Product Strategist: Freemium and Multisided Markets

Early in the week, I read the Tyner Blain post "Freemium Business Model" http://tinyurl.com/cm7vkw. As I read it, I jumped to multisided markets. But, the author, tweeting as sehlhorst was quick, in the article, to push back against that leap.

In this article, I'll provide some triangle model illustrations to point out the differences between freemium and multisided markets.

Freemium

When the Wall Street Journal hit the web, it insisted on paid subscriptions. Other content providers opted for free. At some point paid subscriptions didn't work. Free didn't work either. So an evolution occurred. Read this for free, but if you want to read that, pay for it. The free and paid content showed up in the same publication. The paid content helped the providers to keep the servers up. Being advertising-supported was not a business model that worked, so someone had to pay. The select few paid for premium content. The rest of the readers opted for freemium, or subsidized content.

If you think of software as media, then the transferability of the freemium business model to SaaS applications is easily seen. I've used the online Rand McNally trip planner. I was a freemium user. That use motivated me to pay for a subscription, so I could use the premium functionality.

This figure shows the pricing partition extending across the development effort from requirements to server operations and client interface. The pricing partition goes even further when you think of offer and it's broader organizational interface. Once you create a premium layer, customer service starts dealing with billing issues and things beyond the reach of the code.

Finding the appropriate balance between free and paid is tough. You can move the boundary as if it was a slider control, but you can lose subscribers that way. In some sense, you need to prove the value of free components, like in value-based pricing, if you intend to keep the subscriber population near the price boundary.

Premium presumes that you have populations that can and will pay for premium functionality. In the figure, populations are shown in blue. Morrison came up with the idea of using Poisson distributions to represent populations in games with unknown populations, or Poisson games. That is what was intended by the blue partitions. Premium also presumes that you have premium functionality. A given feature is used at some average frequency by a given population. That average frequency can be used to rank features according to the long tail, assuming a power law curve or inverse exponential distribution.

Moving the price boundary changes the populations that can use a given feature, So it likewise reorganizes the frequency of use.

Multisided Markets

Google is the best example of multisided markets. They eat keywords, search keywords, provide keywords, sell keywords, and leverage keywords in an ever expanding portfolio of ways. Keywords are their platform. I've come across a book on platform economics unfortunately no title is at hand.

In a multisided market, an application captures and saves data and metadata. The data is then reused by another application for an entirely different use. The pricing boundary can move the proportion of payment contributed by each side. The data can be used by many other applications, so the payment contributions can be further distributed. Each of the applications producing or consuming the data can have its own free-premium price partition separate from the multisided price partition.

This figure presents a more abstract visualization of a multisided market.

Google leverages their keyword databases in many ways resulting in many multisided markets.

Multisided markets are organized across producer-consumer stacks. Spiders consume html pages while loading the search engine database. Page ranking algorithms eat the database entries and produce aggregate page rankings. Search engines capture keywords and produce search hits. A separate communications channel arises around keyword bidding. Search results aggregate consumables from the various channels. The producer-consumer stacks become tree like. The search hits come with various pricing situations some free and some paid, but paid by entities other than the user.

That freemium is typically a matter of free and premium, in the late market, mass customization strategies, and value-based offer bundles makes any software into a collection of freemiums across a spectrum of pricing differentials.

Conclusion

Freemium and multisided markets are not the same things. They can be used together. In "The Art of Pricing," http://tinyurl.com/cj3hql, independent populations will pay different prices for the same functionality. That independence is an issue of communications isolation. This is more a matter of geographic markets. Then, there is the matter of pricing as a filter. Price higher if you only want affluent buyers, but then realize that there are fewer affluent buyers. Similarly, price enterprise if you want to go down a road littered with the few big sales, but few, which leaves you only to go upmarket with the CxO sale, upmarket being where incumbents go to die. Freemium and multisided markets provide additional pricing strategies, and additional architectures for the software or services being priced.

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