Give away the diagnostic, sell the remedy

Companies that employ the “freemium” business model give away a product or service for free and then charge for additional features. The freemium model has gotten more popular as the cost to deliver free services has dropped but the cost of employing sales and marketing people hasn’t. One of the hardest questions around freemium models is deciding how to divide free from paid features.

One particularly effective version of freemium is: “give away the diagnostic, sell the remedy.” The best known example of this is anti-virus companies that give away free virus scans but charge for virus removers. In fact, this tactic works so well for anti-virus that it almost seems coercive (and has indeed been abused, for example, by “anti-spyware” software that deliberately conflates cookies and viruses). But, in general, giving away a diagnostic seems like a reasonable way to demonstrate the effectiveness of a product while still being able to sell valuable additional features.

Selling the remedy has become increasingly popular with B2B companies. For example, a friend recently wanted to ensure that his company’s (non-spam) e-mails weren’t getting blocked by spam filters, so he contacted an “email delivery optimization” company. They ran a free test and reported that his emails weren’t getting filtered. Two months later they called back and said “uh oh, your emails are getting filtered.” Sure enough his open rates had dropped and his anecdotal tests confirmed that his emails were being inaccurately labelled as spam. Because of the free diagnostic, he had confidence in the company’s technology, and was willing to pay them to fix his problem. And the email optimization company had spent almost nothing to acquire a new customer.

http://MeetInnovators.com Adrian Bye

so you’re saying free trials make sense?

http://about.me/mikerowan Mike Rowan

He is not referring to trials per say, in fact the users are getting a full version of “a” particular service offering, which if they want to keep getting w/o getting paid for services they can. In the example of the anti-virus it’s valuable to know your computer is infected, and you may decide you want to keep being assured of this. But, at some point you need to leverage another service (cleaning of the viruses) which is also offered by the same company. In this example there is no free trial, just two different services, one that is clearly the remedy.

http://MeetInnovators.com Adrian Bye

with absolute respect to everyone involved “freemium” is just renaming an old concept, eg from columbia house: http://www.mentalfloss.com/blogs/archives/91126

http://about.me/mikerowan Mike Rowan

I was referring to your comment about trials, not freemium. Sure, there are many names, but the trial “concept” is different that the freemium concept. Simply put, trials let you use a specific product or feature, then typically expire and usage is not available. Freemium is the use of a specific product or feature and although it may have limits or function you are free you use it for as long as you like with the limits. But, this is another conversation entirely.

http://MeetInnovators.com Adrian Bye

i think its relevant…

we have horse racing tracks and casinos.. you can go enjoy the environment for as long as you want, eat the food, etc.. and only financially get involved if you want to

this is a fundamental business model that has been around for hundreds, if not thousands of years.

http://www.cdixon.org chris dixon

No one (or at least I’m not) claiming “freemium” is a new idea. The question for entrepreneurs is how and whether to apply a freemium model to their businesses, which are indeed often new and where casinos etc only offer partial guidance.

http://www.cdixon.org chris dixon

Adrian – fair point. But the internet product/services we are talking about are new, and the right model for them is still being figured out. In this post I’m trying to summarize one method that seems to be working well.

http://www.cdixon.org chris dixon

No, not my point at all.
http://www.cdixon.org chris dixon

Um, no. This is different than free trials.

http://andrewbryk.tumblr.com/ Andrew Bryk

What do you think is a good process to go through to decide if the products your company offers in a premium account are worth it? Would you say the test comes from customer validation? How do you know that some other company can’t just come in and let your premium products be free and offer something else while still making a profit?

http://twitter.com/aortenzi Anthony Ortenzi

You mean like Microsoft and IE vs. Netscape? Clearly nothing.

http://www.cdixon.org chris dixon

Netscape’s problem wasn’t that IE could replicate them, it was that they tried to monetize servers and should have monetized their destination site.
http://www.cdixon.org chris dixon

Netscape’s problem wasn’t that IE could replicate them, it was that they tried to monetize servers and should have monetized their destination site.

http://www.cdixon.org chris dixon

That’s a great and difficult question. I am coming at this right now from the perspective of talking to some companies that have hard-to-replicate technology and products that genuinely provide value but are having trouble proving the value to the market or getting the word out. So for them the “free” part is hard but the “premium” part seems easier (and more defensible).

http://about.me/jelpern Jordan Elpern-Waxman

Would love to talk to you about these companies. Seems right in Genacast’s sweet spot. Just sent you a LinkedIn invite.

http://www.cdixon.org chris dixon

That’s a great and difficult question. I am coming at this right now from the perspective of talking to some companies that have hard-to-replicate technology and products that genuinely provide value but are having trouble proving the value to the market or getting the word out. So for them the “free” part is hard but the “premium” part seems easier (and more defensible).

http://twitter.com/Alphashack Alphashack

The handle and the razor blade

http://www.cdixon.org chris dixon

I don’t know. How are handles “diagnostics”?
http://www.cdixon.org chris dixon

Hm, not sure the handle is a diagnostic.
http://www.cdixon.org chris dixon

I’m not sure it is really similar to handles/razor blades.

http://about.me/jelpern Jordan Elpern-Waxman

I refer to this as the “car mechanic” trick. When was the last time a car mechanic charged you to figure out what’s wrong w/ your car?

http://www.cdixon.org chris dixon

Good point. Although much better if it’s not done deceptively.

http://about.me/jelpern Jordan Elpern-Waxman

I think it’s less sketchy when done in an enterprise sales context, where the buyer is reasonably sophisticated w/ regards to the purchase.

