The Ups and Downs of a Free-to-Premium Marketing Approach

We’ve all faced the challenges of trying to break through the flood of advertisements that overwhelm our prospective customers. Over the years many marketing approaches have emerged to address this challenge.  Two of the most notable are “relationship marketing” and “permission marketing”.  Both approaches advocate trying to retain someone’s attention once you have paid to get it in the first place. This can be achieved by building a trusted relationship and selling products over time.

One of the best ways to accomplish a trusted relationship is by offering a very valuable, completely free product or service.  This gives you an ongoing opportunity to patiently introduce the benefits of your premium products. I call this approach free-to-premium marketing.  It is important to understand that these products must be completely free and valuable, not just free trials or “crippleware”.

Once traction has been established with free-to-premium marketing, it can also be very effective for attracting new users via word-of-mouth.  People love to talk about valuable free products, and this not only applies to consumers.  Business buyers also enjoy being “in the know” about free alternatives and sharing this information with their peers.

Many successful businesses have been built using the free-to-premium model.   One of the most noteworthy is Efax.  Efax has attracted over 9 million registered users by offering a completely free fax number that delivers faxes to your email.  Many Efax users upgrade to the premium version, which lets you choose the area code for your fax number.  Efax likely contributes a significant portion of its parent’s (J2 Communications) $1 billion market cap.

Other successful free-to-premium products include AVG and Zone Alarms.  Both products entered highly competitive markets (anti-virus and firewall) and became significant players in their respective categories.  In 2004 I also introduced this model at my company.  Since then we have attracted millions of users – with upgrades driving sales across several product lines.

Not all products and services are ideal for the free-to-premium model.  Even within the same category, one provider might be able to execute the model while it is impossible for another.  For example, one of my competitors, Webex, tried to replicate our free-to-premium model, but eventually discontinued it.  There are several confidential reasons why we had an advantage offering a free version.

In order to be successful, free products or services must have a low marginal cost and very efficient marketing.  While word-of-mouth will likely become a strong driver, a company must first gain initial market traction.  This generally requires both a large marketing investment and near flawless marketing execution.   Acquisition costs must remain low since a large portion of the free users will never generate any revenue.  Once free users have been acquired, you must continuously work the funnel to improve upgrade rates.  Finally, there is downselling pressure for anyone that discovers the premium product first or upgrades and then decides that the free version was enough.

Still, with the right product and marketing execution, a free-to-premium model can be a powerful growth driver.

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