understanding freemium: how to create & grow paying customers

Understanding FreemiumHow to Create and Grow Paying Customers

Presented by : Chris Hopf

August 12th, 2009

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A G E N D A

1. Presentation (me)

2. Q-n-A (you)

T H E B U Z Z

The Buzz

Understanding Freemium - How to Create and Grow Paying Customers

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• Where is the Freemium Buzz coming from?• Numerous Articles

(e.g. – New York Times, Financial Times, etc.)

• Tons of Blog Posts (e.g. – Fred Wilson, Andrew Chen, etc.)

• Industry Events / Presentations (e.g. – Start Up School, Startonomics, etc.)

• Chris Anderson’s recent book *Free: The Future of a Radical Price

• Twitter / FriendFeedTweets and Posts galore

What is Freemium ?


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Give something of value away for free,supported by profitable revenue earned

from the sale of an upgrade or complimentary product.

Some of the Main Reason Why . . .


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• Attention / Attract Eyeballs

• Build Awareness

• Network Externalities

• Create a Standard

• Build Communities

• Path to Follow-on Sales

• Gain Competitive Advantage

• Increase Switching Costs (does it really though?)

• Hobby or Charity (not really a business)

Reasons FAVORING Freemium


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• Reduces perception of risk, giving prospects the opportunity to use and experience the value of the solution (favoring trust & loyalty).

• Costs of distributing and supporting digital content continue to decrease (some say close to $0.00)

• User acquisition is expedited, increasing efficiencies and network effects.

- Faster adoption - Greater brand awareness

- Collective intelligence - More defensible (not likely)

- Large base to spread costs over = efficient marketing efforts

Considerations DISCOURAGING Freemium


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• Prospects will make more of an effort to learn about and discover how a solution will benefit them, if required to pay.

• Customers place more value on what they pay for, which also increased retention, renewals and referrals

• You must carefully track ability to convert FREE Prospects into PAID Customers

Conversion Rates vary by product but typically range from 0.05% to 5.0%, with an average of 2.0%

• Depending on your conversion rates, it can be difficult to cover acquisition, support and other costs

TODAY’S FOCUS

1. Already LIVE w/ Freemium

2. About to Go LIVE w/ Freemium

How to Create & Grow Paying Customers . . .


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Begin with that being your objective

Key Points to Consider . . .


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Start Early

• Pre-Beta (even better if at concept, fine tune as you go)

• Launch Beta with a Pricing Page• Establishes value and reference price early

• Begin with a forecast• This requires choosing metrics carefully• Plan for profitability• Yes, assumptions will be made but minimize them



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Really get to know your target market(s)

• Talk to real people (yes, in person)

• Think like your customers• What are they trying to accomplish• How will your solution help them accomplish this• What are the alternatives to your solution

• Have a solid understanding of your value proposition

• This will help you understand what should be included in your Free Offering.



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Design, Develop & Code for Freemium

• Iterate fast, but smart• All features tied to benefits users care about

• A/B Test to understand which features tie to benefits users are willing to pay for

• Have a roadmap • That illustrates and validates relationship between

targeted customer segments and what is included in your various offerings



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Sign-up / Pricing Page is Critical

• Craft & Improve Compelling Calls to Action• Understand & improve your conversion funnel• Tactics to convert Free Users to Paid Customers

• Simple Design & Concise Sign-up Steps

• Include Testimonials

• Three Offerings Minimum (Free + 2 Paid Offerings)



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Free Offering Details (What’s Included)

• Must be crystal clear and easy to understand

• What is in the Free Offering• Consider including Premium Features for limited time

in Free Offering, after which bumps down to only Free features

• How will you release new features (benefits)• Consider making new features available to ALL offerings

for limited time, after which only available in the PAID offering you target them for (ref: roadmap)

Freemium is best . . .


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• in markets with low or no variable costs

• stronger the network effect, the more valuable and defendable the product offering will be

• best with unique solutions with very little alternatives or substitutes

Freemium is best . . .


