. Some premium functionality matters a lot to paid users but its deprivation doesn’t impair free usage.
4. The product is viral enough that any cannibalization is, on the whole, offset by faster growth.

For the failure of Chargify:

1. Most Chargify users never became paying customers.
2. There is no differentiation between paid and free users as almost all are free users.
3. For the merchant, they can enjoy the free service with less than 50 customers a month while charging $49 for more than 50 customers. But the functions is the same for paid and free, the difference is just the number of customers.
4. Chargify started out in 2009 but it was on the path to bankruptcy within a year.
   

For the success of Dropbox:

1. Dropbox’s users with the core free version will move upstream to paid version if they love it.
2. It was easy to differentiate the paid and free Dropbox’s users.
3. It provides extra storage for users up to 100 gigabytes at $9.99 while free version starts at 2 gigabytes can only be increased up to 18 gigabytes by providing customer referrals.
4. There are more than 50 million users, has since accepted that offering free accounts is a legitimate marketing cost.