Free and Freemium Managed Services: What's the Business Model?

Free and Freemium Managed Services: What's the Business Model?

free managed servicesFree. Freemium. Free trial. Free education. Free content. More and more, I hear the word "free" across the managed services market. I'm not pressing the panic button -- good managed service providers are still charging a premium for their offerings. But I do wonder how the "free" story is going to play out. Here are some thoughts.

The Freemium concept isn't new. Fred Wilson, a venture capitalist, described Freemium opportunities in this March 2006 quote (credit: Wikipedia):

"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base."
When Wired Editor Chris Anderson published the book "Free" in 2009, the term Freemium went mainstream -- and software CEOs took notice. During the 2009 N-able Partner Summit, CEO Gavin Garbutt announced a freemium endpoint security strategy. And during ConnectWise Partner Summit 2009, Anderson was on stage talking about freemium strategies and his other best-selling concept: The Long Tail.

I blogged a bit about the freemium trend in October 2009. Then, the topic popped up again Jan. 4, 2010, on Stuart Selbst's Facebook page, where he wrote:
"Want to generate more revenue in your IT business? Give managed services away for free."
I don't agree with the statement but Selbst -- a business coach who assists MSPs -- stirred some great discussion. So I took the bait and decided to blog a bit more on the topic.

Free vs. Freemium

My key thesis: There's a huge difference between "free" and "freemium"
  • Free means you're desperate for business and you'll do anything to get your foot in the door.
  • Freemium means you have a clear strategy -- a free carrot -- that will engage numerous customers and convince a few of them to sign up for additional lucrative services. Plus, a freemium effort demands a natural bridge from the free offer to the paid model.
Chris Anderson says there are five freemium business models (credit: Wikipedia):
  • Feature limited
  • Time Limited
  • Capacity limited
  • Seat limited
  • Customer Class Limited
Here are some examples of each (off the top of my head...):
  • Feature Limited: The old Wordpad and Notepad model, which inspired users to ultimately purchase Microsoft Word. Updated 4:00 p.m. eastern, Jan. 6: Check out Office 2010 Starter
  • Time Limited: Free software or service trials that time-out after 30, 60 or 90 days
  • Capacity Limited: Email services that offer a free amount of storage, then you have to "pay" for more storage once you exceed a certain threshold
  • Seat Limited: N-able's endpoint security offer gives MSPs one free N-central Essential license for each N-central Professional license they have in place
  • Customer Class Limited: Under certain license models, enterprise customers that purchase Microsoft Office 2010 will receive the free ability to host Microsoft Office Web on their own premise

When Free Fails

Still, Free and Freemium doen't always succeed. We've all seen:
  • Free, advertiser-driven WiFi networks that (A) lacked enough advertising dollars for long-term success or (B) delivered such poor bandwidth that users moved to a rival paid system
  • Freemium strategies that felt like bait-and-switch offers. Sign up right now -- the clock is ticking -- to get one month of free service but get locked into a two-year service contract

Will Free Hurt Margins?

Yes, some MSP offerings will suffer from commodity pricing over time. Proactive remote PC management, for instance, is an old story.

But I think managed services are like a broadband pipe. Even as one service becomes a commodity, you can push a new, higher-margin service over the pipe.

Roughly two years ago, some industry watchers were talking about a "race to the bottom" -- which involved low-cost MSPs driving down prices and margins, and potentially hurting the overall market. Fast forward to the present and I hear victory stories from folks like Inhouse IT, which is winning more business involving customers who were disgruntled with their previous "lower cost" MSPs.

Simply put: Customers are starting to understand that you get what you pay for. Careful with free. Focus on freemium.
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