Start with Freemium under Shadow IT: Today's Way To Win Customers?

I have a confession to make. I have signed up for software service without telling my IT department. I've done it not once, not twice, but many times.

I bet that I'm not alone, however. I'm sure many of you have done even worse things: spreading unsanctioned, unsupported, fly-under-the-radar services to your co-workers. I am not talking about signing up on Facebook or Twitter (although that's how pretty much how Facebook and Twitter grew their user base). I'm talking about services that you need to get your job done, services like salesforce.com, linkedin.com, box.net, dropbox.com, yammer.com, surveymonkey,com, zendesk.com and many more.

Any of these services sound familiar? I'm sure most of you have heard of one or two. In fact salesforce.com is one of the biggest Software-as-a-Service (SaaS) CRM company that had $1.3 billion revenue in 2009. Many others are following its SaaS model of offering service, and Shadow IT is one way to describe the unmanaged nature of these services. It is often talked about as the key to succeed with SaaS offering and to break into a new customer account.

Why would it be? Simple. There are either no upfront cost to many of these services or very minimal trial account cost. Mostly it's free (aka freemium). You just sign up as you would for a free webmail account, and 30 seconds later (or depending on how fast you can decide your account name and password) you are in business. You are either downloading the large file that you needed, managing all your contacts, sharing documents with your co-workers or customers, etc.

Unlike webmail however, these services are not usually integrated with other services. It takes two to join and get benefits of these services. They are social by nature. There are exceptions to this rule, but largely you are either inviting your co-workers to join, asking customers to sign up, or suggesting your boss to login so that he can see what you've been up to. Many of them have social network aspects to them, and this makes them viral. And once it gains critical mass in an organization, they tend to embrace it as sanctioned tool, and buy them as paid services for whole. Yammer is betting on this free-to-paid conversion scenario imitating LinkedIn's model.

In fact there are young startup SaaS companies that have little or no sales team that are generating revenues while relying on individual users signing up for services.

But it's unclear whether freemium model will work for all. Problem is users tend to stay on free account unless there is compelling need to switch to paid account. Many stay away from switching because they don't want to go through the hassle of justifying the account purchase to accounting team (usually their managers). Unless business case is strong, people tend to switch to different freemium service. In this age of boosting productivity while cutting cost, who would blame them?

How many of these freemium offering startups will survive is not yet clear. But it sure seems there will be many more Shadow IT services appearing in your intranet in near future.