Does free/freemium work in the enterprise?

By boris, February 27, 2014

When developing a business model, every software and app start-up eventually faces the same core question: Should we focus on monetizing customers or driving usage?

For consumer apps, this question has been answered (or mostly answered): the best approach is to offer a free service to help attract and retain users. As Fred Wilson put it: “When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice.”

After you reach enough scale, you can start monetizing in such a way that won’t introduce too much friction to the user experience. For example, one could argue that native advertising like Google Adsense or Twitter’s sponsored tweets actually add value to the service. Consumer apps can also choose the freemium path to monetization and upsell customers to premium subscriptions – Spotify, Skype, Ancestry.com, and Dropbox are some good examples.

Likewise, free is the way to go for mobile apps. As this chart shows, paid mobile apps are virtually dead – your mobile app will either need to be ad-supported or have in-app payments.

But what about enterprise apps?

The monetization question is much tougher for enterprise products. While free rules the consumer world, it can be a different story in the enterprise…

  • Offering an app/service for free can send the wrong message. Here, free can be equated with low quality. Business users and managers might worry a free product isn’t sophisticated enough for their needs or they might not like to have ads in their enterprise product.
  • While viral growth and network effects exist in certain enterprise settings (for example, communication and file-sharing products and in industries like legal), network effects are typically more limited in a B2B environment compared with B2C. That means that a free strategy won’t deliver the same payback in terms of ramping up your user base as it would with consumer products.
  • Free isn’t necessarily sustainable with B2B. Acquiring business users may prove too costly, forcing start-ups to raise incredible amounts of money to finance aggressive sales and marketing efforts for a free app.

In the enterprise, freemium models generally work in two situations:

  1. You target a large enough user base
  2. The product becomes more valuable over time…either through a network effect like with Skype or Dropbox or because of data lock-in as with Evernote.

When free won’t work: How to implement paid subscriptions in the enterprise

If you’ve determined that a freemium model just won’t work for your product and users, there are a few things to keep in mind to maximize your chances of success with a paid subscription:

  • The most popular strategy is to offer a free trial in order to encourage sign-up. The exact length of the trial period varies, although 30 days is the most common. Just make sure you give the customer enough time to adopt, get used to, and hopefully come to depend on the product. Also, be flexible in terms of extending the period if it will lead to a more successful evaluation and sale.
  • Choose a pricing model that encourages usage within the company. For example, if you have one core feature that drives usage and adoption, then make that free or include it in the base package. Likewise, if you need a certain number of people to adopt your software, be flexible around the number of seats that represent the threshold for each tiered pricing level.
  • Make sure that your “paywall” doesn’t create any friction when it comes to sharing data with other players in the industry or within the organization. Enabling collaboration will not only make the tool more useful but might also generate viral growth. So make sure your service offers some kind of easy sharing and a free read-only option.

While free services dominate the consumer world, that model is not necessarily going to work for enterprise apps. Make sure to evaluate monetization strategies within the context of your specific product, and not someone else’s.

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  • http://www.startupmanagement.org/ William Mougayar

    Agreed, but wouldn’t you say that Free with a deadline has the same effect, even at the enterprise level?

    I think the trick is to offer as much value, as deeply as possible, and as quickly as possible. I would say usage + value. Deep value has higher switching costs and better conversion rates. Otherwise, your conversion and retention will be both leaky.

  • http://www.appkey.com/ Jim Vitek

    One has to look at employee motivation and IT governance to understand the type of freemium model can be effective for enterprise. A freemium solution is great if it COMPLETELY solves a small problem. Reputation points are earned, and there is no “you wasted time on that? What about our 100-item-long priority list?”. Once the solution is proven for department A or region B (the ones who have been bugging you for it), it is EASY to get buy-in for a larger deployment in next years budget. However, life is painful for the implementor if the solution doesn’t COMPLETELY solve the problem (however small). Implementors like pushing the ‘approval’ process up front so they don’t have to risk any part of their performance evaluation on a decision they don’t control.

  • bwertz

    Great point – employment motivation is often overseen.

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