HOW TO: Change Your Business Model From Paid to Freemium

Umberto Milletti is the CEO of InsideView, the social CRM application which brings comprehensive sales intelligence gained from social media and traditional sources directly into any CRM platform for increased sales productivity and revenue.

Much has been written on the pros and cons of the freemium model by Mark Cuban, Malcom Gladwell and Chris Anderson, among others. Rather than debate, this post is a guide to how you can actually implement the freemium model for your business if and when you get to a point of serious consideration. I can share some of the unique experiences from our own business and how we switched from paid to freemium and whether it makes sense for your company.

First question: Does freemium make sense if you already have a healthy paid-only revenue model? The answer is almost always “yes.” I know you’re thinking time is precious and often limited, but ask yourself, “What position would I be in if someone offered a free product that competed with mine?” If you are in the software or information business, the odds that it will happen are pretty good. Sure, it might not be as good as your product, but is it good enough to siphon customers?

We’ve seen this movie before, with enterprise software vendors ignoring SaaS and open–source technologies under the belief that they would not penetrate the enterprise. (Ten years ago PeopleSoft’s CEO famously declared “Marc Benioff is trying to get in the big leagues with a Wiffle ball and plastic bat.” That bat is looking a lot like maplewood now.) The freemium model is creating similar disruption in the enterprise software and information markets.

Upfront, it is much harder for a company moving from a paid product to go freemium (Paid2Freemium) than it is for a company that initially offered a free product. For the latter it’s a matter of survival, while the former usually has a solid business and thus, much more to lose. It is analogous to traditional software companies having a very difficult time shifting to SaaS because of the revenue-recognition impact to their existing model. But in addition to protecting a business from the above-mentioned attacks by a competitor with a free offering, a well-tuned enterprise freemium model can actually bring tremendous sales and marketing benefits: Low-cost, potentially viral adoption, and upsell starting points.

Here are some areas that prospective Paid2Freemium companies should explore:

You can’t afford to have a free version of your offering if it’ll cost you an arm and a leg to support those free users. You need to think about the delivery costs (including IT), support costs and any setup costs incurred by your organization. If you realize free will cost you too much, you have the option to define the free version of your product to be cheap to delivery, easy to support and set up (free users don’t expect a complex application anyway).

If your product doesn’t have momentum, you should probably wait before introducing a free product. You don’t want lots of free users out there bad-mouthing your product because the user experience wasn’t so great. The bar for product quality is actually higher for free products than it is for paid products (which might seem counterintuitive). Some end users might be forced into using a paid product because it’s company mandate. Those same users will not engage with a free product unless they like it, since there is no one to force them. One of the great side-benefits of having a free product is that it really forces you to focus on the user experience.

This is probably the hardest part, and probably one that will take a number of iterations to get right. You might always be tweaking the location of the upsell points that entice a free user to pay for your premium offering. Start with putting these upsell points in places where there is some value for the free user to need more and it’s evident there will be an increase of value if they turn into a paid user. A good example is Skype, which allows you to freely make calls to other Skype users, but upsells you to a paid call when you want to dial physical phones.

You should, otherwise your management team and your board are asleep at the wheel. One of the main areas of concern will be the potential cannibalization of your revenue stream. Your sales organization is likely to be concerned about this point. There might be questions about marketing (“Will free diminish our brand?”), product development and IT (“We need a bazillion dollars to create a highly scalable product and infrastructure”), finance (“You can’t make money with free, it’s just a cost-suck.”)

This transition will require strong leadership and a core belief at the top (usually, the CEO). Otherwise the internal organizational antibodies will kill the free product before it’s had a chance to grow into your successful new business model.

If you do decide to experiment with a freemium model, it’s important that you view it as a long journey — not a project with an upfront start and a finish line. It is an experience that will either modify the DNA of your company, or will fail (which is fine, at least you’ll know the pitfalls that your future freemium competitors will encounter.) The DNA of a freemium company is quite different from that of a traditional B2B company and evolving will make you stronger. Have you experienced the successes or challenges of a freemium model for your B2B company? If so, please share your experience with us in the comments below.

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Why SMS Marketing Still Makes Sense for Small Business

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Mobile texting paradoxically sounds like “old news” as far as new technologies are concerned. After all, we were able to send each other texts before our mobile phones even had color screens. While the Western world has focused on smartphones and flashy apps that let you pull up RSS feeds, find information, or fling exploding birds at structures, SMS marketing is still a hugely important part of our mobile lives.

Consider that while smartphone adoption has been slower than anticipated, nearly every mobile phone user in the U.S. is capable of sending and receiving text messages. Additionally, SMS has become increasingly important in developing countries where the penetration of feature phones far outnumber smartphones.

Companies or small business that can nail down their SMS marketing strategy, especially when the space is still ripe for innovation, can open up a number of opportunities. We spoke with four mobile experts for some tips, advice and insights on how to include SMS in a global business strategy.

