Can you move away from freemium?

One of the popular forms of price discrimination for software services/platforms these days is freemium. This is where there is a free product offered alongside a premium product. For online storage and backup, this has been a familiar strategy used by start-ups such as a Dropbox but also established firms such as Google, Microsoft and Apple.

The problem with freemium is that, to work, some consumers must pay for the premium product and they must do so sufficiently to cover the costs associated with the free product. In other words, the free product has its value in referring consumers to the premium product. This might arise from “trying before you buy” or from network effects.

Yesterday, SugarSync — an online backup service that I have used because it syncs my actual folders rather than requiring me to use a dedicated folder — announced a move away from freemium. No longer will they provide a free 5GB account for any user. Instead, there will only be premium products. And those premium products will have the same price as before. SugarSync also promised improvements to their service but those are still to come. (Of course, you can still “try to buy” with a 30 day trial but that is a different proposition although it is technically freemium).

Now the idea of getting rid of a free product is understandable but it also tells us something. First, free wasn’t working as a referral product for them. In other words, too few consumers were converting to premium products. Second, free was costly for them and could no longer be sustained. Third, their premium prices were set as if the free product did not have costs to them. In other words, had they been saving costs, the premium prices could have been reduced. That they have not done so suggests some earlier mis-pricing.

That said, it is hard to see this move as a positive one for the company. One of the things I worry about with backup services is that they will always be there when I need them. But the worry is that the company may go under. This move from SugarSync does not inspire confidence in this regard. It is suggestive of a company under pressure and looking to a possible change in industry practices to keep it going. I worry whether the current prices are enough to keep it going when they move away from an aggressive growth strategy but I also worry that prices will rise in the future when SugarSync works out who really depends on it. Either way, I can’t win but given my calculus here neither can SugarSync.

When it comes down to it, DropBox has a free option. That means that when I want people in my network to use a service, I can’t point to SugarSync as a free option. I will refer them to DropBox which suggests that I should probably go all in there. SugarSync appears to be betting on DropBox moving away from freemium when its free customers move to it, push up DropBox’s costs etc. But that is hardly a given. SugarSync doesn’t seem to be in a position to unilaterally change pricing in this market. That said, I stand ready to be surprised. This is a market that I have been wrong about in the past.