Free” is a word that inspires a lot of emotion. It’s a source of happiness for cheapskates like me, but some content providers are enraged by the expectation that their work will be released without charge. But perhaps no group is more fervent about the possibilities of “free” than the advocates of the freemium business model.

In the early days of the Web, free was very much the norm, until the dot-com crash thinned the herd of some truly ridiculous companies. Once the dust from the crash settled, businesses started getting antsy about the Web, wondering how in the world they would stay in business by giving things away.

A few years ago, business began trying to combine the two models — giving some things away in the hopes of selling other things. It’s an idea that had some powerful advocates and some notable success stories — but this week, freemium took a hit, as custom social-network provider Ning announced it is backing away from the model.

Does that mean freemium is dead? Hardly. But Ning’s decision does tell us some powerful things about how the model works — and who it works for. Ning offered a pretty decent free product during a difficult economic climate. That might seem like a good thing, but the problem with a competent free product is that it tempts users to settle for good enough.

I think advocates of the freemium model would do well to look social gaming. The most successful social games never outright require you to spend a dime — but they do make it clear what you’re missing out on. Players are made keenly aware of how much better equipped certain competitors are — and they know that edge is the difference between a free and a paying player. The lure is always in front of you, and eventually it wears down your resistance to the idea of paying for something you’re used to getting for free.

Users of a freemium product or service need to feel like the free version really is good enough — at first. The deficiencies in the system should only become evident over time. Businesses should work to create a level of engagement with users that makes it more onerous to switch to a competitor than it is to upgrade. As other social networks toy with the idea of creating professional accounts or offering paid services on free networks, hopefully they’ll keep the upgrade logic of social gaming in mind.

Do you still see freemium as a viable business model? What was it about Ning that kept the model from working for them? What other companies do freemium well?

Image credit, iQoncept, via Shutterstock

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7 Responses to “Is freemium still a viable model for social networks?”

  1. @FSSimon says:

    Ning's decision is not an indication that freemium doesn't work. As someone who has a Ning site, I can tell you the problem is the lack of robust features that draw participants into the networks. It doesn't even rate "good enough" in my opinion. I had already decided to move my network to LinkedIn, where interactivity and stickiness have always been top priority for the developers. I wish Ning offered a compelling lesson in web-economics, but it doesn't. It offers a lesson in building robust and evolving applications.

  2. Jaime says:

    Freemium has been around for over 100 years. It hasn't disappeared yet, and I don't think it will. The web is just forcing us to rethink current business models and how we can capitalize on the volume of content and users online. Companies need to thoroughly think through their strategies and understand (as much as they can) from the beginning how their business models will pay off either directly or indirectly.

  3. @iceman65 says:

    Nothing is free and you will always need to pay in one way or another, today or tomorrow. Free can prove to be very painful and inflexible choice. This will now be obvious for millions of community owners who have choosen to rely on Ning to create and develop their social networks. I am one of them…

    I also agree that the freemium model is not dead beacuse of the Ning decision. But the Ning failure indicates that the online display ads model did not managed to generate enough revenue for Ning. I have never clicked on a single Ning ad and the failure says a lot about the online ad model. Moreover, it is healthier for companies to build their own online community to protect their investment. This choice reduces the risk and enables companies to utilize flexibility in their business model, social business alignment, meet customer demands, easy integrataion with CRM/ERP-systems, easy to measure return on social investment etc.

  4. [...] Is freemium still a viable model for social networks? | SmartBlog …5 hours ago by Jesse Stanchak  Free is a word that inspires a lot of emotion. It's a source of happiness for cheapskates like me, but some content providers are enraged by the expectation. [...]

  5. @dlatendre says:

    Jesse… great analogy using social gaming!! As I stated in my blog article at IGLOO Software (http://www.igloosoftware.com/blogs/expertcorner/ningwhatadingaling), I believe the Freemium Model is part of doing business on the web in the 21st century. That's why we offer free online communities at IGLOO Software. People are looking for transparency and they want to try before they buy – to validate your company brand promise. The trick is how you upsell and monetize your free offerings – and I don't believe that online advertising is the right solution. Like you, I do believe that you must offer extremely compelling and cost effective upgrade options and packages to your customers that they can't live without.

  6. John says:

    You hit the nail on the head with this statement – "Users of a freemium product or service need to feel like the free version really is good enough — at first. The deficiencies in the system should only become evident over time." I was just looking at some SlideShare slides on Dropbox over athttp://www.forentrepreneurs.com/two-excellent-sta… and this is something they do extremely well. From my own experience I got hooked to Dropbox. When I started running out of space I referred a bunch of my friends to get more space, and when that ran out I finally become a paying customer. Dropbox has a lot of value and allows me to work more efficiently, so I don't mind paying for it, but had I had to pay for Dropbox upfront I probably would have never tried the service. In this case Dropbox perfectly executes the freemium model.