Yesterday I had a very interesting discussion with a friend about the different pricing models in the new generation of enterprise software. Obviously, the bulk of the discussion centered on the viability of fermium models in the enterprise. Having written about this topic before, I decided to post some content from a previous blog post that capture some of my ideas about this topic.
Despite the proven effectiveness of the fermium pricing model in internet products, enterprise software vendors are just beginning to experiment with those models. Certainly, in the most traditional enterprise software circles, the term fermium is associated with “you have no idea of how to make money with your product” Below are some of the most common arguments that are typically presented against the fermium model
- Customers should pay for the product…
- What’s wrong with offering the software in a trial period?
- Are customers going to take us seriously?
- Are people going to try to gamble the system and take advantage of the free offer?
- Are customers likely to upgrade after using the software for free?
- How does this change our sales model?
The arguments above are not only valid but certainly expected. If you think about it, until now freemium models have, for the most part, been associated with consumer technologies in which user volume is sometimes more important than the revenue model. When it comes to enterprises, the old mindset of long sales cycles, proof-of-concepts or trial periods, and armies of nicely dressed sales guys still prevails when it comes to enterprise software.
Despite the previous arguments, we are seeing some very inspiring examples of enterprise software companies relying on freemium models to attract large numbers of customers. ZenDesk, Box, and Atlassian are just some examples of companies that have challenged established vendors in the enterprise software space and reached massive levels of customer adoption by leveraging freemium as the center of their revenue model. These companies are capitalizing on a very unique time.
We are living in really exciting times in enterprise software. The emergence of mainstream computing models such as cloud infrastructures and virtualization, the increasing presence of alternative connected devices as well as the new wave of social communication methods are fomenting unprecedented levels of innovation in the space and are allowing small companies to challenge established vendors such as SAP, Oracle, IBM or Microsoft. In my opinion, these technical revolutions are also opening the door for flexible pricing and commercialization mechanisms to be adopted in the enterprise software world.
A freemium pricing model definitely offers a lot of interesting opportunities in the enterprise software space but there are some serious factors that need to be taken into consideration before adopting it.
Where Freemium Works
Having a large number of customers is always exciting and can definitely help position your company as a leader in a specific market. However, if that customer adoption comes at the price of real revenue you better have a very solid strategy about how to monetize your product. In the consumer world, there are some established mechanisms such as advertising that offer a clear path to monetization once you have an established user base. That equation is not as clear in the enterprise world in which, most of the time, you have to find a way to have some of your customers pay for your product regardless of your user adoption.
In that sense, you must do a very detailed analysis of the characteristics of your product and market to make sure it is a good candidate for a freemium pricing model. Based on my experience, I can list a few factors that need to be present in order to have a chance of success with a freemium pricing strategy:
- Great product quality: This one is very simple, if you want customers to pay for your product after using it for free, your product should offer an impeccable experience that justifies the upgrade.
- Large market: The only reason for embracing a freemium model is to have a large number of customers using your product. In that sense, the market has to be big enough to give you access to tens of thousands of customers and/or millions of users.
- Scalability and monetization unit: Number of users, servers, devices, api calls, storage capacity, etc are some of the metrics you can use to model your pricing structure. In any case, you have to have one or various units to scale your product from a free base.
- A broad spectrum to upgrade the product: When going freemium, you have to assume that a significant percentage of your users are just not going to upgrade from the free version in the current version of the product. Even if your target market is large in terms of the number of potential customers, you have to make sure is also broad enough that will allow you expand onto new areas with new products or features that will keep expanding your user base and number of paying customers,
- Simple to install and use: In addition to providing a great experience, your product needs to be simple to install and deploy within an enterprise environment.
- Simple pricing structure: If you expect customers to give you money after using your product for free you have to provide a pricing structure simple enough that won’t impose major challenging from the budgeting perspective.
In addition to the aforementioned points, there are other elements that could make your enterprise technology an ideal candidate for a freemium pricing structure. Intrinsic virality or the ability to building a strong user community around the product are probably some of the hardest aspects to accomplish but if you get there your product will be in a position to experience high and consistent levels of growth.
The Advantages of Freemium
If the conditions are created, a freemium pricing model can offer very tangible advantages over traditional pricing structures. Here are some of the ones that come to mind:
- Large customer base: Having a large number of happy customers can be one of your biggest assets, which will open the door for all sorts of interesting opportunities.
- Different sales cycle: Freemium can improve your sales cycle by only dealing with customers which are already using your product vs. having to start with a traditional enterprise sales cycle.
- Bring freedom to IT: I know it sounds cheesy, but I can’t avoid feeling satisfaction knowing that offering your product for free empowers IT users to make their own decisions and try to use the best products for the job without having to play IT politics at the very beginning of the technology acquisition process.
Regardless of the clear advantages and undeniable hype around freemium pricing, there are still some serious considerations in order to determine whether it will be successful in the enterprise. If you are founder CEO considering embracing a fermium model in your product, I will encourage you to do some serious analysis about the pros and cons from your specific commercialization model. In the end, once you make the commitment to offer your product for free you might not be able to rollback without damaging your brand.
What do you think? Does freemium work in the enterprise?