Freemium model helps turn cloud consumers into paying customers

Consumers don't want to pay for a cloud service they've never used, leading many cloud storage providers to attract customers via the freemium model.

Editor's note: This is the second part of a two-part feature story on challenges and opportunities in the consumer cloud market. Don't miss part one, "Consumer cloud market grows rapidly, but providers face many challenges."

The path to the consumer cloud market is paved with good intentions. It's growing rapidly, especially in cloud storage services, and providers need not worry about violating service-level agreements. Still, making it in consumer cloud services is no small feat.

It's not that people are cheap and don't want to pay for services. They just want to be comfortable with what they're paying for before they pay.

Robb Henshaw,
director of corporate communications, SugarSync Inc.

And perhaps here's the biggest challenge providers face: Consumers are not so sure they want to pay anything at all for these services.

It's why many pure-play cloud storage service providers like Dropbox and SugarSync are seeing some success with "freemium" models that give people a certain number of gigabytes of free space before charging extra for more storage. Robb Henshaw, director of corporate communications at SugarSync Inc., said the company did not offer a freemium package when it initially launched in March 2008, and the company had trouble finding its footing in the market at first.

In an effort to compete with Dropbox and others that did offer the freemium model, SugarSync started offering its own freemium package in 2010, giving users 5 GB for free, then charging $5 a month for 30 GB of storage and going up from there. The company found that removing that initial must-pay barrier led to huge growth.

"It's not that people are cheap and don't want to pay for services. They just want to be comfortable with what they're paying for before they pay," Henshaw said. "[The freemium model allows them] to try something risk-free without a credit card. It's not a trial. They know there's a free plan that is always free, so they can get in the door, test it out and then they might decide to make a purchase decision."

Henshaw noted that the majority of SugarSync users are free users who stay under that 5 GB limit. But he said many customers quickly seek more space after realizing the value of the service.

"Usually, what's considered successful in the freemium world is a 3% to 5% conversion rate from free to paying customers," Henshaw said. "Our conversion rate is significantly higher than that."

Consumer users become business users

It's possible that profit margins may be thinner in the consumer cloud market than in the enterprise market and that some of the bigger players are taking the biggest piece of the consumer pie, said Mike Jude, program manager at Stratecast, a division of market research firm Frost & Sullivan. But he also believes that many companies must be doing OK.

"My assumption is that the pricing scheme for consumers has to be different. But is the margin different? It may be a little less, but it may not be a lot less," he said. "I don't think there would be all these new entrants to the field if there wasn't money to be made there."

And, in fact, even if the consumer side doesn't reap as much profits as the business side, some providers have found that free consumer subscriptions could lead to bigger, more profitable business accounts. Robin Daniels, head of enterprise product marketing for Box, a cloud storage provider that dabbles in both markets, said many consumers find so much value in their personal accounts that they end up encouraging their employers to sign up for the service.

"Most of the collaboration tools people use, like email, have been around for 20 or 30 years and don't meet the needs of the modern employee. Employees are frustrated with the tools they use at work, and after they have a personal account, they go in to work and say, 'Why don't we use Box?'" Daniels said. "So, the marketing people will share files, then finance hears about it and they do it. It becomes this viral thing that spreads by word of mouth."

About the author:
Dina Gerdeman is a Boston-area-based freelance writer and editor covering business news and features.

This was last published in March 2013

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How successful do you think the "freemium" model would be for your business?