NEW YORK (AdAge.com) -- As a web business model, it's hard to get hotter than "freemium," the catchall term coined by venture capitalist Fred Wilson a few years ago. Myriad web and mobile apps have embraced the concept, offering a free, ad-supported version of a product or service, and a paid, premium version.
Casual customers can try out the offering before deciding to open their wallets; advertisers get the implicit value associated with underwriting content or services.
But lately it seems like the ads are becoming part of the wrong kind of inducement; that is, to drive consumers away. It's the flip side of freemium: ads not there to persuade, but to annoy users enough to convince them to pay.
"Don't like the ads? Upgrade to Premium now," suggests Trivial Technology to users of its "lite" iPhone backgammon app, hoping they'll shell out for the $1.99 premium version. A similar pitch is on offer at Pandora: "No ads: Pandora One is completely free of any sort of advertising: no audio ads, no visual ads. It's just you and your music." And it's the first selling point for the Weather Channel's $3.99 "Max" version of its iPhone app: "Complete weather coverage in an ad-free environment!"
That's just the tip of a freemium iceberg that also includes TwitterFon, SMS service Pinger, Tapulous' Tap Tap Revenge game, Android financial app Funky Expenses, Last.fm, Grooveshark and Spotify.
The hybrid model is a hedge on both a weak ad market and the consumer's well-established reluctance to pay for anything online. And some app makers say giving up advertising revenue on a premium version is an easy decision: there simply isn't much revenue there in the first place, and since the number of paid subscribers tends to be low, they're not adding much to the scale for advertisers anyway.
Take EverNote, a company that allows you to upload and stuff, as well as sync across many computers. EverNote's free ad-supported service, with 1.5 million users, provides just 15% of the company's revenue; the vast majority is provided by the 30,000 users that pay $5 a month or $45 a year for an upgrade. A message reminds users whenever they close an ad that they can upgrade to an ad-free version.
"Certainly, one of the reasons people upgrade is to get rid of the ads," said VP-Marketing Andrew Sinkov.
Al Sutton, developer of Funky Expenses, said he'd love to dump advertising altogether but the ethos among Android users is that apps should be free. "It's the kind of thing we could kill tomorrow and not really notice a revenue difference," he said of his mobile ad revenue.
Now, generally ad-free isn't the only inducement to upgrade. Evernote offers more storage and features, for example. Pinger allows paying users to send unlimited SMS messages, instead of a cap of 15.
But what happens when the ads themselves become a negative inducement -- a form of punishment for users unwilling or unable to pay for the premium version? Online and mobile ads are already maligned for sorry targeting and bad creative and the fact that freemium models are counting on an "annoyance factor" isn't likely to help that case.
"Advertising in general is annoying and intrusive when it is not relevant," said Chris Cunningham, CEO of Appsavvy. "A lot of mobile ad networks have completely dropped the ball and let CPMs fall far below what they're worth."
AdMob general manager Jason Spero said his network delivers higher CPMs than typical web ads. "The data shows when users are offered the choice they prefer to consume ads when tastefully done, and not pay," Mr. Spero said. "If 80% to 90% of your users are never going to pay, advertising is the way to monetize."
Half of iPhone users buy an app at least once a month, according to AdMob. It's hard to say how many do so to avoid ads vs. adding more features, but there are opinions.
"People will pay to open up new features, save time or for services that make them money. But they have been very reticent to pay just to eliminate advertising," said Michael Lazerow, CEO of Buddy Media.
And advertising done right can even ad value. Take the house ads on Twitter, which are usually useful tips for using the site. Evernote recently dumped its ad network and started curating its own ads, making usefulness to users rather than revenue as its main gauge for what it runs. It allowed premium users to turn the ads back on and something very weird happened -- many of them did.
It goes to show when ads are done right, ad-free need not be the sales pitch for "freemium."
"We originally thought everyone would turn off the ads, but now we're seeing users who are premium turning ads back on," said EverNote CEO Phil Libin. "It's surprising because you don't need to."