Going freemium: Enterprise ISVs can learn a lot from Apple's App Store

October 13, 2014 OpenSystems Media

Apple’s App Store has exponentially increased the market for consumer apps, and, consequently, their value to consumers and revenue potential for app producers. Apple achieved this by perfecting the try-and-buy “freemium” model.

Because App Store apps are usually free, there’s no risk or barrier to trying them. When consumers don’t like an app, they simply delete it. But when consumers do like an app and use it, they quickly bump into the limitations of the free version. Apple makes it mindlessly fast and easy to upgrade to a paid version, so that anyone can enjoy the app’s full functionality without missing a beat. And the app producer reaps the financial reward.

Enterprise software vendors increasingly see this freemium model and they smell money. The problem is, most business-to-business (B2B) applications aren’t usually distributed through app stores, and there’s no public app store equivalent for enterprise software.

What’s the technology behind-the-scenes in consumer app stores that enables try-and-buy? And how can producers replicate the freemium model in a traditional enterprise setting? To understand how and why freemium works, first we must define what a freemium model is, and the circumstances around when it’s beneficial and when it’s not.

Freemium is a pricing model in which a software producer offers a free version of an application that can solve real customer problems right off the bat. The customer seeking greater value can then pay to upgrade to enhanced versions with additional functionality. A freemium model is advantageous because it provides a great way to achieve rapid uptake of software by a large number of people, resulting in broad product awareness. It also leads to shorter sales cycles for the premium, paid functionality because the user already knows and likes the base product and is already sold on the benefits of upgrading.

Freemium doesn’t work as well when the product is complex and requires a high upfront learning curve, or when the free functionality isn’t useful enough to drive upgrade demand. Freemium also isn’t ideal for producers unwilling or unable to give away some level of support to the free users to ensure the best possible first impression of their product.

Freemium sales grew by more than 200 percent overall in 2013, primarily in mobile and web-only applications. Freemium favors these application types because implementation is easy. For instance, web-based applications frequently are updated without user knowledge, enabling both free and paying users to upgrade automatically with no effort on the producer’s part. Ensuring that users have the latest and greatest version (whether free or premium) also reduces the likelihood of a poor user experience due to product issues that have been resolved in subsequent releases.

Because users of web applications also have to log in, producers can exploit the built-in login process to upsell freemium customers to paid functionality at the moment of highest likely impact. This increases the ease and efficiency of converting those users.

In actuality, a public app store offers much of the core functionality found in commercial enterprise licensing and entitlement management systems that many software producers already use. These systems provide capability around installation, mobile application management, licensing the apps, and managing the entitlements like who owns what and for how long.

These capabilities are what make the app store an ideal environment to offer the freemium licensing model and provide a pathway for upgrades. It also means that enterprise producers that have implemented software licensing and entitlement management systems can easily and effectively implement freemium models – and enjoy the resulting bump in revenue and uptake typically associated with public app stores.

The major challenges to implementing freemium models for enterprises within an enterprise desktop environment include:

  1. Users frequently abandon free products after bumping up against the limited functionality because they have no way of knowing that an upgrade to the paid version would resolve those issues. Those users also don’t have an easy way to quickly upgrade.
  2. Free versions tend to get passed between users. Without the strict licensing process and communication channels enabled via the public app store, producers have no way to identify and track their end users, or to communicate with them. This severely impedes a smooth freemium-to-paid upsell/upgrade process.
  3. Promoting the premium version usually is less successful in an enterprise/desktop environment because the contact information that producers typically have for their freemium customers is scant compared to public app stores, typically only an e-mail address. This limits how upgrades can be communicated.

These challenges can easily be solved when enterprise software producers implement effective licensing and entitlement management systems, in effect substituting the automation built into public app stores. Licensed (paid or free) software applications simplify and enable upselling to the end customer because these systems collect all the necessary contact details about the user, and provide the mechanisms to communicate with that user, and even collect critical usage data (such as frequency of use) that can facilitate the upgrade process and enhance user satisfaction.

Good licensing can also make upgrades significantly easier to manage. For instance, licensing and entitlement management can allow users to download the full product initially, and then enable only those specific features packaged for the free version. If and when the user upgrades to the paid version, it’s not necessary to download a new version. Via licensing, the user can easily upgrade the previously downloaded product on the fly and receive the new license key to unlock the premium features. In this way the upgrade is easy, quick, and seamless to the end user, similar to the app store experience.

Finally, the ease of communicating and promoting enhancements typically associated with app stores can be accomplished with a good licensing and entitlement management system. For instance, direct “in app” product messaging is an effective way promote upgrades from freemium. This is the process by which the producer can directly send a message to a user through the product itself as it’s being used, such as a pop-up message indicating that a feature being clicked on is only available in the paid version, and that the user can “click here” to upgrade now. Because the message is being received at the time of use and need, in-product messaging can be very targeted and effective.

Freemium is a high-growth business model that so far has rarely been exploited in the enterprise desktop marketplace, except by the most cutting-edge producers. A good efficient licensing and entitlement management system can generate freemium growth in desktop applications, increase profitability, and provide better insights into how and when consumers use a software product. Licensing and entitlement management systems also simplify the upgrade process, and enable targeted promotions and communications at time of need.

Marty Bakal, a Product Marketing Manager for Flexera Software focused on the Software Monetization product line, has more than two decades of experience working in various capacities in the embedded systems and software industry in multiple industries including medical device, consumer, telecomm, and automotive. Recently, he has been defining different initiatives for the Internet of Things (IoT) and Product Line Engineering (PLE) and Agile development.

Marty Bakal, Flexera Software
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