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Link Freemium did not work for Phanfare

Fred Wilson of Union Square Venture is a big proponent of the freemium business model on the internet. He recently reiterated that when it comes to delivering media on the net, freemium is a great way to go. Fred originally endorsed Freemium back in March of 2006.

I have a tremendous amount of respect for Fred. I don’t know him well, although we have met a few times. And I read his blog pretty regularly so feel like I know his views. I can’t say that I was not enticed by Fred’s arguments. At the time, Phanfare was growing nicely but marketing costs were high. It seemed that if we created a freemium business model and allow everyone to use Phanfare in some basic form that it would help us prospect for customers willing to go for paid upsells.

But I also had my concerns which I wrote about in May of 2006 in a post entitled Why is there no free version of Phanfare. At the time, I was concerned that there were few network effects to Phanfare and hence the value of having a large community of free users was not that high. I was also concerned that as a differentiated provider, we would be hard pressed to make money with the load of the free users.

But in 2007, we embarked on changing Phanfare to incorporate a free version. The thinking at the time was that our calculus had not considered the cost of marketing, which is lower if you can prospect by attracting people with a free version. We thought having some network effects to Phanfare were important, so we also added social networking. We thought that people would connect to their friends on Phanfare and expose them to the system.

We offered 1GB of storage to free users and unlimited storage to paid users. Classic freemium.

Here is what happened.

  • We saw a surge in registered users.
  • We saw drastically reduced margins. Customers with less than 1GB but paying our full subscription fee were our most profitable customers. With those people at the free level, our margins were down significantly.
  • We lost the ability to effectively use CPC search marketing (google). When we had a free trial, it was easy to see which clicks were worth paying for. But with freemium, the conversion funnel was so long (average of nearly a year before the person needed more storage) that any attempt to optimize price per conversion was hopeless. (Try adjusting the shower temperature with a 12 month delay between knob and temperature change and see how it goes for you. In control theory parlance, this is known as introducing a delay in the feedback loop)
  • We lost our position as a premium provider. People perceived Phanfare as “free” and it was hard to describe ourselves as a paid service for those who care about preserving their full size originals and displaying them in a better way.
  • There were few network effects to Phanfare. People who were our customers did get their friends to register for free accounts, but the rate at which those people became Phanfare participants was very low. We did not have a social network; we registered the audience.

Another issue is that storage is the driving cost factor for Phanfare. The page views per bytes/stored is so low for us (we are an archival service storing full size originals) that advertising, even if it was welcomed by our user base, would not pay the bills.

Fred Wilson estimated that Facebook might have $.25 revenue per user per month. Phanfare could never survive on that.

In the end, freemium is not a good model when the cost of delivering service to free users is high. But more fundamentally, I reiterate my position that freemium is a bad marketing plan for any premium business that hopes to be the differentiated provider.

Freemium makes sense when at least one of the following conditions are true

  • Free users have zero marginal cost to the company. True for Skype and other P2P services that get participants to volunteer infrastructure.
  • The value of the product to a prospective customer depends on their being a large network. True in dating, Skype, Facebook, Ebay and Twitter.
  • The business can be run ad supported. That means that the business has reach and attention that scale along with costs and costs are low enough that ads pay the way. (At Phanfare our page views per byte stored are so low that advertising does not work well). Any ad-supported business can consider paid upsells. At some level they are running freemium. Or put another way, they are using their reach to pitch their own products.

Not a single one of these conditions is true for Phanfare. Moral of the story: trust your instincts.

This entry was posted on Wednesday, July 8th, 2009 at 10:56 am and is filed under Cloud Computing, Digital photography, Digital video, General, Phanfare, amazon. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

Viewing 27 Comments

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    All good points. However as an enthusiast and a paying user, I loved the ability to use Groups to pull in other friends and photographers. The pitch was: "...a great way to share full resolution photos. If you only have a few photos, it is free but you might want to consider this as you main storage for your best photos due to accessibility and backup services."

    Now, without this ability to use Groups effectively, I will need to look beyond Phanfare to other services where one can share high-res photos. I think you may be opening up a chink in you armor to competitors. With the falling cost of storage, I think other photo sites may start offering high res free storage or bundle the photo storage with other data-center services. Perhaps you can consider allowing others to upload to an existing album (eg Apple's MobileMe)

    At any rate, until a better alternative presents itself... I love your service and will happily keep using it for my own photos but will need to augment a group photo sharing arrangement.
    • ^
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    We plan a phanfare subsites feature in the pro release that will allow you to designate a url like yourname.phanfare.com/soccer and put any subset of albums under that URL. Optionally, you can have the subsite protected by a password.

