Should I use the freemium model? Part 1

Original author: Jules Maltz and Daniel Barney
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Your attention a free translation of the article Julie Maltz ( Jules Maltz ) and Danielle Barney ( by Daniel Barney ), partners IVP , which specializes in investments in the late stage of the rapidly evolving Internet startups and software companies.

For many months, the issue of the profitability of the freemium business model has been actively discussed. Some argue that this is an “expensive” toy, because such a model sacrifices revenue, in every way supporting free downloads by users who will never become “paid” customers. Others take a different point of view and say that freemuim is the future of business, the logical conclusion to the development of the information world, in which the cost of network bandwidth, storage and data processing tends to zero.

They agree on one thing: freemium is a very powerful model. It looks like a samurai sword: until you master the art of utilization to the highest degree, you can “chop off your hand”.

In fact, freemium is an all-destructive model that must be used wisely. Based on communication with the leaders of Dropbox, Evernote, HootSuite and others, 6 main tenets of the use of such a business model were compiled.

1. Start with the product.


The idea that constantly pops up in the thoughts of company executives: the startup leader must be sure that his No. 1 priority is a product. Developing a quality product is as important a task as it is difficult to build a freemium business model. An ideal freemium product does not require marketing, it attracts new users (“paid” and “free”) with minimal effort and cost. This is possible only when the product you created “falls in love” with users on its own.

The conversion of users into “paid” customers for a typical freemium startup is from 1 to 10 percent. As a result, such a startup should have low cost and low costs for sales and marketing. Failure awaits if sales, delivery, or product support is too expensive. The product should attract customers due only to its "internal" advantages and advantages. For the user, it should be simple and "working." This does not mean at all that the product will be primitive and stupid - a dummy, although free, is still not needed by anyone.

Please note that the level of complexity and quality of your product must correspond to both "free" and "paid" users. Many freemium companies fail just because they offer users a “sophisticated” product that does not, however, carry any value. In fact, supplying users with an “average” product, you noticeably reduce the likelihood of changing “free” users to “paid” ones, thereby destroying the whole point of using the freemium model at the core of your business. Value for both groups of customers and continuous improvement of their own product is the key to success.

Once you have created the perfect product, it's time to thoroughly examine your client.

2. Do you need a freemium product for your main target audience?


Freemium, like a subscription or a perpetual license, is just one of the tools that help sell your product. Your first priority is to understand the client’s problems and invent a solution to these problems. Once you succeed, you can begin to experiment with your product and, based on customer feedback, understand how much the freemium model suits you.

We suggest you answer a couple of questions in order to determine the profitability of freemium:

A) How complicated is your product? If you enter a market where buyers are looking for RFP, RFI and other strange acronyms with deep meanings, it is very likely that the idea of ​​your product is too complicated for freemium.

In order for the model to start working, your client must be able to understand and start using the product very quickly, without much getting used to and adapting to it. If it is assumed that the user should first read the instructions or study the demo, then freemium is probably not a suitable model.

B) Will your customers be driven to “free cheese” in a mousetrap?How would you react if a stranger suggested you sit with your child for free? Would you take a strange-looking sofa on the corner of the house if you could do it for free? The likelihood that a person will say “no” to a free offer is too high, because from childhood he learned that nothing qualitative and free at the same time happens in life. In different situations, a person is ready to either pay for the use of a product / service, or completely abandon it, in view of the large time costs.

If you realize that freemium is still suitable for you, it is time to understand the value of your “free” customers, and also to understand how the model fits your vision of the business.

3. The value of free customers.


Free users only matter when they benefit your business. The most “seductive” freemium trap is the easy and low-cost attraction of new customers. Which entrepreneur does not want to reach the mark of 100 thousand, 1 or even 100 million users around the world? The point is that if all these 100 million never (directly or indirectly) pay for the use of the product, then they risk becoming a big burden that will slowly ruin the company. For freemium to work properly, free users must belong to one of two categories:

A) Free users who become paid.

They do not pay anything today, but if you understand the statistics and dynamics, you can predict how many of these people will pay you tomorrow.

A key attribute of a product: People recognize the value of your product over time.

Example: Evernote. On the first day, the new startup Evernote did not have much content. The only thing users could do with the product was to invent their own, unique content. After they created a sufficient number of notes, the founders returned to the product to integrate it with other services.

Note: I once had a chance to meet their CEO Phil Libin, since he speaks excellent Russian. One of the topics for discussion was their business model. As it turned out, they’re not so simple: it’s strategically important for them that the percentage of paid users does not increase.
To my question “why?” He replied: “Then we will understand that the free Evernote functionality is not good enough, and since we want to go global, we need the number of free users to continue to increase, and then 3-4% of paid users will be bring more profit. By the way, exactly 3-4% serve us as a trait for which we do not want to step over. ”

B) Free users who attract paid.

These users also pay nothing today, and most likely will never pay. However, their loyalty to your product will attract other customers who will use the service for a fee. In any case, they can be considered one of the marketing channels that do not require large expenditures from the budget and with a fairly measurable ROI.

Key Product Feature: Virality

Example: SurveyMonkey. An online survey service is a good example of a viral product. Free customers who create tons of surveys are key to attracting hundreds of other new clients for SurveyMonkey. With the right approach and conversion, such a tool can be very effective as a channel for attracting users.

To be continued ...

UPD: If you have examples of the use of the freemium model in your companies, well!

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