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• if there are many providers of same solution, then a free version may underscore the commodity nature of the solution and reduce profits for the entire industry/market

• many users get use to not paying anything and tend to be motivated to search for cheapest available

• if you give something away for free, you need to realize profits from some other source / means

LIVE w/ Freemium Examples


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• Dropbox



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• Dropbox

LIVE w/ Freemium Examples 20



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LIVE w/ Freemium Examples 22



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Pricing Observer

A Collection of Approaches to . . .

• Pricing Strategy• Pricing Structure• Conversion Process

http://pricingobserver.com

We capture and monitor the pricing evolution of a variety of products, services and solutions over time.



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Focus on your customers

All employees clearly understand who the target customers are, what the customers' wants and needs are all about, and what your company

does to create and deliver value to those target customers.



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Focus on your competitive advantage

All employees understand how your organization creates value in a way no competitor does and how your products and services set your company apart.

Each employee clearly understands their individual role in communicating and delivering this

differentiation.

This is your competitive advantage.



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Focus on your strategy

All employees are clear about what the organization does and does not deliver to each target customer segment,

and why each unique offering delivers value to the target customers.

Further, all employees see how their individual jobs contribute to delivering and communicating the

particular variations of each unique offering.

Your strategy makes it clear what the company's objectives are and what success looks like.



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Focus on profitable pricing

All employees understand how their individual jobs contribute to the financial

success of the organization.

They clearly see the link between prices, margins, retained margins, cash flow,

market growth and profitability.



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Focus on consistent execution

Successful strategy execution requires aligning the entire organization to strategic objectives.

All employees must be in synch, appropriately equipped and focused on delivering value in every customer interaction - everyday

- every transaction.

Thank You!

Q-n-AContact Infohttp://pricingwire.com [email protected] @pricing

A P P E N D I X

Find out more about Freemium . . . 31

Great Presentations to watch (videos) :http://www.omnisio.com/v/ZW4WTUGdjhG/david-heinemeier-hansson-at-startup-school-08 http://carsonified.com/blog/web-apps/how-to-choose-a-business-model/ Wikipedia : http://en.wikipedia.org/wiki/Freemium 2001 CNET article titled Snapfish scales back free pricing model : http://news.cnet.com/Snapfish-scales-back-free-pricing-model/2100-1017_3-253832.html July 15, 2009 New York Times article titled Xobni Takes the ‘Freemium’ Route, example of launching paid version later http://bits.blogs.nytimes.com/2009/07/15/xobni-takes-the-freemium-route/ Tyner Blain blog post : http://tynerblain.com/blog/2009/02/24/freemium-model/ Fred Wilson blog posts: http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html http://www.avc.com/a_vc/2006/03/my_favorite_bus.html and http://www.avc.com/a_vc/2009/07/freemiumandfreeconomics.html and http://www.avc.com/a_vc/2006/03/the_freemium_bu.html Mark Evans blog post : http://www.markevanstech.com/2008/10/17/freemium-is-not-a-business-model/ June 2008 Mashable article : http://mashable.com/2008/06/13/freemium/ May 2008 CenterNetworks article : http://www.centernetworks.com/clicky-web-analytics-visualization-tools Erick Ries blog post : http://startuplessonslearned.blogspot.com/2009/01/three-freemium-strategies.html Andrew Chen blog posts : http://andrewchenblog.com/2009/01/19/how-to-create-a-profitable-freemium-startup-spreadsheet-model-included/ http://andrewchenblog.com/2008/11/17/how-to-calculate-cost-per-acquisition-for-startups-relying-on-freemium-subscription-or-virtual-items-biz-models/ David Semeri blog post : http://lmframework.com/blog/2009/06/freemium/ Phil Wainewright, ZDNet article : http://blogs.zdnet.com/SAAS/?p=706 Financial Times articles : http://www.ft.com/cms/s/0/350370f2-66a0-11de-a034-00144feabdc0.html?nclick_check=1

http://blogs.ft.com/gapperblog/2009/07/why-venture-capitalists-like-the-idea-of-freemium/ Peter Froberg’s blog : http://www.freemium.org/ Anders Sundelin, The Business Model Database blog : http://tbmdb.blogspot.com/

