Giveaway Formula For Success

There is a lively discussion among online business practitioners on the many pros and cons centered on the new freemium business model or better known as giveaways. Some other items are thrown into the forum (open source business models, development models, and others) including the hairline distinctions between free and freemium.

There had also been declarations on the distinctions (and which model is better) between an open-source business model compared to the development model. However, since the industry is in current flux and is still evolving as it is, there had been no definite conclusions as yet.

Cases in point

Among the experts and business insiders, there is concrete example of two basically similar companies that are both free business models. The clear distinction between them is in the difference of their contrasting management styles.

The mostly free business model of the famous Craigslist is cited as a perfect example of a good run. In contrast, another free but poorly-monetized business model like YouTube comes up in the discussion.

As it turns out, there is more to being “free” than the price. The series of questions running now is determining the time, the situation and the circumstance in using “free” as an integral part of your business model.

Freemium vs. non-freemium

From a well-known expert, the following factors govern the balance between the free (or freemium) and a non-free product, as dictated by the market forces. The outcome of these issues shall determine which way a product should go – freemium or otherwise.

The first consideration is the cost of marketing and selling to a user in a paid business model. Next would be the cost of acquiring and serving a free user, and finally the outcome of your efforts in converting users from free to paid models.

If all the answers to these questions would trend one way, free and freemium would appear to be a good idea. The opposite outcome would, of course, mean that paid-only would be the better alternative.


The most basic formula in business would go like this: Sales – Costs = Profit. (Translation: sales minus costs equals profit.)

In its long form, it would look like this:

Price Paid By User – Cost of Providing the Service – Cost of Selling & Marketing to Signup a User = Profit Per User. The formula is PP – PC – PS&M = PPU.

Freemium business model

In today’s practice, most free offering (software or product) comes with the usual restrictions and limitations. On the same token, these would also have a premium paid offering that is sold as an upgrade.

In concrete terms, you are spending money to get free users to sign up to a basic service level and spend more money to give that service. On the other hand, you can convert some percentage of these free users to premium ones with some additional costs in sales and marketing.

Freemium wins

Reasons for high marketing costs range from hard-to-please market down to the facts that the new product would have the potential paying users needing close supervision and assistance.

The freemium model would look like a winner if 1) there is strong word of mouth marketing, 2) low cost free user support and 3) there is a high sales and marketing cost of acquiring a paid user.

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