    This solves the group permissions issue but does not give you a way to collaborate, like groups did. For collaboration, we are introducing a dropbox in pro: yourname.phanfare.com/dropbox where friends and family can upload photos and videos. From there you can dispatch them to whichever album you want.
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    Looking forward to the dropbox feature... finally!

    To upload, will it require an account or just a password? Will there be a notification that photos have been uploaded?
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    No registration required. Password protection optional. Note that the dropbox feature is not scheduled until the fall release currently. Notification sounds like a nice idea. The feature is not fully specified yet so feel free to suggest how you would like to see it work.
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    My initial thought was, how will I know when there are new photos in my dropbox? I could proactively check or rely on the dropper to tell me, but why not have the system tell the person leaving photos that the dropbox owner will be notified of the new upload. A simple email to me would work fine or maybe RSS is easier. This would save us both time.

    I'd like to be able to use the Lightroom plugin to upload to friends dropboxes. Or, maybe it would be easiest to implement this by allowing me to push pictures to another user's dropbox similar to the way pictures are pushed to facebook/flickr.
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    The current plan is to give people a URL that will show our web-based uploader (flash and java). Implementing an email notification to the owner seems like a good idea.
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    If it were possible to assign album 'sections' to a subsite, my life would be wonderful!
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    I know it's starting to look like a laundry list, but having the ability to place watermarks in the pro version would be very useful. I recently had some images borrowed and re-posted without receiving credit. If there were an option to download with or without the watermark, based on password, I'd fall right out of my chair!
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    Watermarking is definitely on the list but not in the initial release.
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    The current spec is for you to be able to include any set of albums in a subsite...album sections were never intended to create arbitrary hierarchy, but instead to break up large events into manageable pieces, although I know some people use album sections to create hierarchy by topic and date.
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    Have you seen this article from Mark Cuban? I think both posts -yours and his - are timely.

    http://blogmaverick.com/2009/07/05/the-freemium...
    • ^
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    Thanks for the link. I read the article and the commentary under it. I think his reasoning is flawed. There is no reason why free companies are more susceptible to disruption than companies that charge. Companies that offer free services in an attempt to get an audience are usually the low cost providers. And it is true that someday, somebody will try to eat your lunch. But this would happen even if you charged.

    In fact, if you charge as the low cost provider, as Microsoft does with windows and office, and if the technology becomes commonplace and costs continue to drop (google/advertising/SaaS) then you are vulnerable to an attack that offers your product for free (less).

    This is really what is happening to Microsoft. They killed the workstation manufacturers by charging less for operating systems and then linux open source started giving the stuff away. This was not too much of a problem for MS because the free software folks never figured out how to monetize the audience they gained by giving stuff away, and without revenue, the product was never that polished. Linux did have an impact on server sales, but not desktop OS sales.

    Enter google who figured out how to make money off the audience. Google + open source means a real competitor to MS, precisely because they offer their services for free.

    All companies go through a life cycle, whether they get paid directly or by third parties or freemium upsells. Few companies manage to reinvent themselves to be around for 100 years or more. The only one that really come to mind are companies like IBM and Coke, the first by constantly shifting their business focus and the second by having an evergreen brand that they have managed to keep relevant through smart brand advertising.

    My point was that there are certain attributes that make freemium a better or worse model and Phanfare has none of them. I would argue that the differentiated provide never has the attributes to support freemium. There are some pockets of giving stuff away for free, like iTunes on windows, but that is a small strategic move by a large player that gets paid for nearly every other part of the ecosystem that the iTunes supports.
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    I do not actually use Phanfare, but was forwarded to this great post from Facebook, I agree totally with everything you said, and I shall be sending this to a few of my friends who religiously believe 'noone will pay you for this or that on the internet, you have to make it free!'. Like you said, the bottom line is, there is no one single rule that applies to every site/business, you have to analyze (for example the 3 conditions you set) and decide for yourself!
    • ^
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    Maybe Phanfare should have thought about how much space to give out instead of just randomly choosing 1gb. Could have calculated the costs per user beforehand and adjusted the amount of space to give away based on that.
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    We started with a gigabyte, knowing full well that half our customers had less than a gigabyte. It seemed that less than a Gigabyte would simply not be competitive in the world of free (Google gives at least that much away). We later limited free accounts to 256MB. That helped. But of course, with a space-limited account, prospective customers could not try Phanfare for their larger collections without paying.