There’s a huge population of consumers in the U.S. who do not own smartphones, notes Tom Cotney, CEO of mobile marketing firm Air2Web. “And if you’re going to provide some kind of customer service capability on mobile phones, you really need to reach as much of the population as possible.” That isn’t to say that mobile apps are useless, but having a way for text to complement or introduce those services can help you reach a larger base of people. This is especially true in developing countries where the percentage of smartphone users is even smaller.

Even though it may seem like global mobile marketing is just the purview of large, international companies, small businesses can also jump in. “We are a small business with no outside funding,” said John Pelphrey, CEO of One-Txt, an SMS broadcast service. “The trick is to find the right niche, something that you’re knowledgeable about and have some connections in and work it from there.” Pelphrey saw opportunities on continents like South America and Africa where cell phone access is more common than landlines or even open InternetInternet access. “Their first access to the outside world is their cell phone,” Pelphrey added.

It’s one thing to say there are opportunities in global mobile texting. It is another thing to come up with a plan and put it into action. For Pelphrey, a successful strategy is about intimacy and immediacy: “To have the right information for the right person and at the right time.”

Most expert advice focuses on capitalizing on the intimacy of a cell phone. “The mobile phone is the most personal form of technology there is, barring hearing aids and other medical technologies,” Cotney said. Rather than sending out a text blast, treat your messages like a conversation with the customer while offering them value: “You really need to offer consumers a foundational benefit as the primary reason for having a mobile relationship with you.”

Of course, mobile texting isn’t all just sunshine and rainbows. There are some key limitations to consider before jumping in. First, SMS is necessarily limited by its character limit. In the U.S., text messages are limited to 160 characters — which is fine if you’re checking in with friends but more difficult when you’re trying to connect with or sell to consumers. That limit further varies by country. While Asian countries are closer to 70 characters, their individual characters usually have more meaning than Western letters.

There’s also the problem of getting your message to its destination. “There’s no single international body that goes and hands out short codes,” said Andrew Kenney, Chief Operating Officer at ONEsite. “You have to get one for a specific region. Carriers won’t deal with the particular brands.” After that middleman, it’s important to think of how your audience receives your messages. Not everyone has premium messaging or unlimited texts, Kenney warned. Texts can be expensive for your consumers, so make sure there’s value to make it worthwhile.

Ideally you could set up regional offices to best understand the communities you’re contacting. If that’s out of the budget, try to set up a contact already living in that community or do your research to make sure you know what times of day people are most social or what kind of information or language will be most effective. “Every country, every tribe, they’re all going to be different,” Pelphrey said. “You can’t take the lessons you learned in South America and take it to Africa. Those cultures are so distinct even within a few miles of each other.”

One hesitation businesses have when it comes to SMS is determining if it is a dying breed of marketing, especially when faced with smartphones or the increasing emphasis on mobile apps. While SMS has greater reach, it also has less interactivity. “It’s certainly possible to set your DVR using text, but it’s not a great user experience,” said Griswold.

Anyone worried about text disappearing as a marketing tool should consider that 2008 was the first year that text messages outnumbered cell phone calls. Cotney cited a study that showed users get mobile text alerts seven times more than they used to with feature phones. “Text is not just a technology, it’s an actual type of interface,” Cotney said. “Usually the older a technology, the less frequently it will be used, but text will be around for a long time.”

There are a lot of ways to approach SMS marketing, whether you’re a big company or a small startup looking to branch abroad. There are basic tips like offering your consumers real value, emphasizing intimacy, and being conscientious of cultural norms and traditions. Part and parcel, Kenney advised that “people should go do their research and they should pick partners that they can trust to build long-term relationships.”

Cotney emphasized reach, namely, how many people is your mobile strategy going to touch? While mobile apps may look nice, they can sometimes be a case of prioritizing new technology over a real strategy. “Have a strategy and incorporate how many people you’re going to be able to reach when the product actually gets out there.”

Still, it seems that the most pervasive advice was just to get started. “If businesses think they may want to do text, it’s never too early to collect numbers for the opt-in lists. There are lots of ways to do it…” Paul said. “You don’t have to have everything in place. By the time you do start, you’ll have a head start.”

The cell phone is really the first piece of technology that people started carrying with them all the time, Kenney said. We use it to find our friends or find information on a daily basis. That personal proximity and it’s social capability allow us to have an intimate relationship with our phones and what they can do. SMS is an immediate way to capitalize on those qualities without having to worry about downloading an app or compatibility issues. SMS, if done properly, is an effective way to reach customers both domestically and globally.

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The International Business Series is brought to you by UPS. Discover the new logistics. It levels playing fields and lets you act locally or globally. It’s for the individual entrepreneur, the small business, or the large company. Put the new logistics to work for you.

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