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The 'Freemium' Business Model: Not Quite a Slam-Dunk

by Nilofer Merchant  |  
June 5, 2007

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

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Nilofer Merchant is the CEO of Rubicon Consulting (, a strategy and marketing consultancy based in Silicon Valley that solves complex business challenges for high-tech companies.

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