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Emerging service providers: Be analytical with your free tier of service!

by Ted Chamberlin  |  July 10, 2018  |  Submit a Comment




One of the great things we as analyst get to do at Gartner is witness the evolution of companies.  Most enjoy some degree of success; yet a handful die on the vine. Those that don’t survive can fall into three categories:

  • Some start with great ideas that don’t get fleshed our and executed;
  • some are solutions looking for a problem
  • few are too early for a maturing market.

I was thinking what contributes to these success or failure factors and one area struck me : free tiers and how companies position it and what they do with those users.  Recently, I have spoken with many web performance, image optimization and cloud providers about the intent of their free tiers and unsurprisingly  the answers are:

  • Its our dev/test/QA/live environment
  • Low cost customer acquisition engine.

Definitely reasonable on both accounts. A  freemium model allows enterprises to try before you buy and test with little to no risk. If you as a provider somewhat aggressively monitor that free tier usage and proactively reach out to those  on-the-edge users, then it can be a good client acquisition tool.    But……………how many providers with 100,000s of free users have the time and resources to actively mine,analyze and grow these freemium users? Probably on a few. The dangers offering too little or too much functionality in a free tier is a real concern.

Public cloud providers generally get it right with a limited amount of hours ( 750 ish) of micro instances with open source OS and software. They hybridize a freemium model with a free trial time bound model ( 12 months usually). But really, does AWS or Azure really need to understand how the buying behavior of occasional cloud users? Me thinks not.

There is a hidden benefit if a free tier, albeit with a large amount of scaled users. A few CDN and security service providers view their free tier not only as lead generation but also a captive audience for A/B testing of functionality.  They can develop a tool or service deploy with a brief blog post and then watch how their installed base reacts. If it doesn’t fare well- then a quick roll back and no harm done ( you know its free, right!!). Once these providers have scale on their networks, the marginal cost to support functionality is close to negligible.

So if you are a emerging provider and you believe in viral, referral based growth embrace the freemium model but be smart; learn from those hopefully future premium subscribers.

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Tags: ab-testing  aws  azure  cdn  cloud  free-tier  freemium  security  

Ted Chamberlin
Research VP
18 years at Gartner
23 years IT Industry

Ted Chamberlin is a research Vice President at Gartner, where he is part of the Cloud and Communications group in TSP. His research focuses on the emerging cloud and hosting communications services like IaaS, PaaS, SaaS, colocation, application hosting, streaming and video content platforms, streaming and IoT and software-defined networking. Mr. Chamberlin has experience working with all size organizations from larger multinationals to early stage startups. Read Full Bio

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