Freemium Revisited

Earlier this year, I wrote about a WSJ article that covered the revenue model known as freemium which is a combination of free and premium. The idea is that you release a free version of your offering in order to capture a larger market share and depend on some segment of your market upgrading to a paid version.

I just read a NY Times article that used their coverage of a start-up that makes a product called Evernote to weigh in on the freemium topic.

I knew about Evernote back when it was just a freeware windows application that you could use to capture notes of various media types in one place that was searchable. Their biggest competition at that time was Microsoft's OneNote product which is now bundled with MS-Office and, frankly, I've never seen anyone use it.

Now, the windows app communicates with a centralized network which acts as a repository that you can access from multiple computers or share with others for the purposes of collaboration.

May I digress for a couple of paragraphs? A large part of my training as an engineer was in the black art of categorization. You learn to categorize things. You learn to categorize everything. The predilection to DnD is a natural one because engineers learn how to transform stuff. For example, software engineers learn how to transform specifications into working software. Transformations of that order are fancy sequences of simpler transformations. A simple transformation consists of the thing or things to be transformed (the operands) and the process by which the transformation is to be guided (the operator). The role of the engineer is to figure out that sequence of transformations and also which process to apply for each simple transformation. In engineer speak, this is called "finding the right tool for the job."

Because engineers are trained to categorize, they want a large toolbox with a wide variety of tools by which they can use to transform things. It gives them more choice, more freedom. Those who never received training on how to categorize see this as a liability instead of a benefit. They want only one choice of tool. They want a tool that does it all.

That is why I don't use Evernote. It is a single container by which you are supposed to put everything into. I doesn't appeal to me but I recognize that it does appeal to a very large number of people. How do you feel about it? Would you rather just open a document because you want to access it or would you like to choose which tool to open a document in because different tools have different specialties and you wish to pick the tool that is most conducive to the job at hand?

Anyway, back to freemium. What's really interesting about this NY Times article is that they put some numbers to the Evernote's take on the model. They currently have a half million active users. If you stay with the service for a year, then there's a four percent chance that you will subscribe at $5 per month. They claimed that they earned $79,000 in July which, according to their other figures, means that three percent of the total active user base subscribes. They project that this subscription rate could climb to as high as 22% which would yield a little over a half million on revenue per month.

They also claim that this will scale. They won't have to staff up further as more people subscribe. They claim that their current costs is nine cents per user per month and project a break-even date of January 2011.

Whether or not you believe these numbers, the freemium model is compelling and is most probably worth some exploration and consideration. I use it in my business where access to Code Roller (the community edition of a software development project life cycle management solution) is free for all (including my competition) but you have to pay if you want my company to develop the actual software being described by your project.

What is your take on the freemium revenue model? Is it an exciting way to gain market share or do the challenges of monetization and fear of commoditization of your product or service give you pause?