Dan Zambonini blog post : http://www.boxuk.com/blog/monetizing-your-web-app-business-models

Brad Burnham blog post : http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html Predictably Irrational blog post : http://www.predictablyirrational.com/?p=653&date=1 Broadstuff blog post : http://broadstuff.com/archives/1816-Will-zero-friction-ecosystems-destroy-value.html Seth Godin blog post : http://sethgodin.typepad.com/seths_blog/2009/06/malcolm-is-wrong.html The Free Debate, Squidoo Lens : http://www.squidoo.com/the-free-debate

http://www.omnisio.com/v/ZW4WTUGdjhG/david-heinemeier-hansson-at-startup-school-08

http://carsonified.com/blog/web-apps/how-to-choose-a-business-model/

http://carsonified.com/blog/web-apps/how-to-choose-a-business-model/

http://en.wikipedia.org/wiki/Freemium

http://news.cnet.com/Snapfish-scales-back-free-pricing-model/2100-1017_3-253832.html

http://bits.blogs.nytimes.com/2009/07/15/xobni-takes-the-freemium-route/

http://tynerblain.com/blog/2009/02/24/freemium-model/

http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html

http://www.avc.com/a_vc/2006/03/my_favorite_bus.html

http://www.avc.com/a_vc/2009/07/freemiumandfreeconomics.html

http://www.avc.com/a_vc/2009/07/freemiumandfreeconomics.html

http://www.avc.com/a_vc/2006/03/the_freemium_bu.html

http://www.markevanstech.com/2008/10/17/freemium-is-not-a-business-model/

http://mashable.com/2008/06/13/freemium/

http://www.centernetworks.com/clicky-web-analytics-visualization-tools

http://startuplessonslearned.blogspot.com/2009/01/three-freemium-strategies.html

http://andrewchenblog.com/2009/01/19/how-to-create-a-profitable-freemium-startup-spreadsheet-model-included/

http://andrewchenblog.com/2008/11/17/how-to-calculate-cost-per-acquisition-for-startups-relying-on-freemium-subscription-or-virtual-items-biz-models/

http://lmframework.com/blog/2009/06/freemium/

http://blogs.zdnet.com/SAAS/?p=706

http://www.ft.com/cms/s/0/350370f2-66a0-11de-a034-00144feabdc0.html?nclick_check=1

http://blogs.ft.com/gapperblog/2009/07/why-venture-capitalists-like-the-idea-of-freemium/

http://www.freemium.org/

http://tbmdb.blogspot.com/

http://www.boxuk.com/blog/monetizing-your-web-app-business-models

http://www.boxuk.com/blog/monetizing-your-web-app-business-models

http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html

http://www.predictablyirrational.com/?p=653&date=1

http://broadstuff.com/archives/1816-Will-zero-friction-ecosystems-destroy-value.html

http://sethgodin.typepad.com/seths_blog/2009/06/malcolm-is-wrong.html

http://www.squidoo.com/the-free-debate

Hierarchy of Business Problems

Source: A. Abela @ www.extremepresentation.com

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Return on Investment Inadequate

Investment Level

Inappropriate

Too High in Wrong Areas

Too Low in Right Areas

Profit Level/Growth

Inadequate

Costs Too High

High Fixed Costs

Inappropriate Overhead Allocation

Actual Cost is High

High Variable Costs

Sales/Growth Too Low

Inadequate Market Share

Low Revenue Customer(s)

Low Price/ Purchase

Low Share of Customer Purchases

Low Share of Customers

Weak Retention Slow Acquisition

Market Size Too Small

Target Segment Defined Too

Narrowly

Category Adoption Rate

Too Slow

understanding freemium: how to create & grow paying customers

Business

grow paying

individual

make left

limited time

competitive

paid customers

target customers

paid version