SaaS For IT Management
This blog is all about using Software as a Service (SaaS) for IT Management.
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The Freemium Model and Software as a Service (SaaS)
Posted on July 6th, 2009 3 commentsSince coming to work at Aprigo, I’ve been a subscriber to Phil Wainewright’s Software as Services blog on ZDNet. Today I saw his article entitled "Free is not a business model" and it inspired me to dust off the SaaSForITManagement.com blog to highlight what he had to say.
The article starts by examining what "free" has come to mean online, and Wainewright comes up with two reasons why businesses like the "slap a google ad on it" approach to online revenue generation:
- The idea of charging people money makes them uncomfortable
- They don’t have the vaguest notion of how to incorporate a charging mechanism into their website
This flavor of free just doesn’t cut it anymore. The days of building a large enough userbase and putting off revenue until later….well, those are over. Instead, the freemium model is picking up heat, and Wainewright describes why it makes sense in the SaaS market. Wainewright quotes Chris Anderson:
Freemium is the inversion of the traditional free sample. Rather than giving out few percent of your product away for free as marketing, hoping to sell the rest, you give away most of your product for free as marketing, hoping to sell to a minority. This is only possible in the online realm, where the marginal costs of production and distribution are close enough to zero to ’round down’.
“Freemium is now the main business model of the booming ’software as a service’ industry online, the online games industry and the fast-growing iPhone applications market. I think that creating business models around Freemium — what to charge for and what not to, a question determined as much by psychology as economics — will be the most interesting, and lucrative, efforts of this online era. And the book, both in its chapters and its tactical advice at the back, is intended to help guide that.”
I think Phil and Chris make some great points here when it comes to SaaS and the freemium model. When it comes to SaaS and pricing, there are a few important factors to consider:
- The ability to "try it out". The nature of SaaS is such that prospective customers can try out the real, working product before making a purchase decision. There’s no prolonged sales process that prevents the customer from experiencing what they’ll actually be getting in the premium product.
- Low switching cost. When you make a decision to buy enterprise software, you’re fairly limited in switching options. You’ve made a $250,000 up front investment, so you have to stick to your decision. In the SaaS approach, the cost of switching is nominal. If you find something better, you can cancel your account with one vendor and switch to another immediately.
These two points are really important, as they keep SaaS vendors honest. If the product isn’t good enough to convert users from the free offering to the paid one, they’re in trouble. And if another vendor has something better, without lock-in there’s no reason customers have to stay with a stagnant vendor.
1 responses to “The Freemium Model and Software as a Service (SaaS)”
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Hi.. Your post got me thinking… What is more valuable for a software company (like facebook or flickr). 1,000 paying users or 100,000 non-paying users? What are your thoughts? View my blog post here: http://www.purlem.com/blog/?p=57
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Martin Thomas August 10th, 2009 at 17:02