Every software product needs a sales price: the amount of money the customer pays for its use. Which price is right obviously depends on the product and the market. Customers are willing to pay good money for decent products and services. Good products can therefore be ridiculously expensive. But maybe “free of charge” is the right price for your product in your market.
Having a sales price of zero is admittedly weird. But offering your product for free, removes a great hurdle for prospective customer. Zero takes the costs out of the equation. Making your product free to use, is the single best way to grow your customer base. Free may even be the best sales price you could have.
There are three reason why software companies offer their products free of charge: land grabs, multi sided business model and freemium.
Companies undertake a land grab when there is a significant benefit to being the largest vendor in the market. Time to market is priority number one. Twitter is a good example. Twitter rather raises money from shareholders than charging customers. By making the Twitter service free and showing only a limited number of ads, they remove friction for the users, and grow their user base fast. Charging users would inhibit growth of the network, thus lowering the net worth of the company. Companies that attempt a land grab assume that once they have won the land grab, they will somehow find a way to monetize their accumulated user base.
Google is an example of the multisided business model. The company does not charge users for the use of their products. Google’s argumentation is the same as Twitter’s. Asking money for every search would quickly lead users to alternative search engines (maybe even to Microsoft’s Bing). Instead, Google makes money from third parties who sell services and products to the primary users. They do this through sponsored search results. Facebook, another typical example, bluntly sells the customer data at its back door. In the multisided business model the user is not the customer, it’s the product being sold.
Lastly freemium is a popular model, with LinkedIn as a famous example. Anyone can join the professional networking site for free. For heavy users, LinkedIn offers a paid premium version. Hence the name: free + premium = freemium. The freemium model operates on the assumption that a portion of the users will upgrade to a paid version. This is also the model’s pitfall: failing to get users to upgrade. Getting the model right is tricky. On the one hand you want to offer useful features for free, while still having even more useful features available that users will pay for.
In a B2B market, free may not be the right price at all. Land grabs are not common, and companies obviously hate it when you sell their information. The freemium model is most suitable. Perhaps selling a small product for an extremely low price, while promoting your more profitable flagship product may work very well for you.