As widely reported, Facebook acquired messaging service WhatsApp on Feb 19. My preferred take is from Ben Thompson here. For a more skeptical view see Arnold Kling (here and here) or Matthew Yglesias (here). But rather than debate the acquisition, I want to narrowly focus on WhatsApp’s freemium model. You get the first year free and pay $1/year for each subsequent year. Having what’s essentially a super long trial period as a freemium model is a very clever, and I wouldn’t be surprised to see it emulated. Also, it’s worth noting Facebook is likely to modify how WhatsApp monetizes users post acquisition. So let’s focus on the model itself, and its wider applicability.
Contrast WhatsApp’s model to the two month free trial period offered by Basecamp. A two month free trial is exactly that, a free trial. You can test drive, but especially for business software, it’s not long enough to complete a major project and see the returns. But a year is a different story. Enough time to see if you like it, plus get customer lock-in due to switching costs. And customers will only convert to paid if the value proposition is clear after having used the product long enough to know exactly how it works for them. This model keeps the team and work culture completely focused on making the product great, as conversion to paid becomes a key operational metric. A competitive advantage. Especially for a startup trying to crack a new market.
Let’s also contrast this to a free version of a product which handles a few specific use cases, with the goal being to upsell customers to the full product for a subscription fee. Perfectly legit. But the downside is you have to bifurcate your product into a free and paid version, and sometimes this is hard to do and while retaining the integrity of the design.
Last month’s post on freemium didn’t discuss the WhatsApp model. So consider this an update. In particular the first year free model (or even longer for certain cases) might be a killer approach for business software-as-a-service, not just for consumer apps like WhatsApp. We’ll see if it gains traction. For more, see my full post on the economics of freemium: Internet pricing, Dungeon Keeper and the case for Minimum Viable Free Product (MVFP).
Update: one good question I got on twitter was how to pay the bills in the first year with this model. One approach is start with a short free trial (say a few weeks), then over time keep doubling the free trial period until you hit a year. WhatsApp started as paid and then switched. But phasing in a longer and longer free trial period would be more consistent for customers and better align to the freemium approach.
Thanks for the update. So you think year-long trials are the way to go because of better lock in? Here are two issues with year-long trials you didn’t mention:
1. Fraud/abuse. If, all I need to do is give then a new email address each year, what’s to stop customers from using a new email address just to get another year of free service? If I have to do it every month or week that’s more effort upon fraudsters.
2. Missing the “time of need window” in the post-usa-centered economy. The “time of need” is hereby defined to be the time a person really wants something from you. Usually, the time of need window is actually narrow, in some cases hours, and after a month, especially a year or so, the potential customer is focused onto other issues or solutions that have come up and/or are more urgent. Realize, new solutions regularly will be coming up to the surface and hitting the limelight of the media, especially if a company has a good product. I realize you think IP is worthless, but, ironically, because I now somewhat agree with you, I personally think it is indeed for this reason that any business models that rely upon a duration of need greater than a year are missing out on revenue maximization unless their ip protection is really strong, which it is isn’t going to be *for most startups* in light of the past (AIA et al.) and future (
1,2,3) changes in us ip law secretly designed to curtail this (i.e., allow services and products of such startups to be ripped off by fortune 500s); the kill rate of the new IPR procedure (internal interparts review of granted patents by the us pto) is above 90%, as a future two-part article in the April and May 2014 editions of Intellectual Property Today by Dr. Neifeld will be showing soon.
That second point was a bit wordy. To summarize it, I think in the post-AIA, anti-troll, anti-startup, pro-huge international company like the one you work for, and even to some extent anti-“cool job in the US of A” era, most startups, but not necessarily fortune 500s or all startups, need to take the money and run, so to speak, and a year-trial dealeo won’t turn out too well for them.
For what it is worth,
I’m trying to understand why Windows with Bing, or what it is. Is it cripple-ware like http://en.wikipedia.org/wiki/Windows_Starter#Main_editions I can’t imagine it is. Maybe no advanced components like full disk encryption, but not intentionally knee capped to 3 processes. I think they will use the lock in that you are talking about. I don’t even consider OneDrive since I’m tied to Google Drive. I don’t know how much the pain to switch would be, probably not much, but the thought doesn’t cross my mind.
If you figure out Windows with Bing, I’d be interested to see your thoughts. Not sure what it is, or strategy yet.