Andrew Chen Archives

Freemium pow-wow!
My friend Charles Hudson and I recently co-hosted a dinner conversation on the topic of Freemium business models. First, a quick blug: if you aren’t reading Charles’s blog, you should check it out! He runs BD at Serious Business up in San Francisco, and also has put on a number of great conferences like the Social Gaming Summit.

Anyway, we had a bunch of interesting people on hand, including folks who were working on monetization from a bunch of companies. The dinner was generously hosted by Bluerun Ventures, and we ate a lot of pizza. We had folks from places like:

• Xobni
• LogMeIn
• YouSendIt
• Puzzle Pirates
• Dropbox
• Imeem
• Dogster
• Crazy Egg
• etc.

There were a couple of key themes in the conversation, which I’ll outline below.

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.

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:

• 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.

(am I missing any? Please write me a comment! Will drill into these in more detail sometime)

UPDATE: Ted Rheingold from Dogster also added a couple ideas that came up – see the list below:

• The higher the price point, the less churn/drop-off amongst subscribers.
• Offer users a 30-day free version of the premium right next to offer to join free service. Put the two free offers side by side so people a) know they are making the choice for the premium version, b) less likely to be concerned about a ‘catch’
• Offer a money back guarantee period once payment starts.
• On the consumer side do not overlook the emotional motivation to subscribing. Whether it to feel a part of the club, to show your elevated commitment, or to keep moving up the kicking-ass ladder (see Kathy Sierra) subscribing to even utility services such as LinkedIn can have a very strong emotional component.

Many of these tactics have been used by successful players in the market – the most often used examples are ZoneAlarm, eFax, AVG, and others. In fact, here’s a longer Linkedin discussion with many of those brands and more. Sean Ellis in particular is an expert on this area.

Note, of course, that most of the above tactics and examples stem more from the enterprise world, whereas the consumer folks tend to use different examples – like Skype, Cyworld, etc.

Key idea #3: Freemium products face common design challenges
As a corollary to having a playbook of different tactics, you might also imagine that Freemium products must have similar design challenges as well. In particular, the biggest question of freemium is:

When does Free stop and Premium start?

On one hand, if you give away too much, then your conversion rate from free-to-paid ends up being too low. This means that people are too easily satisfied with your product, and have no reason to convert to being a paid user.

On the other hand, if you force the user to premium too early, then you lose out as well. They may not give your product a chance, and move on to something else, before they start down the path of converting to a premium user. Similarly, the free segment of your audience can help drive distribution and virality, and without that group, it becomes much harder to get meaningful amounts of traffic.

Charles Hudson has a great discussion of this design issue on a recent blog, where he writes:

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.

You can read more here. The longer blog goes into the discussion of the best way to segment free versus premium, and whether it’s better to go with a trial period with a full premium product, or if it’s better to go with a stripped-down Free product and a separately upgraded Premium product. This segmentation is a key design issue in the Freemium world.

Special thanks to Hiten Shah for helping me recall some of the bullet points!

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