Freemium can be a viable revenue model... sometimes

Mark Evans wrote a post two days ago claiming that freemium is not a business model. Peter Christensen followed with another post on the topic saying that it is not a business model but just a marketing strategy. IMHO freemium can be a viable revenue model... under certain conditions:

• A "free" service with real value (either directly or through network effects) to build a user base
• A good balance between "free" features and "paid" features, i.e. "paid" features really need to add value to the "free" service. Not all web products can cater with this segmentation
• Well-thought price points that match the willingness-to-pay of certain segment of the user base... and that is very difficult to get right, especially when there is no market benchmarks
• Good marketing tactics to encourage conversation from "free" to "paid"

There might be other conditions but the point is that not all web products are candidates to freemium due to their inherent characteristics. Nor is it easy to implement. It's an iterative process with trial and errors. But if a product builds successfully a freemium model, it can be an elegant substitute to an advertising revenue model, especially if the product doesn't fit with an ad model. Think about it, if 5-10% of the user base pays USD 2-4 per month, it could generate as much revenue as advertising from the entire user base. A value added service is bound to find people willing to pay the price of a coffee.

A good example is Xing (a European publicly quoted competitor of LinkedIn). Xing has 8% of it's entire user base or 26% of its unique visitors with a paying subscription. They pay an average of EUR ~55 (USD ~75) representing EUR ~15 per unique visitors vs. EUR 3.4 in advertising and job listing. Of course users have a higher willingness-to-pay for their career than for other typical web services. But still it makes the point that freemium can be a viable and lucrative revnue model and at the same time not hinder the user experience.