    Our current (and original) offer of a free unrestricted trial allows prospective customers to truly kick the tires. It also puts pressure on prospective customers to make time to make an actual decision on our product. Without that time pressure, they may not try it at all.

    I think you are going to see some major changes in the industry in the next few years. Already, we have seen Kodak back away from their position of unlimited storage for free. This year they sent out dunning notices to all customers who did not transact at acceptable levels and told them to either buy more stuff or they would delete their data.

    In photo and videos sharing, you can be free or archival but not both. The three archival free players are shutterfly, snapfish and Kodak. Kodak already backed away from free. HP has long had a requirement of purchasing and I bet it will get stricter. Shutterfly is the strongest player and they will hang in there the longest. I don't believe they keep archival versions on disk. I think they keep them on tape. That makes their cost position the lowest among the three print-to-share players, but I bet that they too will start choking on the ongoing liability of storage as people start printing less and less.

    My belief is that keeping your high resolution originals is a luxury item for consumers. With 99% of the emotional value conveyed by a version of the image that contains 10% of the data, only an enthusiast cares about or understands archival storage. And those people will pay, because the audience for personal media is not there and hence advertising is not possibility.

    The most successful photo sharing company is facebook, and they throw away 99% of the data. As such, they are a classic low cost provider. I don’t think freemium works for the differentiated provider. I have yet to come across a counter example.
    • ^
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    Great post Andrew - full of useful information.

    Freemium makes most sense when there is a major gap in functionality between the free and paid versions - and this generally happens when the two versions are aimed at different market segments (eg free for individuals and paid for commercial).
    • ^
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    Thanks! I don't agree that the premium and free versions can be targeted at different markets. The power of freemium is that is prospects for potential customers. As such, the free people need to be in the same market as the premium people, with slightly different requirements. For example, in skype, there are tons of consumers in the system and some are willing/able to pay for skype out and skype in.

    I like the definition of a market from "Crossing the Chasm." A market is a group of people that reference each other for their buying decisions. Freemium is all about finding that group and bringing them in, and then sifting through them to find the group willing or able to pay.

    But with Phanfare, freemium dilutes the brand, cannibalizes the paying customers, and makes the conversion funnel hard to optimize.

    If you define freemium as an ongoing free level of service, the question is what benefit does the company enjoy from offering that service and what are the costs. Without strong network effects, it is usually not a good idea. But this is not physics, subtle differences in the offer can change the outcome of the experiment.

    For example, some of our customers like the idea of registered viewers. That way they get highly detailed viewer information. To provide that, we need to provide registrations for viewers. Is doing so that different from allowing free viewing in general? No, but some may argue it’s a form of freemium.
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    Andrew I'm afraid I'm going to have to disagree with your disagreement :-)

    There are lots of examples of personal/corporate freemium, ranging from 37Signals to Google Docs, but I'll go with my favorite example: linkedIn.

    Most of the people I know are on linkedIn and none that I know of pay for the premium service. Does this bother linkedIn? I doubt it.

    This huge (free) user base represents a valuable asset that can be monetized (from corporate customers) in many different ways , for example search, or the ability to contact prospects directly.

    It's a beautiful model.
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    Linkedin certainly satisfies my criteria for freemium. Very low incremental cost of a user and strong network effects.

    But to some extent, linkedin is just providing a service to professionals for free (a market) and then selling access to a different market (recruiters mostly, although bus dev people also buy accounts to get access to Inmail). It is almost two products. But I agree, there is a continuum between individual professionals and workgroup use and their freemium does bring you in as an individual and eventually get the corporation to pay, probably via expense account. But it is not an enterprise sale.

    Blackberry is an interesting case. They gave away their desktop redirection software and professionals started using it. When there were sufficient users, central IT at companies, which wants central control, then purchased the enterprise redirector and took over control of the blackberry devices. Of course, they did satisfy the criteria of having low marginal costs for free users.

    Using this "freemium" approach, Blackberry snuck in through the backdoor of the enterprise.

    Maybe we were just not clever enough. Maybe we should have given away photo asset management software and storage to millions of creative professionals with the goal of eventually making an enterprise sale ;-) One problem is that it is hard to get a creative professional to trust you with their assets unless you have a business plan that makes them the customer. I think that in this particular market, people want the standing of being a customer, not an eyeball.
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    re Phanare - I don't think it's a question of being clever (you've got no issues there, btw) - it's just a question of which market you're in. As you correctly point out, the value of your service to one single user is not really increased by having other users on board. But the network effect is only one of a range of variables which influence the success of a freemium offering.

