Taking the P out of Freemium

The numbers in the Freemium business model are similar to direct mail.  2% of the users buy.  Fortunately for the businesses selling their services through the Freemium model, serving the 98% is about as cheap or maybe even cheaper than sending out direct mail pieces.  Better yet, the cost of servicing the users that don't pay is offset by selling access to them and their data to advertisers.  

All good?  Yeah!  But wait, what happens when some other company swipes the 2%?  In an emerging marketplace where new entrants create new sectors and then have them all to themselves, this all works great.  But as the market matures and competitors flood in, it is pretty easy to see how there could be a company that gets the Premium customer and does not have to give away their service to 98 out every 100 users.  

What if small businesses try out cloud storage with DropBox, but when it comes time to pay, go to Box? Box bills itself as the enterprise version of DropBox and it could play out that users perceive that it would be silly to pay DropBox when they could get an enterprise version at Box.  Maybe this is why Box has been able to raise $150 million even while Google is entering the market with Google drive and Microsoft is entering the market with Skydrive.  Could those companies be serving as Freemium providers just driving Premium users to Box?

This is what Apple has done.  They dominate the Premium part of the hardware market and their share of the profits in the industry far exceeds their share of the market.