Freemium won’t work for everyone. But there are a couple of important trends described in Anderson’s book that we should all be conscious of.

1. The cost of distributing content and software online has fallen close to zero. This is highly disruptive for companies whose business model was designed for a prior era when distribution was more costly, such as print media, entertainment and software publishing. Software with mass market appeal — so long as it’s easy to develop, operate, support and maintain — now costs virtually nothing to deliver to customers, which means the high prices and comfortable margins vendors used to charge are now being wiped out.
2. Certain classes of software, delivered as SaaS, will become free at the point of use. The virtual elimination of distribution costs will allow new vendors to enter markets with business models that rely on one or more of three alternative revenue sources to cover the cost of their free offering. The most disruptive of these competitors will be the ones that identify alternative revenue sources with high value and/or high margins, because this substitute revenue will fund low-to-free software pricing in markets where conventional vendors have traditionally charged high prices.

The three alternative revenue sources are:

* Advertising. As we’ve seen from Google Apps, non-intrusive advertising does seem to be accepted even for business use when it’s perceived as funding free use of the application. SaaS vendors should be cautious, however, as we have no confirmed evidence even that Google (let alone anyone else offering ad-funded apps) makes enough from advertising to cover its costs.
* Freemium. Distributing a free version in order to reach a wider market, among which some customers will decide to pay for premium services, is well established. It’s worked for some open source vendors and for SaaS vendors with mass-market appeal as 37signals and Box.net. As I’ve discussed previously, the trick is to target the right free users to yield a sufficiently lucrative conversion rate. I don’t agree with Anderson that this is the default business model for SaaS, but I do agree that we haven’t yet explored all the potential it holds.
* Syndication. I’m not sure about the name — it may end up being called something else — it’s the least developed of the three, but I think it holds the greatest potential. What I mean by syndication is delivering third-party services within an application and taking a commission on the sale. I’ve previously called it promotion, as opposed to advertising — it’s also akin to what the retail industry calls merchandising. Some examples include SlideRocket, which sells media objects, such as images, music and cartoons, for use in slideshows created on its platform, or SmartRecruiters.com, which is a free online recruitment application for small businesses, funded by reselling a portfolio of ancillary services within the application, such as job board placements and reference checking. I recently recorded a podcast with the vendor’s CEO about this model. Last month, at the OnDemand Europe conference in Amsterdam, he took part in a very interesting panel discussion I moderated on the topic of SaaS monetization. A video of that discussion is now online.