

Freemium - Shmeemium (or why micro-billing is better) - hymanroth
http://lmframework.com/blog/2009/06/freemium/

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LeBleu
In implying the penny gap can be eliminated, this article fails to account for
mental transaction costs. No matter how simple a microbilling service is,
there is still a mental transaction cost for deciding whether to pay or not.
If my time is worth $20/hour (US average wage), and it takes me 3 seconds to
read your microbilling screen and understand what you are charging, it has
already cost me a penny. 3 seconds is enough time for the average reader to
read 5 words. I would estimate you have about a minute to explain your service
and charge for it, if you want the customer to spend a quarter on something
that is worth fifty cents (or more) to them. (See
<http://szabo.best.vwh.net/micropayments.html> or
<http://en.wikipedia.org/wiki/Micropayment#Theory.2Fcriticism> for more
background on mental transaction costs.)

If the price of your freemium service is artificially high, then you are doing
it wrong. The freemium model is for services where the price of supporting
free users is less than the price of other ways of informing your paying
customers that you exist. (Including cases where free users contribute value.)

The best way to structure the freemium model is such that you only charge for
things that are natural scarcities, not things that can be freely replicated.
For example, charging for support (human time to solve your problem) is better
than charging for features. (Existing features aren't scarce, it costs nothing
to roll them out to all users. Implementing new features is scarce.)

~~~
davidmathers
_In implying the penny gap can be eliminated, this article fails to account
for mental transaction costs._

Seriously. Clay Shirky explained this 9 years ago:
[http://www.openp2p.com/pub/a/p2p/2000/12/19/micropayments.ht...](http://www.openp2p.com/pub/a/p2p/2000/12/19/micropayments.html)

I can't believe someone is writing this in 2009. There's so much wrong with it
I don't even know where to begin, but this paragraph stuck me as particularly
wrong:

"Fair enough. But here’s one thing freemium fans can’t deny: in their model, a
tiny minority of paid users subsidizes the service for everybody. It is this
simple fact that makes the freemium model self-defeating, because, for the
numbers to work, the price of the paid service must be set artificially high."

That's just pure mental confusion and abuse of language by the author.

Try this thought experiment: github launched as a micropayment service. It
would already be dead. How do you calculate the "fair" price of something that
doesn't exist?

~~~
hymanroth
Shirky was talking about micropayments for content in that article. An endless
stream of little decisions. I agree with him.

However, as I pointed out in a comment above. The one-off mental transaction
cost for agreeing to be micro-billed for a continuous service is less than
that required to sign-up for a premium version of a service.

As to my supposed abuse of language, I don't understand what you mean.

~~~
davidmathers
_As to my supposed abuse of language, I don't understand what you mean._

Correct me if I'm misunderstanding you on this part: If your claim is that the
paying users of github are subsidizing the free users, that's simply not true
and is a misuse of the word subsidize.

Calling a price "artificially high" on the other hand is meaningless. The
correct price is the price that create the most value. There's no such thing
as an artificially high price in an open marketplace. Or, more specifically,
it's impossible for the producer of a good or service to set a price that is
artificially high.

~~~
LeBleu
_There's no such thing as an artificially high price in an open marketplace.
Or, more specifically, it's impossible for the producer of a good or service
to set a price that is artificially high._

That's not true. The real world is not the same as an idealized economic
model. It is quite possible for a business to set an artificially high price,
at least in the short term. In a competitive market, it results in the
business getting less revenue, and quite possibly going out of business, but
that is not instantaneous. If the price is merely sub-optimal, but not
outrageous, it is quite possible that the overcharging business will make
enough money to stay around for years.

Even John Maynard Keynes commented on those trying to profit by shorting
irrational bubbles, "Markets can remain irrational longer than you can remain
solvent." -- if you're a company benefiting from the current irrationality,
that means you can stay around until the market returns to rationality. (For
example, see Citibank, Lehman brothers, etc....)

This is without even accounting for the fact that these services are usually
not pure commodity markets. They are in monopolistic competition
(<http://en.wikipedia.org/wiki/Monopolistic_competition>), sometimes with only
very distant substitutes, giving closer to monopoly control over their market.

