Freemium Success and Freemium Fail

A picture of Sirius XM Radio Office

Picture by www.ShootJoeC.com via Flickr

When it comes to success stories, there is perhaps no better example than Sirius XM Radio Inc. (SIRI). As we’ve discussed previously, the Freemium business model works best for ventures that:

  1. Provide a product or service that can be upgraded
  2. Generate income via subscribers
  3. Offer a new or innovative product or service

It is not essential that a business venture answer “yes” to all three interrogatories—even one “yes” opens the door to the possibility that a freemium model might work.

Sirius XM offers satellite radio broadcasts requiring a specialized receiver to capture the signal of the commercial free content the company offers. Additionally, the service is available by subscription and you would have to acknowledge that commercial free radio is an innovative concept. In short, Sirius XM was able to answer these three questions in the affirmative.

Sirius XM’s management team concluded that the company could reap greater financial rewards by giving away the service for a limited period. To accomplish this, Sirius XM partnered with automobile manufacturers. The manufacturers agreed to install radios in new cars which were capable of receiving Sirius XM’s signal and Sirius XM agreed to provide a free six-month subscription to purchasers of these automobiles. When the six-month free trial expired, car owners could elect to subscribe to the service. Sirius XM, in turn, agreed to share a percentage of the subscription fee with the auto manufacturers, making everyone happy.

Twenty-two years later, Sirius XM enjoys 20 million subscribers and annual revenues exceeding $3 billion. Sirius XM has expanded the program to include used cars equipped with Sirius XM receivers. This gives Sirius XM a second crack at enlisting subscribers. Sirius XM has partnered with more than 10,000 used auto retailers offering free trial subscriptions to their customers too!

This was a brilliant strategy on the part of Sirius XM’s management team, freeing the company from a near total dependence on volatile new car sales volumes.

Sirius XM’s success proves the precepts on which the freemium model is founded …

  • The product or service must be very good
  • The cost of providing the service or product must be zero
  • The product experience is sufficiently positive to entice the consumer to purchase and/or upgrade
  • Support costs must not rise proportionately to the number of end users (paying or non-paying)

Faced with the high costs associated with promoting and advertising a new product or service, it is understandable why so many new enterprises seek to follow the freemium business model. Unfortunately, the freemium model is not a one-size-fits-all strategy.

Ask the Founders of Chargify

Charfify LLC was founded in 2009 and launched with a freemium model in which it gave away billing software to small merchants billing fewer than fifty customers per month. The hope was that as these merchants grew, they would upgrade to Chargify’s premium software at $49 per month, allowing the merchants to bill more than fifty customers per month.

There were certainly no issues with Chargify’s software. However, in the economic downturn, few businesses were growing rapidly enough to warrant the upgrade. In fact, most users failed to become premium clients. As a result, Chargify was flirting with bankruptcy.

Fortunately, the management team at Chargify recognized the model was not the right fit for their enterprise, put up a pay wall and began to turn a profit. Lance Walley, co-founder and CEO said:

“The decision to move away from freemium was the best business decision we ever made,”

Why Did Freemium Fail for Chargify

While Chargify could answer “yes” to at least two of the three questions asserted earlier, they failed to take into account the economic climate of the time and they failed to meet three of the four precepts of the freemium model I bullet-pointed earlier.

Yes … they had a very good product (as evidenced by the current profitability of the firm) but:

  • The cost of providing the product was not “zero”
  • Because of the economic downturn, the incentive to upgrade never materialized

And

  • Support costs were not mitigated by new users coming on board

In our next installment, we’ll look at ways to make freemium work. We’ll talk about:

  • Constraining free offerings
  • A dual marketing approach
  • Referral incentives
  • Delineating differences between free and paid
  • Developing a natural progression

Time and space permitting, we will also discuss various models used by successful companies to measure growth.

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