It might sound obvious to anyone who has had run a lemonade stand, but giving away products and services for free -- even on the Internet -- isn't a good business decision. This Freemium strategy is something a lot of digital companies have adopted, thinking that attracting a big group of addicted followers is more valuable than setting a precedent that one's company is worth paying for. (Think, any service you use on the Internet: Spotify, LinkedIn, Skype, etc.) But, it turns out, that tactic isn't a good idea, say The Wall Street Journal's Sarah E. Needleman and Angus Loten. "The freemium approach doesn't make sense for any business that can't eventually reach millions of users. Typically only 1 percent or 2 percent of users will upgrade to a paid product," they write, citing examples of smaller businesses you've never heard of almost going out of business giving away their stuff for free. But, we'd argue it's not ideal for even the biggest of businesses.
The theory behind freemium is that it lowers adoption barriers, giving a product buzz and a user base that will later lead to later success. But, even when it does work, a company has devalued its product from the get-go. When Spotify first came to the U.S. for example, it offered a paid version of its service, but had a similar free tier with almost everything the one that cost money had. It said it was going to start charging everyone within six months. A year later and many can still get all that streaming music for free. It has signed up millions of users, saying last August that it had over 1 million U.S. subscribers. It would look like a freemium success story -- Spotify has a 20 percent conversion rate from unpaid to paid -- but most of Spotify's users don't make it any money. Eight percent of the user base brought in 83.5 per cent of Spotify's total revenue in 2011. The rest came from digital advertising, which has an ever-decreasing value on the Internet. The company has a service people love and are willing to pay for, but most people won't because why buy the music streaming service if you can get the songs (with ads) for free.
This article is from the archive of our partner The Wire.