There is a bit of chatter in the blogosphere today about the beauty of “free”.  Fred Wilson repeats his assertion that starting with free is a great thing to do, and he cites RedEye VC who makes the great point that demand drops off massively at the introduction of any charge at all – even if it is just a penny.  He also argues – and Fred quotes this:

I can’t think of a single premium service that has achieved truly viral distribution.

I’m not sure exactly what he means by this.  The comments to both the posts I linked to above get a bit hysterical on the importance of revenues and how lots of companies with a free basic service and paid for premium service (i.e. a freemium business model) have successfully gone viral.

Flickr and their pro account is a great example of this, as is our investment in WAYN.  I wrote this about WAYN in a post I wrote in November, shortly after our investment:

The subscription model is interesting.  The trick has been putting enough into the free offering to drive growth in registrations and having a distinct offering with clear extra value for premium subscribers.  Simply offering extra storage or allowing 10 photos instead of five doesn’t cut it.   Some of the advantages of having a premium account include preferential positioning on search results, access to extra communication features and search tools (e.g. so you can find someone from San Francisco, who is also French, is aged 31-40 and has been to London, and interact with them).  Going forward they are looking to introduce a number of exclusive travel and lifestyle benefits for paying subscribers, so watch this space…

Since then we have been experimenting with the right point for the boundary between the free and paid for service, and that is something I’m sure we will continue to do until the day we exit.  The right balance moves over time as you add new features and the competitive situation evolves.  Dating sites have been at this for the longest time and have turned it into more of a science than an art.  They A-B test new ideas obsessively to maximise conversion to paying subscribers – e.g. changing the number of free messages you might get, the amount of information you can see about who has clicked on your profile and a thousand other things.  To me that is the right model – a site like WAYN is a bit different to dating sites in that conversions aren’t everything – there is value in growing the free user base too so you need to be a little more subtle in your approach, but the basic idea is right. 

A working freemium model is of course attractive to VCs.  The fact that WAYN was profitable was definitely a factor in our decision to invest.  I say “working” freemium model because there is a world of difference between an established 5% conversion rate of registered users to paying subscribers and an assumed one.  My advice is to get premium side of the site up and running as soon as humanly possible.  I met a UK start-up called FridayCities last week (of which more later).  They have been live for little over a month and are already in a position to demonstrate the demand for their premium service – this added a lot to their case.