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.