Today’s Wall Street Journal reports on the Freemium model. When it works, and when it fails. Additionally, Matt Malone, GrubHub’s CEO, also shared his experience of switching from a freemium to a subscription model after testing his product and listening to his customers.
First the successes: The article cites Dropbox Inc., LinkedIn Corp., and Skype Inc., as examples of companies successfully building a free user base through positive network effects who recommend and rely on others using their services. Some percentage (1%-2%, according to David Cohen, founder and CEO of Tech-Stars) of the free users then pay for premium features or bring in paying users through word of mouth.
It is easy to see why the freemium model is so attractive to startups, but the liability of a large freeloading user base is increased operating costs, and potentially negative reviews of your brand if you fail to meet expectations.