When Freemium Works as a Business Model

Last week an entrepreneur mentioned they were thinking about introducing a new product with a freemium business model. Freemium, where there’s a free edition of the product along with a premium upgrade, has been a mainstay of cloud software for decades now. Only, it doesn’t work for most products.

Let’s look at when freemium works best. Here are a few characteristics:

• 2nd or 3rd generation product – Once the market has been educated, and people know how to use that type of product, freemium works as users can jump in and be productive (e.g. Mailchimp was a 2nd generation product when it came out).
• Fast time-to-value – Products that deliver value quickly work best for freemium such that users can understand and appreciate the product with minimal handholding (e.g. Google Docs where you can start typing immediately). Complex, complicated products don’t work well in the freemium model as there’s too much energy required to get value.
• Viral distribution – Freemium really shines when the very nature of using the product propagates it to other users. Think about Calendly links for scheduling meetings, Dropbox sharing of files to different people, etc. Distribution is one of the most difficult aspects of B2B software, and the most successful freemium products have a heavy viral component.

Freemium, when it meets these criteria, is one of the best business models around due to elegant product distribution and scalability. The next time freemium comes up, see if it has these three characteristics.

What else? What are some more characteristics of the most successful freemium products?