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.