For the series this week, we are going to take a look at a version business model. The main principle behind this model is providing different versions of the same software. The idea of creating multiple products out of a single application has been the most popularly adopted model for over a decade. Now, just like any business model there are some serious pitfalls and benefits of this approach. Luckily with many real world examples we can create a very accurate idea of this model.

Overview

The basic idea is very simple, take a single application and split it into different versions. Each version will have a different number of features. To keep this simple lets say we have two versions, a free application and a professional one. This business model requires more research then the alternatives and is commonly overlooked. Whenever you market an application as a free and pro solution, you run the risk of giving your product away for nothing. By building a free solution, you have to ensure that there is enough left in the professional version to get them to abandon your free solution. There is no algorithm for coming up with this, you cannot simply cut the features in half (sorry folks). I personally avoid using this business model for this simple fact. In my opinion, you are better off competitively pricing your product then creating your own competition with a free vs pro scenario.

Now this isn’t the only hurdle you must overcome. Pricing the pro model is bound by the free version. It is very unlikely that once your price is set for the pro edition that you can ever get away with raising it. By doing this you’re risking people leaving for your free version or walking away completely. This has happened with many open source products that tried to turn commercial and as I have spoke about, once you lose the community you might as well close up shop. Now if you can figure out the best price to feature ratio, you can have a very successful business. A great example of this is Flickr’s business model. They understood the consumers needs and broke them into two groups. The average user, who would use the free version, and the photographer, for the professional edition. They fortunately didn’t cripple their free version at all, but rather just expanded the storage size for professional users. This only worked since photographers inherently need more storage (due to more pictures taken) where as normal users, generally do not.

Advantages

• Client Stability
  • Generally speaking, once someone becomes a paid customer they will stay one for the remaining time they are a client. This includes upgrading to new editions (if that is in your business model)
• Exposure
  • Marketing your product as free will give your product more exposure from users. This can help improve your product and also reach users who would have otherwise moved on.
• Long Term
  • If you can successfully overcome the hurdles of pricing and defining editions. This can setup a consistent long term cash flow for your business. Take a look at Microsoft for the best example as they use this model for nearly every product.

Disadvantages

• Creating Competition versus Yourself
  • Doing a free and paid application makes your business its’ own worst enemy. You now have to spend money on marketing to your free clients to upgrade to the paid application.
• Losing the Community
  • Once you define the initial features for each edition, if you ever decide to add a new feature and make it paid only you risk losing free users.
• Pricing & Features
  • The number 1 hurdle you will face is making sure the editions are similar yet different. There is a fine line you have to walk in order to be successful. When you finally set the features, coming up with pricing on the paid edition must appear low enough to encourage upgrading and once that price is set you are pretty stuck.

Conclusion

After looking over both sides of this business model, I feel that there are much better models available. I would never encourage creating competition with yourself if its avoidable. I can see this being a decent idea if you’re competing with an existing commercial product as the free edition may steal you customers, but still risky. It has been shown that once a customer adopts a commercial application they tend to stick with it unless something compelling guides them elsewhere. I apologize for those who think this business model was too obvious, but I need it for some of the following articles as they are deviations of this ancient model.