Some business are free but still turns out successful, while other business will be doomed to fail over a freemium model. What makes a freemium model, or subscription model, or money upfront work?
It’s helpful to categorize businesses into three categories:
1. Losing value as you consume more
For example, video games, hamburger. You consume it the first time and it’s great. Next time less great. Eventually there’s no value.
For these types, you must charge upfront, since all the value is upfront.
2. Flat value as you consume more
Newspaper, Youtube. You consume it, it’s great. Next time you are on, you consume something else, equally great.
For these types, subscription (maybe with a free trial) or advertising works best, since the value is continuous and you want people to pay continuously.
3. More value as you consume more
Evernote, Dropbox. You use it, its great. You use more of it, it gets even better.
For these types, freemium can work well since you can expect a healthy amount to convert to paid as they derive more value out of increased consumption.
Source: Phil Libin of Evernote.