An over promoted business idea of recent times is that “free” is the path to riches.  This concept approaches a thought bubble. While only a handful of companies (e.g. Google and Facebook)  have achieved  widespread adpotion and success by offering free services, the success of these companies has spawned a disproportinate amount of attention on a new business model – the  “freemium” model. Top technology blogs like  Venture Beat, Giga om, Silcon Valley Watcher and Tech Crunch have covered the topic, Freemium conferences have been held and a pop culture book  “Free: The Future of a Radical Price” was a best seller (and top free download).

This attention may be misguided.

There are critical distinctions among the oft touted freemium, ”freeluxe”  and “paidium” (both newly coined terms by me!) models that should be considered. Perhaps, too many companies choose to pursue the freemium  model instead of  the paidium model due to the hype over” free”. Perhaps, too many companies chose the freemium route because they don’t see the one significant difference between the freemium and freeluxe models. Perhaps, too many companies choose the freemium model because of the marketing and sales challenges of the paidium model.

As a result of these miscalculations, many good new products are perhaps being brought to the market in the wrong way and there may be a  misallocation of (venture) capital as is often the case when bubbles, thought or otherwise, are prevalanet.

Here is a review of the three models.

The Freemium Model

The freemium model involves a company giving away a product that is either feature, time, capacity or customer service limited. Examples include, Ning, Pandora and Flickr. Freemium companies make money either through advertising, subscriptions, or a combination of the two. Both revenue streams have potential limitations.

For advertising to be a serious revenue opportunity, the freemium company must achieve a massive audience or user base.  If  such an audience can not be achieved and usage is relatively limited, subscription revenue may be a more attractive option. Freemium companies, however, face the challenge of trying to charge  for a product that  the consumer is happy to use for free.

Training consumers to use a product for free is different than training customers to purchase a product. Consider the analogy of  training a dog with a bone. If you merely give a dog a delicious bone and then try to take it from him you  may encounter resistence and get bitten. If this occurs you may sagely retreat and let the dog keep the bone.

If you instead train a dog to sit, fetch, retrieve and drop a bone, you can repeat the process with a fair level of certainty.

The first canine example is analogous to a freemium company attempting to upsell their previously free product -the resistence is often fierce, as if the freemium company is trying to take something away from consumer that the consumer believes he is entitled to. In most cases the company may just allow the consumers to continue to use the product for free and hope that enough  will so they can sustain themselves on advertising and a small number of subscriptions – see Pandora.  The Freemium model rests on the easy (lazy?) marketing of the product i.e.- giving it away and hoping consumers will flock to it and/or eventually purchase a subscription.  Success with the freemium model appears to be limited. I need some help here:

Please provide the names of Freemium companies and their publically reported revenues or, if private, best guesstimates

The Paidium Model

The Paidium model depends on consumers paying companies for use of their products. Training consumers, to pay in the first place, is an art form well worth learning.   Think Apple. Apple has done a tremendous job of training its customers to camp out and wait in lines, often stretching many city blocks, for the priviledge of PAYING for their products. Apple has trained their customers well to sit, fetch, retrieve and drop a bundle on Apple macs, iphones and ipads.

Paidium companies, like Apple, make up the bulk of the largest and most successful companies in the world. The walled garden/stadium scarcity and/or quality of their products and services makes people want or need to purchase them.  Think also Microsoft, Cisco, Fed Ex, Activision, Oracle, Amazon, Pixar and Starbucks.  Paidium companies focus on not only producing quality products and services, but also on marketing and selling them. They don’t merely rely on the chance that they might “go viral”.

Take a look at the list of the Fortune 500 companies and count how many employ a “freemium” or even a “freeluxe” model. The vast number are in the “Paidium”/PAYMEUM camp.

The Freeluxe Model

The Freeluxe model, in contrast to the freemium model, starts with no limitations on product usage and its business model does not depend on ever charging.   This means that for a freeluxe company to be successful it must achieve a massive user base to garner profitable advertising revenue. Examples of Freeluxe business models include Google, Facebook, Twitter and You Tube.

Freeluxe companies tap into the consumers’ love of free. Catering to the consumers’ love free doesn’t necessarily translate into a winning business model.  Consumers also hate advertising and intrusions on their privacy. The Freeluxe (and freemium in some cases) model relies on the willingness of consumers to take something for free with an acceptable corresponding tradeoff in advertising and loss of privacy.

Unfettered use of a full featured product is essential to the success of  a freeluxe company. Google would  most likely never have become a global levianthan if they had limited use to say, 10 free searches a day with one page of results and charged there after for more searches and results.

Similarly, Facebook’s progress towards world domination would have been halted if users were only allowed 20 free friends and had to pay thereafter to add more friends.

Had Google or Facebook adopted a subscription freemium model, it would have limited growth of their audiences and stunted advertising revenue. Here, freeluxe worked better than freemium. Very few companies, however, can ever reach the scale of audience required to become a freeluxe company. They therefore have to start charging subscription fees to pay their bills. This as we have seen may be difficult if the user is conditioned to using the product for free.

Giving the consumer what they want is only half the battle the other half is getting the consumer to give you value in return.

Charging in the first place may be a better alternative.