------
olefoo
One aspect of freemium models that you are giving seriously short shrift to is
that they often have an element of value exchange to them. Additional users
free or pro, make the service as a whole more valuable, if the cost of
subsidizing a freegan is less than the value they contribute, it's a perfectly
rational exchange. This is why craigslist, flickr and myspace were able to
sustain that model, the marginal cost of an additional user is usually much
less than the utility they provide to the rest of the users.

And that isn't even considering the value of peer production, from mutual
support to people building tools within the ecosystem that is hosting them. In
your spreadsheet example, the use who posts a widely used rent/own evaluation
worksheet is still charged when she uses the site, even though you should be
compensating her for the value she adds to the site.

While I like the idea of microbilling, I think it's somewhat orthogonal to
freemium models.

~~~
hymanroth
Good point. But not every web service benefits from the network effect. The
spreadsheet example was not chosen at random. As long as you can save you
spreadsheet in a common format, would you really choose a service with a
higher user base over one that offered much better functionality but with
fewer users?

There is space for both models. But for web _applications_ I think
microbilling has significant advantages

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netsp
I don't understand the logic flow of this article. First it seems to place to
place freemium & micro billing in opposition. I don't see why.

Then it goes on to describe all sorts of problems that might affect a freemium
model. They can be annoying. There's a race to the bottom. There's the penny
gap. paid subsidises free. All true. None universally applicable. Certainly
none universally deal breakers.

To pick on the last one I could give this analogy that applies to many kinds
of freemium businesses. Whenever you buy your brand of toothpaste (that you
have been buying for 20 years) you are _subsidising_ advertising to new
markets in countries you don't care abut. In other cases even that analogy
doesn't hold because free customers do not raise costs.

When finally getting back to microbilling, the solution appears to be some
sort of universal easy micro billing service & a cultural shift away from
subscriptions towards pay-as-you-go. Fine. Good. Works for iphone apps &
mobile phone trivia, why not web apps?

What relevance does this have for business models that rely on freemium? None.
No such service exists at this point. The fact that the proposed solution is a
universal one, points to the fact that WebApp companies shouldn't roll their
own.

I agree that micro billing is a good idea. I don't see what it has to do with
freemium.

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theBobMcCormick
I can see the potential for micro-billing in B2B services, but I'm quite
certain micro-billing will never be successful in the consumer market. The
problem as I see it is that most potential customers will see micro-billing as
the very embodiment of "nickle and dimed to death". Which is not very
surprising. Usage based billing is seldom ever popular with consumers, who
have historically chosen flat-fee options in overwhelming numbers whenever
given the choice.

------
Banzai10
Actually, the ads often help to keep the price of freemium not as high as was
mentioned in the article.

Also the Micro-Payments are good for sellers because the customer have less
control over what he is consuming, because it's a pain in the %$# check every
time how is your consume.

So having less control over your consume the pop up comes faster :D

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noodle
i don't necessarily disagree, there just needs to be a powerful, useful,
efficient, central microbilling service before it actually catches on.

i also don't necessarily agree with the assumption that the paid versions are
artificially higher. the point of the free version is for the ads to more or
less cover the costs.

~~~
hymanroth
The cost of the paid versions are artificially high wrt to the additional
benefit they provide and to what they would cost if all the users paid up.

As web apps become more prevalent, people will be less willing to giving up
their acreage to ads.

Agree that microbilling needs critical mass before catching on.

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albertsun
He just "assumes" the step of a clearinghouse for payment information exists
and stores the users payment information. Unfortunately, nothing of the sort
exists, and would be quite a big hurdle to get over.

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talleyrand
Isn't the model this article describes exactly what Amazon does with AWS?

~~~
davidmathers
_Isn't the model this article describes exactly what Amazon does with AWS?_

Metered usage is not the same thing as micropayments. I may have skimmed the
OP too quickly, but if metered usage was the proposal then the title is
misleading. The use case for metered billing is rapid scaling in the face of
unpredictable usage patterns.

------
abrahamvegh
Excellent article. Freemium is much better for both consumers and producers:

Consumers avoid annoying ads, and they get something they don't mind paying
for (one reason being that it costs so little).

Producers just win all around. :)

~~~
hymanroth
I hope you meant 'micro-billing is much better'....

~~~
abrahamvegh
To a certain extent, yes, I did. Thanks.

