An Engineer

Many folks ask us why we don’t have a free version of Phanfare with limits and upsell services, products or a relaxation of the limits for a premium price. This business model, sometimes called Freemium, can make good strategic sense. Skype is probably the best example of a service that offers a free service with an upsell, but Flickr, DynDNS and the WSJ.com are others.

To provide a free version there are two major considerations:

• What is the value of the free users to the company. What do the free users add?
• What is the cost of supporting free users?

Skype is well-matched to offer a free version. The value of Skype to any user is related to the size of the overall Skype network (I can call more people). The cost of supporting those additional users is zero. Skype runs peer to peer, so there are no incremental hosting or bandwidth costs related to the free community.

What Skype sells, mostly, is the ability to call in and out of the traditional phone network (SkypeIn and SkypeOut). That makes strategic sense. The free users don’t cannibalize the sale of the SkypeIn and SkypeOut (well maybe to a very small degree since the more Skype users there are, the fewer people outside of Skype there are to call), and in fact increase the pool of people who might buy the upsell.

Because the value of the free users is so high to Skype and cost so low, it makes perfect sense to have Skype be free in its basic service. Skype is a classic low-cost provider. They have a close to zero cost position for additional users, and can offer something valuable at a lower price. Note also that the presense of free users does not tarnish Skype’s brand. They are all about letting the world talk for free.

Phanfare is in a different position with a strategy of differentiation, not low-cost. We offer a superior service, not cluttered with ads and we provide support to our customers. Let’s imagine we offered a severely space-limited version of Phanfare to the free users and look at the costs and benefits.

If there were a free version of Phanfare, it is likely most people would not pay for our differentiated sharing, organizing and archiving solution. So, most of our users would be free users. But in fact, even if we limited the disk space allowed by free users, most of our resources would go to supporting the free community.

We offer amazingly responsive support, striving to answer support requests within one hour. Such support costs real money to provide, and without a revenue stream associated with those free users we would quickly find it difficult to sustain offering them free support. It would not be long before we started hiding from our users to lower our support costs, thereby removing one of the very differentiators that would cause someone to buy the service in the first place!

And what of the benefits of the additional free users? There are some, to be sure. These free users would expose their online collection to other potential subscribers to Phanfare, thereby increasing awareness of our products and offerings. But of course, most of the people reached would become free users. And Phanfare is focused more on private sharing than public sharing, so very few of our albums get enormous traffic today. We are not an ad-supported eyeball aggregation play that depends on reach to be attractive to advertisers.

As you project forward, it is not hard to imagine soon having millions of free users and a relatively small number of paying customers. We would then have the costs of a gigantic service before we had any of the associated revenues. Pressure would be on to lower our costs to as close to zero as possible, something that is antithetical to our basic positioning, which is to be the differentiated provider of photo and video sharing services to consumers. We don’t strive to have the low-cost position. Our level of support, and promise of unlimited storage basically guarantees that we won’t!

Soon we would be thinking of how to monetize the free users. Advertising on the free albums is the obvious choice. So now, rather than offering a free 30 day trial of our complete service with no limits to prove to folks that we are worth paying for, we have a sea of free users with ads on their sites, and no support, and a small paying community that we don’t have time to focus on.

And I have not even discussed what such a free version would do to our brand, or how many folks would fail to buy the premium service because the free version (which has zero associated revenues) is sufficient.

We would be in the awkard position of trying to be the low-cost provider to our free users and the differentiated provider to our paying community.

In short, you won’t be seeing a free version of Phanfare anytime soon. Nor will you likely see a free Lexus program, free Apple computers supported by advertising, or a free version of HBO that includes ads. It rarely make sense for the differentiated provider in an industry to engage in free.