Free Vs Paid

There's a movement afoot by investors to back web services with a real business model instead of the pervasive "give it away for free and hope for the best" approach that's been in favor for the past four years. Don't count me in that camp, but the movement is happening with or without me.

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As I noted in the comments to Roger's post, we've struggled with early stage investments in enterprise oriented web services. Sales to enterprises often require expensive sales teams and it's much harder to know if you've nailed the product/service with feedback from a limited number of enterprise customers.

It's much better, in my opinion, to go with the freemium model, give a version of the service away for free to all comers, get a lot of users, get good market feedback, then develop a premium version of the product/service for sale to enterprise customers. If your free version is popular with a lot of users, your customer base is the target for the upsell and you might be able to live without an expensive sales force initially. And, of course, keep your costs really low until you start to get revenues.

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I have been monetizing software for over 10 years (I specialize in the consumer space not enterprise, but it makes no difference), though back we simply called the model shareware.

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There should ALWAYS be a free version of your product. Especially when it’s not a mature product, and there are lots of competitors - GET YOURS out there as much as possible. And if you absolutely insist you should use Trialware it should never be *time based* (most get this wrong), they should be usage based.

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About number of years ago I was selling an enterprise solution into a large firm >1000 employees. The then IT manager and I were talking about why they selected MS Outlook for an email client. His answer was that Outlook was free, it came with every computer. Of course it is not free and it creates lockin and the company had to buy an Exchange Server, etc... MS perfected using the freemium model 20 years ago selling into the enterprise. They were competing with IBM so they had to.

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The standard enterprise model is expensive and time consuming. It requires that you stuff as much as you can down the channel once you've carved it out. The natural ecosystem is a few companies with strong sales relationships buying up lots of smaller companies with strong products. The big guys need more product for the channel. Most of the small guys are focused on technology, not sales. They don't have the time, money, inclination, or talent to get big on their own with mainstream enterprise sales.

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Our portfolio company Tumblr built and launched the service with two people working part time. They now work full time on it. It reaches 30mm uvs/month. And it's free. And it costs them almost nothing to support and improve it.

Same is true of disqus, delicious (pre yahoo), etc, etc

Freemium is alive and well if you keep your costs down

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It helps underfunded early stage startups focus on bettering their product rather than spend a lot of time trying to sell something not always not ready for prime time to a handful of customers.

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We have Freemium version that is fully functional and has no expiration. It is limited to a certain amount of data you can acquire.
The purpose of Freemium is twofold, IMHO: To build an active user-community and to generate solid, qualified leads. We are converting a significant number of Freemium users into customers and our service is not cheap (starts at $500/month). The reason is that it is a professional tool, not a widget or aggregator.
The community aspect is invaluable in product development and utilizing collective wisdom for QA. This is a definite value add.

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