I am happy to see the “Free” debate expand to the enterprise (Aaron Levie of Box.net analyzes the applicability of the Free model to Enterprise Software on TechCrunch). The ensuing debate has strong advocates in the Freemium camp, as well as those who believe Freemium is a stupid model.

I believe Enterprise Freemium can work, but not for everyone, and only if executed just right. To be clear on how I define success for the Free model, the two principle reasons I see for invoking the Free strategy are: (1) Cost effective branding and awareness, which hopefully lead to (2) More revenue based on the Free-to-paid conversion rate.

While there are a number of promising companies that have adopted an Enterprise Freemium model (37Signals, Google Apps, Box.net, InsideView), it’s too early to be sure that they will all live up to the promise of highly scalable business with lower sales and marketing expenses. Lacking the proof of time, just like in the early days of SaaS (DigitalThink, a company I founded in 1996, used a multi-tenant SaaS architecture before the term SaaS even existed), the debate will revolve around opinions and vision. And that’s the beauty of the technology space, where the winners are those that bet on trends that are highly debatable.

I believe Freemium is a game-changing opportunity for Enterprise applications and platforms, but it won’t work for everyone. There are two basic requirements for Freemium to work:
– Scale: the market has to be large, millions of users with TAM value of $10B+/yr
– Conversion: The Free and Premium offerings have to be designed to provide enough value to Free users to avoid high churn, but also enough value in the Premium offering so that at least 1% of the Free users are willing to pay for it.

The Enterprise market is more segmented than the consumer market, since there are fewer employees than consumers, and companies are highly structured (by vertical, size and internally by job function). The Freemium model won’t work for companies serving a smaller enterprise segment. Let’s see why.

Freemium offerings tend to have a majority of users in their Free offering, with a much smaller percentage willing to pay for the Premium offering (anywhere from 80/20 to 99/1). The simple math is that to build an interesting business ($100M+ of annual revenues) one needs at least 100k users paying $1,000/yr or 1M users paying $100/yr.

A lot of Enterprise applications will find it challenging to create a valuable Free version without cannibalizing their paid services.  This is why the market has mostly focused on free, time-bound trials of the full-featured application, but free trial models have a number of limitations:
➢    Many users don’t want to invest time in setting up a free trial and learning a new application, knowing that they will lose access to it if they don’t convert to a paid account.
➢    Many users don’t have budget right now, so they walk.
➢    Many users don’t want to deal with sales people, they just want to try out the application before having conversations with the company. Most free trials are set up to require sales interaction (or trigger sales follow-up).

In other words, free trial models eliminate a large percentage of potential users, when compared to freemium models. Companies that can design a freemium product set that satisfies free users, but also drives meaningful conversions to premium services will have a clear scale advantage over those that only use a free trial model.

To be continued
In the next post, I’ll take a look at the current challenges and limitations in executing an Enterprise Freemium model.

by Umberto Milletti, CEO InsideView