LinkedIn: When Freemium Trumps Premium

LinkedIn: When Freemium Trumps Premium

In full-disclosure, I want to be on record as saying that I'm a big believer in the 'freemium' business model.  Not that it's the only business model out there, but when it is well thought out, it's pretty hard to beat.  And this goes for non-tech companies as much as tech companies, and it's as old as Jell-O giving out free cookbooks and samples in the early 1900's to get Jell-O fully seeded in the marketplace after many failed attempts.

Today's Definition: Freemium is the giving away a basic version of the product for free, while charging for a premium level of service.  This is especially beneficial if the value of the premium product is created by the basic users in their use of the product.

Consider Linkedin.  In the aftermath of Microsoft's purchase of social media giant, LinkedIn, I thought it might be interesting to take a look at an interview that the Wall Street Journal did with David Sacks, Founder and CEO of Yammer, PayPal, and Geni, back in March of 2013 (link[1]).   

In that interview David cautioned that the biggest pitfall of the freemium model is the chance that the free model can 'cannibalize' the paid version.  Admittedly, it will take a lot of careful planning and patience to distinguish the two products, but in the case of LinkedIn, it appears to be worth it.

Quoting from that article (source:[2]):

"So when is the freemium model worth it? Freemium services tend to work best when these four conditions are met:

  1. The population of free users enhances the value to those who pay.
  2. The two types of users — those who have a willingness to pay and those who don’t — are easy to differentiate.
  3. Some premium functionality matters a lot to paid users but its deprivation doesn’t impair free usage.
  4. The product is viral enough that any cannibalization is, on the whole, offset by faster growth."

Of course that article talked about the $1.2B exit value when Yammer was sold to Microsoft, and a case was made that Yammer satisfied all of those basic criterion.  But how did LinkedIn's model compare on those criteria?

In the case of LinkedIn, I believe that all four conditions proved true to that model:

  1. Pretty much, if you - as a free user - didn't have a LinkedIn account, you didn't exist to the business world.  After all, you're reading this, aren't you.
  2. Premium users were easy to find.  Just about every sales rep and recruiter uses LinkedIn to find prospects and candidates.
  3. If you were not a recruiter or a salesperson, the functionality still helped you personally, by providing you with a way of  networking with groups on specific topics, announcing your own personal career moves, and a host of other valuable data that transitioned beyond just your current job.  It became your resume.
  4. There have been, and still are, many attempts to create a look-alike model, but if you're like me, I passively resist getting on all of these other networks, because there's nothing that they can 'apparently' do for me, that I can't get on LinkedIn - and it takes a lot of work to get there - and in more than one case, they managed to spam everyone in my contacts list.  That was personally embarrassing. 

So while I reiterate that there are other business models that can work, I think that the Freemium model is the best opportunity to be the most disruptive and lucrative in the final analysis.  Think about it for your company's business, and I'd love to hear your thoughts.

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