In addition to economic problems I have with freeconomics, the loyalty aspect came to my attention recently. This time it is with freemium, a business model which I view as rather reasonable unlike other more extreme free arguments, and so the issue is more subtle.
I was a business strategy consultant at Bain, and 'customer loyalty' is one perspective of Bain that I really like and agree. I even translated Loyalty Rules by Fred Reichheld into Korean edition while working at Bain. (You may think this is obvious for an ex-Bainee, but I have not always been very enthusiastic about perspecitives that came out of Bain. For example, I do not fully agree with 'profit from the core'.)
So, why do I think at least some variation of freemium conflicts with customer loyalty? First of all, loyalty economics says that if you care more about your loyal customers you are better off. Sounds too obvious? Maybe. But this has a very strong warning against focusing too much on acquiring new customers. Typical businesses spend too much money on marketing and sales, and too little on caring loyal customers. So what happens very often is you give discounts and all those benefits to new customers, while claiming full price to your loyal customers. Loyalty economics, as argued by Fred Reichheld, says that this is economically destructive as well as morally low-road.
Let's have a look at freemium. Some argue that you should give away your most popular contents for free and make money by making niche contents paid. This model has a strong possibility of compensating free riders (apparently not your loyal customers) with your loyal customers' money.
In theory, the free users may not be free riding. They may be contributing a lot as marketing agents, linking to your sites and talking about your contents. But the issue remains, if majority of free users are just free riders. And I am guessing that is the case.
I have not thought through this yet. So, let me just ask some questions.
- Does this freemium model have conflicts with customer loyalty as I described? Why or why not?
- If yes, is this conflict inherent and common among all freemium models or just some kinds? To put differently, is customer loyalty in conflict with 'free for a month and paid afterwards' model? What about 'free for limited features and paid for full features' model?
- How can we make (freemium or not) change the business model so that we compensate loyal customers better?