March 27, 2013

Freemium strategy and getting free users to pay

Turning a product with a freemium business model into a great business is tough, but can be done both for B2B and B2C. The reason to have a freemium business model (instead of paid-only) is to get more users to try the product and effectively lower customer acquisition costs.
There are three different types of free economics for freemium services.
  • An online service can ideally be paid-for with advertising from third party advertisers. Marginal costs can be as high as the advertising-sales will cover.
  • If the service is not paid-for by advertising, the free service should provide brand awareness and leads for the paid service at lower cost than trial/traditional sales. Marginal costs needs to be low.
  • A downloadable software (like MySQL or WordPress) can be provided with no marginal costs (depending on how distribution is managed) can be provided for free.

In order to convert free users into paying users and revenue, a company needs to work on multiple areas. There's a lot of learnings to be had in each area, which a company will gain over time.
  • Premium business model - Is it a one-off payment, a membership/subscription or a virtual goods/usage based type model? Preferably the model matches the long-term costs of operating the service. Together with pricing it's the main driver of long-term revenue and customer lifetime value.
  • Pricing - Finding the right price point is essential. Just because 'everyone' in media charges $8-10 per month doesn't mean it's right for your service or product. B2B should likely be much higher. Offer pricing for 3, 6 and 12 months instead of one month makes a lot of sense too, not least to fight churn. 
  • Premium product features - At least one must-have feature that highlights an important difference between the free and paid version. Preferably you have several strong features that give the users the reason to pay.
  • Promotion - You need to actively communicate with free users why they should upgrade. You need several channels (in-product, e-mail, notifications, text messages) and a plan that gives you reason to reach out to users over-time. 
  • Conversion - You need to work on landing pages or other sales/closing techniques (which could be telephone or in-person meetings) to get users to upgrade. 
  • Payment options - Need to be adapted depending on if the customer is a consumer or a business, the country of users and the age of users. Credit card and Paypal works well in the US to consumers older than 18 years old. Premium text messaging works well for teen audiences (even if premium text messaging is a pretty bad payment option technically). For a B2B product, offering invoicing makes sense. For Brazil, Germany, Netherlands, Sweden etc there are local payments options that drive sales. Payments also includes the important aspect of churn due to technical payment errors (a significant source of overall churn for a subscription churn) if the business model is a subscription model. 
  • Language - If the service has many non-English speaking users, the service/product, communication and conversion pages need to be translated to drive conversion (and usage of free product).

(This post was adapted from a comment I made at the news community Quibb.)

1 comment:

Fritjof Andersson said...

Hey, great blog post, man! You've got some really good stuff in there.

For I was playing around with something I called demium, a combination of freemium and demo: a full demo the first x days, then light freemium version. We then realized it was just too messy and in the end not a good thing for the actual user, so we skipped the whole freemium part and went straight to a classic demo setup.