Marketing Profs

Can you make money by giving away your product? Absolutely—and companies like Adobe (PDF Reader) and Adobe acquisition Macromedia (Shockwave Player) have proven it. With Web 2.0, consumers have gotten a lot of things at no cost due to various monetization practices—and that's good.

But should you give away your product? That's another question entirely.

The "freemium" business model wraps free services with an upsell to a premium level of service. Because the user doesn't pay up front, hesitation to adopt is eliminated. As consumers reach a higher comfort level, so the belief goes, they purchase the premium version.

Theoretically, at the same time that consumers have the risk mitigated, they begin to feel loyalty and allegiance toward the company. This model is supposed to foster viral adoption, usage, and consumer loyalty.

The theory is wonderful, but it is not quite the slam-dunk it seems.

To be sustainable, companies require cash flow; solid relationships with customers, partners and employees; and products and services that are valued in the market. Here are several reasons not to give away the store:

1. You're in business—you need to manage payments

Whether you're involved in the development of software or hardware, most of your costs are frontloaded and occur in the prelaunch period. Cash flow is a critical business measurement. Even with a freemium model, if you're not prepared to collect money, handle returns, and complete a transaction, you're not going to last long.

The trick is to upgrade the sale to the premium version as quickly as possible. Whatever system you use should be tested, smooth, and accurate. Transactions are about trust. Mishandle a purchase, and you're giving the customer a good reason not to use your solution—no matter how cool the technology.

2. Perception drives value

Customers might use your free product, but most understand the value of their time. People are understandably leery of startups peddling free products. They're not sure whether you're going to be around in six months—they don't know whether there's going to be a decent ROI related to the time they spend learning your interface. Customers know there is no free lunch. Don't insult their intelligence.