A frequent complaint about web startups is that despite being cool or popular, they lack a clear business model. One textbook example was YouTube. The service had millions of adoring users, but financially speaking, YouTube ran at a loss until Google bought them out in 2006 for $1.65 billion. For a time, the default business model for high-traffic but unprofitable websites was displaying ads. But since effective advertising depends on more than just mass exposure (like targeting) it is not always an effective business model.
A better answer for many has been the “freemium” model, where a company offers its core product or service for free and charges for advanced or special features. Rumors have cropped up in recent years that web giants like Twitter and Facebook, for example, are considering freemium strategies. Below, we’ll profile seven companies that have already mastered the freemium model, and how they did it.
Skype
Web-based telephony company Skype provides an excellent example. Founded in 2003 by ex-Kazaa masterminds Niklas Zennström and Janus Friis, Skype began as nothing more than a P2P-driven application people could use to “call” other Skype users with over the web. Gradually, Skype evolved, enabling users to place calls from computers to regular land lines and wireless phones. Once this happened, Skype simply announced on its website that while computer-to-computer calls would remain free, a “low per-minute rate” would be charged for using Skype to call land lines.
Having used Skype for several years, many users were happy to pay for the extra convenience and features offered by the expansion. Indeed, it was a major driving force behind eBay acquiring Skype for $2.6 billion in 2005 (although Skype has since been acquired by a group of private investors.)
LinkedIn committed to a freemium business model in 2009, according to a BusinessWeek article about how they are “...now boosting sales by adding features that customers have to pay for.” LinkedIn, which lets users create digital resumes that can be updated over time and kept in one place, launched a feature in November 2009 “...that helps recruiting agencies scour the networking site for job candidates.” LinkedIn also offers three types of premium (paid) accounts: a Business account for $25.95 per month, a Business Plus account for $49.95 a month, and a Pro account for $499.95 per month. Each account offers greater flexibility and privileges within the service, such as the ability to send more direct InMails per month.
Today, LinkedIn is the standard for web-based resumes and online hiring searches. And, the company is positioned to profit from its continued growth, rather than simply being content with greater “buzz,” and a growing user base.
ESPN
While ESPN certainly isn’t a startup, that didn’t stop the sports television giant from taking a page out of the web playbook and adopting the freemium model for its online news reports. Early on, the company published in-depth sports reports from the likes of Peter Gammons and Jayson Stark on its website free of charge. Then, in June 2009, BusinessWeek reported that ESPN had, “...merged its online magazine with its Insider service, which costs $6.95 a month.” The Insider service (which ESPN established way back in 1998) was set up such that readers could see only glimpses of Insider stories before being asked to pay for full access.
According to ESPN spokespeople, Insider subscriptions have, “...more than doubled” since 2005. As with Skype and LinkedIn, ESPN’s switch to freemium was made possible by the rapport and trust it established with users by offering free content and features early on.
Flickr
Flickr began as a free service that anyone could use to upload and store their pictures. Naturally, however, storing all those photos required increasingly greater amounts of server space and bandwidth. To offset costs and turn a profit, Flickr eventually turned to a freemium model by announcing the launch of paid Pro accounts in 2006. For $24.95 per year, a Pro account entitles users to ad-free use, unlimited photo storage, unlimited sets and collections, stats on your account, and access to your original files.
Response to the service has been positive, as users were willing to spend money for greater access to a service they already knew and liked. It has also made Flickr more appealing to professional photographers who need higher-powered services for their careers.
Pandora
Before embracing a freemium model, Pandora found itself in a situation enviable to any startup. According to TechCrunch, some of Pandora’s users loved the service so much that, “...they actually ask for ways to pay the company, to make sure it stays alive.” In response, Pandora launched Pandora One in May 2009, a desktop application offering high quality streaming, no ads, and unlimited listening for just $36 per year. Pandora One users also have the option of customizing the desktop application with their choice of graphics. After citing predictions of $40 million in 2009 revenue, TechCrunch concluded that, “...2010 could be the first profitable year for Pandora.”
In actuality, Pandora booked $50 million, and achieved profitability in the fourth quarter of the year. Today, some believe Pandora’s future holds brighter achievements than mere profitability. A March 2010 New York Times article reveals that not only did Pandora avoid joining, “...myriad music start-ups in the tech company graveyard, like SpiralFrog and the original Napster”, the service is now, “...attracting attention from investment bankers who think it could go public.”
Webnotes
WebNotes, a startup that creates technology to simplify the work of professional and academic researchers, is another company to have ridden the freemium model to financial success. In an August 2009 interview with Interview140.com, WebNotes marketing director Alex King spoke of the, “...advanced reporting and PDF annotation capabilities” that come with paid versions of the service. At time of writing, WebNotes offers two paid options to its users. The first is a Pro subscription, which for $35 per year supports such features as multi-colored annotation, page caching and sharing notes via RSS feeds.The Premium version, which costs $300 per user per year, supports all of that plus multi-user support and administration, media monitoring and more.
After starting out in 2007 with just $35,000 in investment capital (according to TechCrunch), WebNotes seems to have discovered its freemium niche early on enough to capitalize from rising demand for its annotation services. Their newest offering was a press clip service intended for use by public relations firms, which, according to WebNotes, “...helps marketing professionals quickly generate media monitoring and competitive intelligence reports up to twice as fast as existing solutions.”
Google Adwords
In a thought-provoking post, Eric Ries of StartupLessonsLearned.com argues there are actually three distinct freemium strategies:
- Free serves paid
- Free trial
- Free as inventory
The latter is what propelled Google AdWords to success - selling access to your free users. AdWords achieves this by allowing advertisers anywhere in the world to display small text ads when people search for keywords relevant to an advertiser’s business. Only when someone clicks an ad is the advertiser charged for the service. In this way, Google has been able to advertise AdWords as being free until and unless prospects engage what you are selling. Indeed, the latest corporate motto for AdWords is “It’s All About Results.” Ries goes on to note that, “...some dating sites work this way too, where you can post your profile for free, and people pay only when they want to contact you.”
The connection between this strategy and what is commonly thought of as freemium, Ries contends, is that, “...the most popular people get lots of value without having to pay.” Yahoo! Search Marketing, MSN’s Bing, and Ask.com operate by and have succeeded in the same manner.
