The fallacy of freemium business model for SaaS vendors – smaller software vendors need to be aware what they are getting into

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The fallacy of freemium business model for SaaS vendors – smaller software vendors need to be aware what they are getting into
by DrSalonen on July 4, 2010
Part of the research that I am doing is to find out what type of experiences software companies have had in respect to pricing models as well as business models such as freemium.  Wikipedia defines freemium as a “business that works by offering basic Web services, or basic downloadable digital product, for free, while charging a premium for advanced or special features”.  Why wouldn’t one like this model?

There is a good paper on this topic written by Lincoln Murphy and his white paper The Reality of Freemium in SaaS. According to an article by Phil Wainewright, this freemium model has not had a good track record the past decade with many failed services or has faded away.

The concept of “free” has never really felt good to me, even with the many books that have been written about it such as Chris Anderson’s book Free: How Today’s Smartest Businesses Profit by Giving Something for Nothing.The things that Mr. Wainewright advices in his article for not relying on a freemium model is as follows:

  1. Vendors do not invest in proper access controls: most services do not have multi-user access control to the application and this model does not fly in enterprises. Wainewrite gives a good example of MailChimp SaaS solution that he used for a recent EuroCloud UK collaboration effort. MailChimp does not give multiuser access to the account, whereby multi-user identity can’t be managed.
  2. The vendors do not invest in instrumentation: the vendors do not monitor usage patterns and services levels as there is no incentive to do it.
  3. There is no such thing as a free lunch: when have you run a business successfully without getting paid? I know, there are a few that have eventually been able to make some money, but that is a misnomer and not a norm.
  4. It restricts choice because only the big guys can survive: smaller companies can’t afford taking this route as big vendors with similar service can pretty much shut down the operations of the smaller vendors.

What we tend to forget is that smaller businesses without a sound revenue/business model can’t build its operations on the concept of “free”. Having done research in the SaaS field and compared it to the traditional software licensing model, I am becoming very skeptical that a company can be built of the scale that it needs to be to be able to survive in the long run without a considerable investment. In the past, in the traditional model, one could build a business by consulting during the days and programming during the night. In this model, one assumed that the software licensing fees would eventually pay off. In the SaaS model, it will take time until the company has revenue that keeps the lights on in the company without having to scramble for money.  

Wainewright refers to venture capitalist Bill Gurney’s statement about Google’s announcement of free turn-by-turn navigation in tis Android mobile operating system as “less-than-free business model”. It can be disruptive, but the more users that use the “free” service get, the more spending the vendor has to do. I just recently read about the astronomical spending that YouTube has taken from Google due to its popularity. For anybody to be able to run YouTube kind of large-scale operation has to have deep pockets. Finally, the article claims that start-ups that want to achieve disruption have to have a 9 figure investment to be able to really scale. After having reviewed some pretty well known SaaS vendors and their financial statements, I no longer wonder why.


Uma resposta to “The fallacy of freemium business model for SaaS vendors – smaller software vendors need to be aware what they are getting into”

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