I was reading a recent post by Fred Wilson on his A VC blog about his favorite business model for Internet companies. Basically his summary was to give a service away for free then charge for a premium or value added service to a subset of those who use the free service. After asking his readers for a name for this model he settled on Freemium.
What struck me by this post was that I have always been leery of the view that a small subset of a customer base actually pay for the rest...but the post brought me to a small epiphany (it may be obvious to everyone else, but it was not to me until now). Let's start with a question:
Q: How do you find and market to a customer base in the abyss of the Internet?
I call the Internet an abyss for obvious reasons. The Internet is a vast space with a massive number of people and a massive number of services and from this space how do you distill your market? What I realized was the free service offering was not there to acquire customers per se but to build a market for your real offering, and a market that you completely dominate. Follow this reasoning.
- You come up with a great idea for a product or service you know some demographic of customer will pay for.
- Instead of traditional demographic profiling, targeted advertising on search engines, etc you come up with another service which would be a draw to a superset of your intended market.
- Put that free service online and through social mechanisms (word of mouth, etc) build up the potential customer pool (as Fred indicated in his post).
- Offer your paid service to the free service pool, knowing that within your free service demographic is your paid service customer base.
So this free service is effectively a mechanism to create an singular advertisement medium where you know (a) your target customers will see the ad for your paid service and (b) you alone advertise in the medium. Rather than look at the free service users as your customers perhaps you should look at them as your potential customer base. The ones that will actually pay you for your product or service offering are your customers. This does not mitigate the cost of having to service those who use the free service. That is critical because your future paying customers are in there! Some may see this only working for services like Flickr where there is a basic (free) then pro (fee) service offering, but it could go way farther than that. Traditional product or service vendors could spend a fraction of their massive advertising budgets to build teams that create these types of free services which would draw in their intended customer demographic creating a medium to reach paying customers, while at the same time offering something that has high value to everyone who uses it. We could name it a free market economy but I think that term is already in use.