    I stand by my assertion that the real key to success is having significantly higher functionality in the premium version - and frequently this additional functionality is only of interest to a specific market segment (eg businesses).

    Another reason for frequently very low freemium conversion rates is subscriptions - people generally hate them.

    I could save myself a lot of typing by simply pointing you here.

    It's a bit long, but it sums up my views on the issue.

    ps Blackberry example is very good, stored for future use, tks.
    • ^
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    Similar sentiments on archival (backup) type services I wrote about here: http://venturebeat.com/2007/02/12/why-online-ba...

    I'm assuming you crunched the numbers re: paying subscribers who had less than 1GB and that you were going to lose them when going to free?
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    We did, but we simply assumed that the virality of the exposure from those free users would compensate. In reality, we were already getting good exposure through the viewers of our paid customers and offering those viewers a perpetual level of free service just cannibalized sales.

    Without network effects (the system is valuable to a potential customer in proportion to how many people are on the platform) freemium is a hard to swallow. Why carry the free users?
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    This makes a great deal of sense.
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    Hi.. Your post got me thinking... What is more valuable for a software company (like facebook or flickr). 1,000 paying users or 100,000 non-paying users? What are your thoughts? View my blog post here: http://www.purlem.com/blog/?p=57
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    Andrew, your last point under “here is what happened” ends with “we registered the audience.” From my point of view, that is not a bad thing. I like the statistics I get from having registered viewers; I like having the ability to share with groups (and hide content from other groups). At the point where the ability to share with “everyone” was introduced, Phanfare 2.x achieved, for me at least, an excellent balance between “publishing” and “sharing” personal photographs.

    From the beginning of Phanfare 2.0 I failed to “get” the whole “social networking” idea; therefore, I never used “groups” for anything more than a means of selectively sharing photos (control).

    Now, with most of the “social” aspects of Phanfare being less obvious to find and more difficult to utilize, it seems that friends, family and groups will be soon be removed. I am struggling to figure out how to administer my site without those tools. Already, it is way too cumbersome for “new” family and friends to “connect” with me. I’ve seen many references to a password for the site and passwords for individual albums, but passwords seem like a bother to manage; besides how “private” is a shared password? By the time I tell two friends, that in-turn tell two friends, and so on the whole password thing seems very much pointless. And even with passwords, there is still no “visitor reporting” available.

    I’m asking that you consider keeping “social Phanfare” without “freemium Phanfare.” I don’t want Phanfare giving its services freely to “strangers.” If you are going to give free service to anyone, give it as “value added” to paying users like me. The people that come to Phanfare to see my photos expect (and gladly accept) that in order to see some of my albums, they must sign up, sign in and be accepted by me. I think the popularity of Facebook bears out that people are willing to do just that – sign up, sign in and be accepted. However, unlike Facebook, Phanfare, the service provider, does not have to *give* the registered user anything, as a paying user *I* am giving them something they want – access to my photos, and in the process Phanfare gets exposure and potential new paying users.
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    Well, for now, it works pretty much as you want since you can continue to use the social networking tools and add friends, who will get space-limited freemium accounts.

    The problem with 2.0 was that there was not much buy-in from your viewers. They hardly even realized they had accounts. They just clicked through the email notifications they got. They can still do that today; you just need to send the invitations to view out manually.

    We added back in visitor tracking in the last release by click tracking people when they view albums via phanfare invitations. From 30,000 feet, it feels pretty much the same to viewers, except that the viewers don’t have phanfare accounts.

    Using phanfare subsites you can create access control groups (as you did in 2.0). it is true that everyone at the same access level shares a password, but if they are clicking through invites, I doubt they even know that password. And really, for personal content, a shared password is probably not a big deal. If it is big deal, you can create a subsite for the rogue with a separate password.

    Most people don’t want to bother to register to consume media. That includes your viewers. You might think you are doing them a favor by sharing it, but with personal media, I would argue they are doing you a favor by looking at it when the person is outside blood family ;-)

    Anyway, right now we are running a hybrid system for those who really like the social networking features.

    My current view is that phanfare is not a social network. It is a bunch of independent photo and video website publishers with their respective audiences. We will continue to develop tools to help our publishers manage their audience, that might include automatic notifications out to the audience to tell them about new content, or a way for viewers to signup in a simple manner to get notified when a phanfare site changed.
    • ^
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    It makes sense to pay for premium service like Phanfare to be able to produce more.
 

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