Freemium in telecom
In recent years there has been a lot of startups that have successfully adopted the freemium business model. The freemium business model focuses on giving for free the basic service and charging for the usage of premium features. The basic service should be understood in a wide perspective. It can be a web application but also digital content like software, games, etc.
Telecom services tend to be paid for all the time by everybody. There is nothing like a free lunch in telecom. However Google has chosen the freemium business model for its Google Voice. You get a free voicemail application with voice transcription, visual voicemail, etc. If you want to make international calls then you pay.
Why is freemium better than premium?
More and more internet offerings rely on high volumes of users that use them. Even if you would get a copy of the Facebook platform, you would never be able to compete with them because they already have the established user base and all the social graphs that are linked to this user base.
If you launch a new service and you charge only €0.01 to use it, then the uptake is drastically lower than if it would be free. Imagine that you had a great business idea but the service uptake is going slow due to the initial signup charge, then this gives competitors a window of opportunity to copy the service. If the initial service is free then your uptake will probably not allow competitors to copy the service before it becomes mainstream.
If your new free service is successful then you can launch premium features and get advertisement revenues, hence converting it into a freemium service.
Where does freemium apply?
Freemium is not a hammer and all services are nails. Freemium applies best for innovative services that people are not familiar with. If it does not cost anything, you are willing to try.
Imagine a hypothetical service for improved “network quality of service – QoS” on demand called BoostMe. All users that have a slow ADSL connection (e.g. 1-3Mb) would be able to install a PC client that allows them to decide which applications or down/uploads they want to boost the network speed for. The normal telecom thinking would be: “if you want to have faster ADSL why don´t you contract the 10MB or 20MB plan and pay extra?”. So this new application would cost money the moment you press the “Turbo Boost Me” button.
The freemium entrepreneur would think differently. If I have to develop an application to boost QoS and make necessary changes in my network, then this service is only profitable if at least 20% of the users download it. To make sure I get to the 20%, I can make the application usage free. Free at least until you reach certain limits. Limits could be hours per month or megabytes per month.
What would be the net effect? In the beginning, some early adopters would download BoostMe and see that it really works when they are uploading their heavy Youtube video. They would tell their friends and quickly viral marketing would do its work. However speed is addictive so pretty quickly people would get used to the faster speeds and either pay for extra BoostMe credits or switch to a premium ADSL plan. Additionally having a service with a mass adoption would mean that advertisers become interested. Special advertising deals could be offered whereby you get BoostMe credits if you sign up for a music services, game services, social networks, etc. or if you buy new devices like WiFi routers, etc. The net effect will be that advertisers will pay a large chunk of the free services and the premium services guarantee the profits.
If you would have launched the BoostMe application as a pay as you go, then probably you would never have reached mass adoption and the service would be killed some months later.
From the cost side things look similar. In both cases you would have all the development, marketing and operation costs. If the service is not successful when it is free then it is definitely not successful if you have to pay for it. You would have lost your investment either way.
If the service is successful then after some time you can still convert it to a pay-as-you-go model. The trick is to call the initial service “beta” and to tell people that while in “beta” the service is free. This gives you the option to make the service paid when getting out of beta or to keep it as a freemium service if the model works…