Thinking Freemium? The Perils of Decision Anchoring

Freemium is a popular business / pricing model where your core product is free, and instead users pay for add-on premium features (i.e. Skype, Gmail). The school against the freemium model discuss low conversions and the overheads of keeping free users, whereas those who practice it claim higher than average user adoption and trial.If you were to ask me, freemium works best when you take on a complacent industry (i.e. e-mail) where users are generally locked in to one provider.

One flaw that we rarely consider is that a freemium model can give away too much for free. I’d probably pay for Google Docs if I had to but I can get by on the free edition. Likewise with my Gmail account. Skype to me is worth the $70 annual subscription as a tool, but I am not willing to pay $70 for the ability to use it on mobile. Instead of anchoring my decision on ‘is this product worth the money’ I am asking ‘*is this worth $70 more than the free version?’. The answer is usually no.

On Tuesday the 17th of August 2010 I crossed a major item off my bucket list and saw Aerosmith play live in Toronto. I was right in the front rows too. I’ve always been a fan of Aerosmith and heard they were incredible live. Not only was I willing to pay so much for something based on buzz and reputation but the mystery drove me mad, what was I missing out on? Because I was not used to getting the concerts for free my internal dialogue was not ‘is this better than the free version’ but ‘is this good?’. The answer was yes.

There is a fine art between restricting features on a freemium model so the upgrade is worthwhile and giving users a free taste. When pricing on a freemium model most companies make the mistake of basing their price on the tool, not the added premium features. You need to consider ‘what are these features worth as an addon?’, not ‘what is my overall product worth?’. You gave your product away for free, it is already worth nothing.