Freemium is not a business model. It’s an effective go to market strategy. And for any SaaS startup filling their pipeline and setting revenue goals for 2010 — it’s imperative this is drilled into your marketing and sales teams’ DNA.

Friend and SaaS Guru, Lincoln Murphy of 16 Ventures – a software sales and marketing consultancy – recently published “The Reality of Freemium in SaaS” on the back of his other paper, “7 SaaS Revenue Streams.”

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Some excerpts from Lincoln’s paper:

“As part of a business model, Freemium has fundamental flaws. The most obvious flaw is that supporting a large base of nonpaying users that will never convert to paying customers can bleed an early stage startup of precious financial resources. In addition, these users can draw on the limited time and attention of the team, taking those resources away from development and support of the premium product that will sustain and grow the company.

While it is the “free” versions of software that get picked up in the blogosphere and social media (for a few minutes, at least), it is also the free products that get lampooned by those very same outlets, and the users, when problems occur. A small base of paying customers can keep both the overhead in check, but also the scale of the venture which the young startup must support.”
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“Investment in lieu of revenue seems to be on many founders’ minds even when investment dollars have been harder to come by. Many startup founders seem to feel like it is easier to pitch investors than to go out and make sales. When this mindset is considered, it is easy to see how Freemium also became so popular with startups; especially those founded by technologists. It takes the pressure off of technical founders who just want to build a product and not worry about “selling.”

Critical questions for SaaS vendors to ask themselves are:
• First the big one: If no one is willing to pay for our product right away, are we sure there is a market for it?
• Second big question: What is the quid pro quo? What is in this for us? Why should we let them use our system for free?
• Do we sign-up for free versions of applications and then stop using them or do we always move onto the premium version? Why?
• How can we monetize users even if they never “convert” to customers?
• How can the users of our system benefit our customers?
• Are our customers just those that pay to use the “premium” version of the system or might they be stand-alone consumers of the byproduct of system usage?
• Can we glean actionable market intelligence from both free users and customers?
• Can we aggregate the network effect data and monetize directly?
• Can we benefit from the “nothing attracts a crowd like a crowd” notion of having a large
number of users?