Anonymous

Try owning a Range Rover…they charge you for diagnostics because they know the repairs are so frequent and expensive that people will likely take the car elswhere for repair or (yes, they told me this happens) people will just abandon the vehicle because the repairs are more expensive the value of the vehicle!

http://covestor.com mickwe

We’re seeing this now in the new batch of investment management services, which run assessments of your holdings (asset allocation, etc.) or risk profile, then offer advisory services – e.g. Betterment, Personal Capital, SigFig.

http://www.cdixon.org chris dixon

Great examples – thanks!
http://www.cdixon.org chris dixon

great examples. thanks!

http://needforair.com/ Charles Migli

Investment banking pitches are the diagnostic, investment bankers are the ~~pain~~ remedy
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http://kidmercury.posterous.com/ kidmercury

1. give away the timeless, sell speed. i.e. give away free stock market tips, sell stock alerts.

2. give away the public, sell privacy. discuss your finances in public for free, discuss them in private for money.

3. give away the product, sell the service. aka, give away mass market, sell personalization.

Anonymous

Makes a ton of sense! I counted off a few well-proven business models for startups that worked with this ideology.

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http://www.Spidvid.com Jeremy Campbell

I see so many freemium sites out there that offer “premium features” that don’t seem so valuable so what I do on some of them is create a few free accounts and use that basic functionality (storage, uploads, upload file size, etc.) or product for 30 days for free.

I think that companies need to do a better job on the diagnostic/remedy relationship in their freemium products. Few sites have this challenging puzzle figured out!

Excellent post as always Chris!
http://www.ferreemoney.com/blog/ Neil Ferree

THIS is the REAL Issue • One of the hardest questions around freemium models is deciding how to divide free from paid features and this is where I need to draw the line. Since SEO is an Event vs. a Process, its tuff to segue from phase 1 to phase 2 w/out the client having to cover the man hours involved.
http://twitter.com/msobolev Misha Sobolev

I can’t think of a better example than HubSpot’s websitegrader – must have generated a ton of new clients for them.

http://www.cdixon.org chris dixon

Yes, great example. A lot of people say that’s one of the main reasons for HubSpot’s success.
http://www.cdixon.org chris dixon

Yeah, great example. People say a lot of HubSpot’s success can be attributed to very smart marketing (such as the diagnostic tool you mention) that radically lowered their customer acquisition costs. (Just what I’ve heard – I have no connection to company).

http://www.betadvisor.com/ Jerome Camblain

1) If the diagnostic is a sales tool, can I really trust the result?
Why wouldn’t it be different than an add for boosting your PC speed?
2) If I do not pay, I do not buy any accountability from the supplier. Why should I trust a free diagnostic if there is no contractual obligation?

I like the freemium model in B2B, but I am not sure your diagnostic plan would work well in Europe for businesses. I experience with one of my investment that businesses are slow to take up open source freemium software for the above mentioned reasons
http://twitter.com/braditdigg Brad

Damn man I just wanted to say how great your posts are, I’ve read many books on business and your blog posts beats them all combined…what a great talent/skill for teaching concepts you have. I think I haven’t wrote a message like this praising someone for 10+ years.

http://www.cdixon.org chris dixon

That’s very kind- thanks!

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Anonymous

Well said. Steve Blank’s approach to this has proven quite valuable in figuring out the key revenue streams in startups.

One well proven example in B2C companies is Badoo. About 40 million people hit the apps and use ‘everything’ for free. Turns out once they see a ‘real’ list of people around them whom they can connect with, they pay $$$ to attempt that connection. Kinda like paid self-serving ads for their Badoo persona.
http://twitter.com/InuToys ina Y A S

Freemium = cross sell? you sell some items/features for free, at same time attracting customers toward other.

I would say Freemium is a nice window to start communication with customer!!
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http://www.elevatorposts.com/ Brian Sirkia

Awesome post Chris, going with sort of a freemium model myself so I’m happy to see support for it. I feel like another big challenge is deciding the price gaps between free (obviously $0) and then more and more premiumy services. Do you think the freemium model drives prices generally down (because you are already getting some for free, why pay anything?) or up (you can see how great part of our services are, imagine what we’ll give you if you pay us!)?
http://twitter.com/walkermckay Walker McKay

Maybe this makes sense for online services, but if the buyer has not paid for your advice, then they will often put no value in it. Buyers will take your free diagnostic, send the results around to your competitors to get their ideas and pricing, then often do nothing or make bad choices about which fix to buy. In general, the more expensive and complicated your fix is, the less effective the old “give away the diagnostic for free” works. True professional selling is having someone “trust you enough to give you money to make a problem go away”.
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Chris Dixon