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Joel Liu's List: Summary for freemium summit
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Feemium model may not work.
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First, an exploration of the freemium business model currently being applied at 3 public companies: LogMeIn, eFax (j2 communications) and Skype. In studying the public SEC documents for these companies we’ve found a consistant 10 to 1 ratio between free users and paid users. A goal we’re trying to achieve at Xobni.
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- Second, I show six business/market conditions that can suggest implementing a freemium model. Many of these conditions are derived from discussions I’ve had with Sean Ellis, who blogs here and has had great freemium experience working with companies like Logmein, Xobni and Dropbox.
- Finally, any time I give a talk at a conference I try to give concrete, actionable examples of lessons learned from my own experience in building Xobni’s business. In this presentation I’ve dedicated the latter half of the content to specific successes we’ve had at Xobni. And this was all made under the warning derived from Paul Buchheit’s brilliant quote: advice=limited experience + overgeneralizations. So be forewarned
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Freemium business models work only when your marginal cost of delivering the service to a new user approaches zero. In traditional goods and services industries, such utopia cannot exist as delivering any physical good or service has real costs associated with it. This is not so in the virtual world as processing, bandwidth and storage costs approach zero. The best you can get in the non-virtual world is "free trial" or "first-one-is-free" type of offers, but those are really marketing tactics and not fundamental attributes of the product or the business model. That is why online businesses that got started in early days of the Web opted for the "free trial" model as they faced steep storage and bandwidth costs (e.g., legacy web hosting companies).
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Paid users’ demographics will differ than the customer base as a whole. Pandora One, the premium version of Pandora, skews heavily toward males 30+ where the site’s audience is 50/50 female/male and broadly distributed across age groups. Understanding the needs of a demographic who is willing to pay was essential to their success.
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7- If your premium service has a high enough cost, it’s best to have some human contact with the customer rather than have them interact with an automated sales system — this makes a big difference in retaining customers. It’s also an opportunity to up sell or cross-sell other services.
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9 - Be careful in setting price points, if they are too high it might attract competitors that can easily undercut your business. Having a lot of free users means it is difficult for a competitor to compete with “free.”
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- Conversion %
- Churn %
- Ratio of free to paying users
- cost to serve each user
We just got back from the Freemium Summit last Friday and it was exciting to hear how focused everyone was on metrics, especially around customer acquisition, retention & usage.
GigaOm's recap is here & a raw compilation of tweets and presentations can be found here.
The metrics that came up most often were:
The best quote at the conference came from Drew Houston of Dropbox, who said "It’s all about finding things in the margins — lots of little things rather than one key thing.”
What metrics are important for your business? How do you track them? How different is the freemium approach from traditional subscriptions?
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Charles Hudson (@chudson) organized The Freemium Summit yesterday in San Francisco. The speakers brought their A-game, including sharing great details about what they've learned about their growth economics. Thanks to River Twitter, and especially the coverage by Marc Perramond (@perramond), Jeremy Nusser (@jnusser) and Cindy Alvarez (@cindyalvarez), it was hugely valuable even for those of us 3,000 miles away.
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Mar 30, 10
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It is very difficult to properly segment users and features such that you provide enough value to both paid and free audiences. For example, an email service that provided a 10 MB of storage for free and 1 GB for the paid version would have a hard time surviving – the basic offering isn’t sufficiently compelling to get people in the door. Conversely, a service that offered 2 GB for free and 10 GB for the premium service might be giving away too much value in the free product to expect a large audience of people to upgrade. And that’s just one product dimension. Adding more dimensions just makes it that much more difficult to figure out the features for which users would be willing to pay.
Going with a free trial can be much simpler. You offer one product that users can fully consume for some period of time before they have to decide whether or not they want to pay for the product. It’s more important to figure out how much time a user needs to experience your product before he / she is ready to make a purchase decision rather than which features should be exposed to paying users vs free users.
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Under the free trial model, it seems to me that testing alternative hypotheses is easier. You have the features you have and all users get to use them. You can increase the length of the trial, decrease the price, or do both. But what you don’t have to do is to go back through your segmentation of features and figure out if you sorted properly.
At the end of the day, I think it’s good to figure out whether the business model you have in mind works. The sooner you find it out, the smaller the stakes and the more time you have to fix it.
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Key idea #1: There’s Consumer freemium, and there’s Enterprise freemium
First off, there was a strong distinction between the usage of freemium in the enterprise versus consumer. In many ways, it was as if there were two completely different conversations going on. In the consumer world, the focus is very much on topics like: payment methods, virtual items, subscription vs microtransactions, etc. In the enterprise, much of the focus is more on the IT infrastructure, departmental structure, expense reports, etc.I think ultimately the distinction comes down to the fact that in the consumer world, people are spending their own money – as a result, they are much stingier, the demographics are more difficult, and you’re often an entertainment experience competing with other discretionary products. Compare this to enterprise, where the goals are more often utilitarian, and business users can more easily justify an ROI with the tools. Furthermore, because the users live in a broader business ecosystem, you have to deal with the IT organization, as well as the opportunity for people to simply expense their freemium costs.
