Should I use the freemium model? Part 2

Original author: Jules Maltz and Daniel Barney
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We continue to write about the freemium model. In the last publication, we talked about the properties of the product, about whether your product is needed by the market, as well as the qualities of the representatives of the target audience. It is time to touch upon three more important aspects.

4. Make sure your math works.

Let's talk about two things that you should definitely analyze:

Market size: freemium works only in large or rapidly growing markets (to confirm it is enough to understand what Dropbox and Evernote are oriented to). Having estimated the cost to zero, you put yourself on the path of free “giving” to many. And due to the fact that most of your customers do not pay you, you will have to collect them in millions, so that the maximum possible part of them will be converted into “paid" ones and keep your business afloat. As mentioned earlier, the conversion of most freemium companies ranges from 1% to 10% (an average of 2-4%). Now imagine how many users you need to build a multi-million dollar business, provided that the client spends no more than a couple hundred dollars a month?

Conclusion: there is no global market - do not use the freemium model!

Freemium ROI: in addition to striving for global markets, it is important to ensure that the total revenue from “paid” customers allows you to cover the revenue for servicing everyone! As noted earlier, freemium only works when the cost of the product and its maintenance are comparable to the cost of each additional user.

If the fremium model suits you, then the ROI after 1 year of operation should be positive.

Considering these two aspects, as well as optimizing the business processes associated with them, are perhaps the most complex tasks that need to be solved to build a successful freemium business. Pricing and defining the boundary between a paid and a free service are what will affect conversion, virality, revenue, and ROI. Of course, finding the right solution is possible only by trial and error, however, scrupulous calculation of the basic mathematical indicators will help you achieve maximum results.

5. Performance: love your customers.

All investors love a business that can provide a large amount of statistics regarding users. Why? It's simple: such statistics reflect the current state and future prospects of the company. Dividing clients into groups based on time intervals (per day, per week, per month, etc.) helps freemium business to determine patterns and trends in the process of attracting users, as well as their involvement, conversion and stability / loyalty.

This statistic is also important because the time period from a subscription to an absolute conversion of a user to a paid unit can be very long. In the traditional model of licensed software, the user pays money in order to instantly get access to the software - in fact, this process of interaction is interrupted. As for the freemium business, the “free” user can start using the product a few years before the first waste! The only way for a company to understand how it is “on schedule” in terms of qualitative and quantitative growth in the number of users is to keep statistics at intervals and track the dynamics.

Note: note that someone loves reporting in excel format, and someone loves a couple of slides with the main numbers. However, in both cases, it is important to highlight these two advantages:

a) Insight conversion and loyalty: statistics of customer groups allows the business owner to understand insights that are invaluable in comparison with the information that he receives during the development and implementation of the product, as well as setting the price for him.

For example (assessment of key metrics such as):
  • What is the typical user behavior 3 months after the first “contact” with your service? In a year? After 3 years?
  • What is the value of a free customer for your business?
  • Attracted by different channels users - do they show different dynamics?
  • How do product modifications and additions change user behavior?
  • How do price fluctuations affect the conversion of free to paid users?

b) Visibility: with the help of qualitative statistics of freemium users, a business can become predictable in the process of growth (something that both CEO and investors adore). In a given period, freemium business profits through 3 channels:
  • “Paid” users who have converted since the start of using the product or service.
  • "Paid" users who have become so over time.
  • New users, which in essence can be both first and second.

Armed with statistics from previous periods, the founder of a freemium business can predict with high probability how many users will spend their money in the next quarter.

6) And what after freemium?

Even though the freemium business can be super scalable and highly profitable, such a model should not be “immortalized” in your mind. Many successful software companies have moved away from this model and adapted their business to the needs and requirements of the client, using other strategies. They insisted on the following postulates:

a) Sales are not the enemy of this business. While freemium companies successfully created “light” products that immediately turned users into customers, they suffered from a lack of a good “sales person” in the state. After Dropbox and others moved into the category of “corporate” services, they quickly realized that the sales department should conclude deals with them.

Explore your customer! Even if your sales model does not meet his expectations - adjust. Freemium companies have the potential to build a strong sales system around their product. Moreover, the freemium business has an advantage over its “paid” counterparts in the form of thousands, and maybe millions of customers in love with the product. So, for example, Dropbox has a huge number of loyal customers, which, potentially, can purchase paid services of the company.

b)There are companies that take advantage of the freemium model without actually offering the product for free! They simply give the client trial periods for using the service or product, which, combined with a reasonable price and high quality, creates a powerful “self-selling” tool. Of course, they lose a little in the number of users, in comparison with the classic freemium model, but this does not prevent them from building a rapidly developing and profitable business.

Instead of a conclusion.

Freemium is certainly a model that is not suitable for every company. However, correctly using it, you can take a worthy place in the market. In the near future, there will certainly appear companies that will become major players through the correct application of the basic freemium tricks and the experience of their predecessors, which is described in this article.

Our last advice: before you become a “bright future” of freemium business, make sure that you, like all successful startups, first of all, offer the highest quality product that solves the pressing problems of a large number of people on the planet.

Good luck

UPD: I would be grateful if you tell us about your personal experience in using the freemium model, the markets of Europe and China are especially interesting.

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