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When the Price Is Free(mium)

How cloud startups are disrupting enterprise giants with a business model.
December 20, 2011

In 2007, we made an interesting discovery at Box, the content-sharing company I run: our service aimed at consumers and small businesses was being used in big enterprises.

At first we didn’t understand how Box had made its way into large organizations, but we soon realized that we were at the forefront of one of the most disruptive trends the enterprise had ever seen: software that spreads virally through employees.

Four years later, Box is being actively used inside 100,000 businesses, including 82 percent of the Fortune 500, to share and manage files in the cloud. With more than eight million end users, Box is one of the fastest-growing enterprise apps of all time.

The rapid growth rate experienced by Box, and by other emerging cloud players, would not have been possible had we followed the traditional rules of enterprise software adoption. Historically, those rules have been dictated by a large number of corporate IT buyers and a very small number of vendors. Suppliers like Microsoft, IBM, and Oracle have remained comfortably at the top of their markets, while buyers have avoided constant churn among their providers. In this environment, it has been incredibly difficult for startups—or for new innovation—to break into the enterprise scene.

So how is it that startups are going head-to-head with the giants of enterprise software, and on the latter’s home turf? They aren’t. At least, not directly.

We tend to think of technological disruption as occurring when new products suddenly enter a mainstream market in a way that incumbents can’t compete with, usually because the newcomer offers some improvement in the underlying technology. That is certainly the case for cloud computing, which allows software to be delivered via the Internet. But what we often miss about such innovations are the destabilizing business models they manifest. Just as devastating to incumbents as the new technology: a new price point, and by extension, a fundamentally new means of adoption.

In the case of Box and other cloud startups, that pricing model is called “freemium.” Freemium pricing is already familiar to consumers who use Flickr, Skype, Spotify, or Pandora. The idea is simple: users get a free “taste” of your technology, often at the price of limited functions, limited capacity, or an abundance of advertising. With a premium subscription (usually for a few dollars a month), you’ll often see those limits nullified, ads vanish, and a handful of extra features introduced.

In the enterprise, the model is philosophically similar—use services like Box for free now, pay for more later for more functions—but the economic relationship is between the supplier and the corporate buyer (the CIO or IT department, for example), not between the supplier and the end user.

Enterprise applications such as Yammer, Assistly, Salesforce’s Chatter, and Google Apps have all found religion. Collectively, their solutions are being used by tens of millions of individuals in organizations throughout the world. In fact, Gmail has used the freemium strategy to quickly become a player in enterprise e-mail, accounting for nearly half of all cloud-based e-mail deployments by large companies, according to Gartner.

This change has broad implications. It means that new services can emerge and scale quickly, bypassing the rules that have traditionally governed how enterprise technology is bought and sold. These apps find their way to the CIO’s desk via his or her employees, not through a consulting engagement, a tedious sales cycle, or an existing licensing agreement.

With freemium, enterprise upstarts are turning the adoption and implementation process on its head, without having to compete head-on with the giants. By the time Box is talking to an IT buyer about replacing SharePoint or another legacy solution with our product, that company has already experienced our service through its employees. This means corporate customers are not paying until the service has been vetted and deemed successful by their own workers. Gone are the days of radically expensive, failed implementations of enterprise technology.

This new model’s disruptive impact on the $246 billion enterprise software market is hard to overstate. Look into nearly any Fortune 500 company and you’ll see the expanding footprint of the freemium model. Marketing teams are collaborating via Yammer’s real-time activities feed. Sales teams are using Box to pull up important client presentations on their iPads. In some cases, it’s the employee using a free version of the service. In others, these tools are sanctioned and paid for by the employer.

We’re at the very beginning of this trend, and the enterprise incumbents are only just beginning to feel the pain. For the most part, legacy systems still coexist with their would-be disruptors. But as organizations of all sizes make the transition to the cloud—a transition they’re only going to make once—the enterprise behemoths are going to have to pitch their fledgling cloud product lines against the services that employees are already successfully using. Then we’ll begin to see the true effects of freemium tools’ reach across tens of millions of end users.

Aaron Levie is cofounder and CEO of Box.

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