Friday, August 15, 2008

Freemium

The Freemium business model was first articulated by Fred Wilson in 2006. It's quite a recent development and one that is primarily adopted by Web 2.0 companies. The basic concept behind the Freemium business model is to give away your basic product for free, while charging for premium or advanced products or services related to your product. The difference between this model and try-free models is that your customers can potentially utilize your free product forever without purchasing premium products or services.

For this business model to work, you will need to give away a lot of your product. Each person that utilizes your free product has a probability of becoming a paid member of the premium version of your product, or premium services associated with your product. Hence, it is obvious that in order for this business model to work, your basic product cannot have substantial variable costs.

However, because of the fact that this business model is counter intuitive, by taking such an approach, one can reach niche markets that would otherwise go untapped. For instance, let us pretend that we own a new VOIP company. We could go with conventional wisdom and provide our services as a regular charged service, marketing it based on its lower cost compared to conventional phones. This however, would put us in the same league with many of our competitors, with litter competitive advantages. However, things would be different if we took a Freemium approach.

The basic service that we could offer for free would be local calls. However, to minimize the variable costs of we would only provide this service to people with an existing internet access and microphones. Now we know that our primary competitor Skype already provides free calls to everyone on their network, and providing free local calls would give us a distinguishing trait. Hopefully, with sound planning and management, this Freemium service would generate enough revenue from non-local calls made through the system to turn a profit. Because this service would be attractive to many people, a supplement income can be made by utilizing the traffic as a revenue generating center. Ads can be placed on the site for non-premium members (without access to non-local calls) to generate income.

If well researched and thought out, the Freemium model can be applied to different areas of business to maximize resource usage. For instance, a courier service might look into providing free deliveries within the same neighborhood to make full use of the underutilized local trucks. This could build customer loyalty and increase the chance of people in the neighborhood giving the courier their longer distance, paid business.

Freemium business models don't always work, but it seems that when it works, it is difficult for a competitor to enter a market; competitors would have to give more for free, and sometimes, that's just what it takes to make the endeavor unprofitable.

Be Safe,

Vic

Friday, August 1, 2008

You don't always need Weblogs

Intel's co-founder Gordon E. Moore observed in his 1965 paper that the power of computers double roughly every two years. This trend has held true for the last fifty years and is not expected to stop for a decade at least, and probably much longer. This phenomenal rate of innovation and growth in technology has lead to an unfortunate side effect of technology progressing so fast that it takes significant effort for many to keep up with it.

Most companies are lead by experienced CEOs without the time to be personally intimately familiar with emerging trends and technologies. However, such emerging trends and technologies are often discussed in major business and news magazines and often labeled the next big thing. This creates a situation where major decision makers in the company, without much expertise on such emerging trends and technologies, decide unilaterally that the company is going to invest in said technologies and implement it to augment existing business practices. Sometimes, the emerging technology is applicable to most businesses, like the personal computer, the internet, e-commerce, and the list goes on. However, sometimes, an emerging trend or technologies is not applicable to certain industries, and funds invested in efforts in this direction would be better utilized elsewhere. Web 2.0 is one such emerging trend.

Now, I refer to Web 2.0 as an emerging trend that you don't need because Web 2.0, technology wise, is widely utilized to enhance websites and every company with a website can benefit from it. However, Web 2.0 as a trend refers to the proliferation of blogs, interactive sites or wikis, and new business structures like the Freemium Business Model.

If your company does not deal with consumers directly, then weblogs are just a massive waste of your time and resources. Let's take a look at the cost and benefits of a weblog.

To have a decent weblog, you will need to hire a full time copywriter with knowledge of your industry. Now this person has to be full time because he will need to do research for his postings. Trust me, no one would frequent a corporate blog that has a writer who does not know what he is talking about. If a person wants to read senseless rants, personal blogs are much more entertaining. You would also need to contract another company, or utilize a decent amount of your IT department's time to create the layout of your blog. Then you would either need to contract a company to host your weblog, or put it on your own server and consume storage, memory and bandwidth.

What benefits do you get from a well designed, hosted and written blog? You get exposure. Now, if you run a company that provides childcare services and you have a well written blog with a sizable audience, you will get some business from the blog, as childcare services are targeted at end-consumers. Let's say, for the sake of this argument, that you run a business that sells aircraft components to airlines and aircraft repair companies. What would your blog achieve? Even if you have a brilliant copywriter, unless he is also an authority in the aircraft component industry, your blog is unlikely to generate business. First of all, your target market is a small slice of the internet community, and even then, aircraft repair managers are unlikely to base their purchase decision on a blog that they read, and they are unlikely to read such a blog to begin with.

In short, unless your business deals directly with consumers, weblogs are not for you. You will be better off dedicating those resources to other efforts such as direct mail and cold calling. Remember, as no two companies are the same, there is no single technological solution that fits every company's needs.

Check back again next week when I talk about why Freemium Business Models don't always work as well as they are supposed to.

Until then, Be Safe.

Vic