Freemium vs Paid: Is the Traditional B2B Model Dead? #w2e

4 minute read
Chelsi Nakano avatar

The checkout counter has generally been a place for leaps of faith when it comes to enterprise software and services, but today’s startups are challenging that approach with freemium models that allow consumers to test adoption and success before purchase. At this year’s Web 2.0 conference in San Francisco, the head honchos of two such companies -- Box.net and Yammer -- discussed their experiences, and why traditional vendors like Microsoft should take notice. 

The Shift

Like most modern shifts in enterprise technology and behavior, the move towards solutions from smaller companies is the result of the growing interest in social media and Internet usage. Most customers, regardless of business type, now interact with vendors via the Web: Facebook; Twitter; e-mail.

This level of convenience has quickly become the expectation all over the business board. Accordingly, today's enterprise software providers are attempting to drastically lower the barrier and make experiencing their offerings just as simple.  

Don't Worry About Failure

Yammer and Box.net are great examples of the kind of low barrier entry that appeals to today's consumer. Both companies require very little information from users looking to test drive the software (the sign up process is comparable to signing up for a social network like Facebook), which is a key element in getting word to spread in the first place. 

In this way, a startup has the ability to define its audience after its product has been released. Now, we've seen cases in which this approach failed (see: Wave) but what were the consequences? Aside from a bruised ego, not much. 

"We’re in an industry where it’s acceptable to have customer failure with web 2.0 technology," said panelist and Box.net CEO Aaron Levie. "Fifty percent of the time, customers are basically writing off the technology they purchased, but the vendor still makes all the money they would in a successful model. Now, people wont pay us until the technology works." 

Don't Worry About Charging

Many companies offer a Freemium model, meaning the base service is free, but premiums for added services, capacity, or convenience come at a cost.

"For us the model is dictated by the way our networks work," said David Sacks, CEO of Yammer. "Our pipeline was filled with viral, freemium users as well as enterprise users. The reason people think you have to choose is that in world where your leads are controlled by marketing dollars, it made sense to prioritize. In a world where viral, freemium launches drive products, you can just kinda let them go and see who adopts and who doesn’t."

Learning Opportunities

Levie added that a freemium model is often the most logical model for startup technologies because of their two types of audiences: one with a large budget and no time, and another that is blocked by technology, doesn't have a budget at all, and wants to solve their problems quickly.

"Freemium balances that by providing no friction while offering a lot of valueable things on the backend," he said. "If freemium was good in the consumer space, it’s incredible in the enterprise space. "From a startup perspective, we have to create alongside really bit companies, and to really be disruptive we have to figure out dimensions they can’t compete on."

Why Smaller Companies will Make it

The competition between smaller companies and the traditional enterprise goliaths has been somewhat of a taboo subject, but it's undeniable that, especially in the case of SMBs, solutions like Yammer and Box.net are becoming fairly popular alternatives. 

Sacks attributed Yammer's success in the face of Microsoft to taking the familiar Facebook approach to workflow (much like Salesforce has done with Chatter), in addition to the time it takes larger companies to release solutions. SharePoint, for example, just launched, so we can't expect another version of it for at least a few years. That's a big window. 

"We get to fundamentally deliver the same product to customers across the board," said Levie. "Whats really cool is that if you look at IBM and Oracle and Cisco, etc., anyone that’s moving to the cloud essentially has a lot of baggage to their traditional enterprise models and a significant amount of technology that has to be built. There’s a lot of disruption that’s possible, and until big companies figure out how to respond there’s an incredible amount of opportunity for startups to compete."