Will Freemium Work For You? Questions To Consider

http://blog.rapportive.com/is-freemium-right-for-you

by rahulvohra • 16 years ago

125 19 16 years ago

blog.rapportive.com

seiji• 16 years ago

Simplify it down to one question: Do you have enough traffic/users where a 2% to 3% conversion rate will sustain your business?

jhrobert• 16 years ago

Simplify further: Do you have 100k active users.

nl2• 16 years ago

That depends on how much you can charge.

For example, you could argue that Google Analytics is a Freemium version of Google Urchin. That costs $9995: http://www.google.com/urchin/pricing.html

(Of course, Google has a different business model for Analytics - basically they want to commoditfy the complements to their advertising business. But my point here is that freemium can work well in enterprise software with less than 100K active users if the pricing is correct)

RyanMcGreal• 16 years ago

The second question sounds like a restatement of the first. If users find your service becomes more valuable over time, why would they stop using it? (Conversely, if users stop using your service, did they really find it increasingly valuable?)

zecho• 16 years ago

Products don't exist in a vacuum.

In one case we could assume no competition or weak competition in the product's market.

Over time, one can imagine a case including competition that disrupts a once-increasingly-valuable product to suddenly drop users.

rmah• 16 years ago

The math is fairly simple. There are two cases: viral and non-viral.

The viral case is when the value you can offer to paying customers actually increases as more free users join the system. In this case, the free users are the resource and as long as the revenue you can extract from their added value exceeds the cost to support them, you can do freemium profitably.

The second case is non-viral and is where most people are. Here, the basic premise is that the free users may A) become paying customers or B) attract paying customers through word-of-mouth/scale halo effect.

In both cases, you need to estimate the lifetime cost of a free user. Even if it's only $0.25 per year, it will be something and is important. You will also need to estimate the lifetime profit of a customer (lifetime value minus lifetime cost). Don't forget user/customer support costs and overhead.

For case 2A, you then calculate the conversion rate for free users. If the lifetime profit of a customer exceeds the lifetime cost of a free user divided by the conversion rate, you win. If not, free users are a drag on profitability and not worth it.

For case 2B, you again calculate the lifetime profit of a customer and compare vs the lifetime cost of free users divided by the expected referral rate free users generate. If the profit exceeds the referral cost, you win. Otherwise, again, free users are not worth it.

Obviously, the above is very rough overview, and in real life there are many additional complexities. There are various ways these cases may mix, the functions may not be linear, etc. But in the end, it's just math and you can guestimate if freemium is economical for your business.

axod• 16 years ago

Surely also you have the option to have free users generating advertising income. I've heard that works for some people.

carbocation2• 16 years ago

Don't forget (C): the free users actually contribute something of value (e.g., information) to your business.

quadnrum• 16 years ago

"[In point A] the value you can offer to paying customers actually increases as more free users join the system. In this case, the free users are the resource"

This was point A.

rubeng• 16 years ago

I'm the founder of Bidsketch and the author of one of the referenced articles.

An often overlooked (and super important) effect of offering a free plan is that it will decrease the number of paid users signing up to your service initially. In other words: you will make less money upfront.

If the free plan is available that's what most people will go for. It seems obvious but it's easily overlooked when trying to calculate whether or not it's worth offering a free plan. If you factor in the initial negative impact of going free as a cost then you're better prepared. Of course, the reason why I wrote the article was that most people (including myself at the time) simply add a free plan because it "works" for [random web 2.0 startup] so they figure it'll work for them too.

JCThoughtscream2• 16 years ago

That's still model-dependent, I think. If the cost is sufficient barrier to entry that user skepticism remains high, then you'd probably have less initial converts simply by having a smaller pool of potential clients giving you a chance.

MicahWedemeyer• 16 years ago

What is your market like? If you are targeting a large unmet need, you should make your product free.

I'd argue the opposite. Get in there and start charging right away. Get as many customers as you can before some buffoon comes in and gives it away for free. If you're lucky, you'll establish that the market price is > 0, and future competitors will charge in a likewise manner.

raquo• 16 years ago

The primary reason to make your product free are positive network effects (no, it's not only about social networks, e.g. making .pdf a de facto standard also counts). The other reason is that the product is useless. The two should never be confused.

duck• 16 years ago

After reading those good points I have to ask - would freemium work for Facebook?

JCThoughtscream2• 16 years ago

How does it not? Of its X population of users, Y% have a need to advertise something on Facebook.

martinkl• 16 years ago

Facebook is an example of a product with distinct modes of use for different audiences (the users and the advertisers). One audience pays, the other does not.

jacquesm• 16 years ago

Great article, really. The hard ones are the edge cases. If you can answer these questions in a clear-cut way then you probably already know whether freemium is for you or not, if you're on the edge the only answer is probably try and see where it leads you, stay flexible and you might be able to push an edge case in to a 'yes'. But be prepared to do a lot of work.

http://jacquesmattheij.com/Handbook+Freemium <- shameless plug.

nl2• 16 years ago

I like the first comment on that:

You missed what I consider the most important question of freemium -- does having a large user base, in and of itself, offer value to the users. I come from the dating site world. Let me tell you, on any social site, if you have a million free users and 10,000 paying users, you're fine; if you have 10,000 paying users and no free users, you're dead: the paying users have nobody to talk to.

Will Freemium Work For You? Questions To Consider

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