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- 30-day free trial (with credit card upfront)
- Free service platform that upsells multiple premium products
- Freemium service that disrupts existing pay-only product category
- A/B testing pricing, purchase flows, etc.
- Achieving purchases by optimizing the new user experience
- Default to premium product, but allow the user to skip to Free
- Lifecycle-based discounts and upsells
- Start with a high price but A/B test coupons to price test
- etc.
Key idea #2: Freemium playbook has already been written
Another interesting discussion revolved around the fact that many of the basic tactics in the freemium world have already been documented and used by previous players.In particular, there are tactics out of the playbook such as:
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Free users are assets, if you can control the cost: Free users build network effects and user mindshare that are useful for later upselling and refer a friend incentive program .Evernote measures revenue per active member per month as a key performance metric (KPI). In month 1, a user will generate $0.02 per month. In month 24, an active user wil generate $0.75. Focusing on upsell and building value drives enormous revenue opportunities. As for referral marketing, Dropbox’s two sided incentives offer increases conversion rates by 60%!
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The company’s team must focus on revenue. 30% of DropBox’s staff, like many other successful freemium companies, are focused on paid conversion funnel optimization. We discussed this last week.
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- Why don't free trials work? Umberto Milletti says it's because you can't create advocates for your service in 30 days, it takes longer.
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- David Sacks asked how do we fight commoditization of our business? That's an excellent question because the dirty little secret of freemium business models is that a competitor could offer a similar service for very little cost -- you have to find a way of differentiating your business, whether it is through community, great user experience, or something else.
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- Consumer-oriented Customer Acquisition Techniques
- Businesses are DIFFERENT than consumers... ...and that is a good thing!
- Businesses have more MONEY than TIME
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Back of the Napkin Math - Is Freemium even possible in our market? Addressable Market x Reach % x Sign-up % x 3% = Potential Paying Customers from Freemium
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Mar 30, 10
1. Don't know box's data
2. A free trial is not enough unless you'are selling to the CIA
3. Hook them early and get their data.
4. High marketing leverage: Your users are your marketers.
5. Fore you to make a much, much better product.
6. Reach traditionally impenetrable markets: your product will seep into new ecosystems.
7. If they don't want to pay, they don't have to leave. Only lose customers to yourself.
8. Delayed gratification: some users take years to pay, most never at all.
9. Free = Cheap & insecure ==> No one ever got fired for buying IBM.
10. Google wants to kill you-
Box.net CEO Aaron Levie presented his perspective on the topic, so we thought we’d share his presentation, “The Audacity of Freemium in the Enterprise.” In it, he gives six reasons why you’d be crazy not to give out your software for free – i.e. reason #3: it forces you to make a much, much better product – as well as four reasons why freemium “sucks” for good measure.
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Mar 30, 10
What's the difference between freemium for personal software and enterprise software?
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Mark Cuban brings
an interesting point to the debate: when you live by your free service, you die by your free service. There’s certainly merit in this argument if your business model is an advertising model based on pageview volume alone or if you’re holding up solely because of venture capital. When your uniqueness and flavor dries up, so may your users, and thus your revenue and funding. This was generally Mark’s concern when we introduced the free version early in 2006 (he was an early investor in Box, with no current stake): Why would people ever pay? How do you avoid just eating up a ton of costs with no revenue to supplement? What about when someone else comes out with a version of your service that’s also free with more bells and whistles? How will you remain competitive? -
There are a few reasons why the freemium model has enabled new software products to grab significant market share while also build a strong enterprise business in the face of dozens of startup competitors and giants like (both free and pay). This model allows you to surface your service to a much wider customer base (cross vertical, geography, function) and learn from and efficiently attract all types of users onto the service. And – more significantly – maintaining a free version of your service for a single user or small group is a very efficient way to get users to eventually actually pay for your product: customers can quickly try out your service without a lengthy sales pitch and users with limited requirements can get by for free, but recommend the business version to their company when the time is right.
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Mar 30, 10
Must read
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2005, Conrad said, they offered listeners 10 hours free before requiring them to plunk down a $36 annual subscription fee. About 100,000 people started listening every week, but only about 1% went on to subscribe. When Pandora asked the other 99% what was wrong, they said: Nothing. They loved the service. They listened to every minute of their 10 hours. They thought $36 was an entirely reasonable price. But... they just weren't willing to pony up.
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Looks like it was the right move: The service became profitable last year, with $50 million in revenue. Nevertheless, that wasn't the end of the subscription story.
How Pandora brought subscriptions back, after the jump.
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