Making Freemium Work: Converting Free Users To Paying Customers

Are you interested in the Freemium Pricing Model?  A Panel of Venture Capitalists discussed the freemium business model at Google I/O 2010.  If you do not want to watch the 59 minute panel on youtube, here is a quick synopsis of the panel and some takeaways for entrepreneurs who are considering a Freemium Pricing Model.

Panelists of Venture Capitalists on the Freemium Business Model

  • Brad Feld – Foundry Group
  • Dave McCulre – Founders Fund
  • Jeff Clavier – SoftTech VC
  • Matt Holleran – Emergence Capital
  • Joe Kraus – Google Ventures
  • Don Dodge – Google (Moderator)

Here are my Notes on this hour long Forum on “Making Freemium Work”

-Rule of thumb for Freemium Business model for B2C: 2% Conversion from free to premium purchase *based on VC data*

-Enterprise – B2B – give away something broadly to get distribution as you build out the product and get more people using the product, then get people to pay.

Dave McCLure: Why offer something for free?

  1. Try to give user time to understand what the product is – product benefits
  2. Distribution benefit – The ability to virally spread the word about your product to other customers
  3. Network benefit – free rider as long as you are participating in the network – ie Facebook, Twitter – Goal is to get 50 million + users
  4. Brad Feld – Direct vs indirect revenue models. -He gives an example of his portfolio company Feedburner.  Free vs $5 per month.  When Google purchased Feedburner, they had 500,000 customers, 2,000 paid $5 per month and 3,000 were using Feddburner for free.  By having publishers , the indirect model becomes ad impressions on all content published.  Google realized it was more beneficial to have all publishers creating content and monetize ad impressions.  Take Away: Don’t lose sight of indirect versus direct Freemium business model.

Product Feature segmentation in Freemium Business Model.  What features of the product should be Free Versus Paid?

  1. Viral Features – put on free side
  2. Sticky Features – engaging customers put on paid side

How Does a Freemium Business Model Effect Employees?

Freemium creates a split personality internally with employees.  Some employees will fight for the customer and how to grow the company quickly versus other employees who will fight that certain features are so valuable that they should cost money.  According to Dave McClure, this is a good thing for companies!

  1. Create utility – customer happiness
  2. Business value – how to make the most $ for the company

Don: If the free product is so good and you are getting so many customers, you can limit the feature usage to price the product.

Matt Holleran: Key Take Away: When starting the company with the Freemium Model, you need to have a clear defined runway for user functionality for an individual or a large group (enterprise application).

Freemium Business Model and Pricing: How Do I Price My Product?

When starting a business and thinking about pricing your product with the freemium model, your original thoughts on how consumers will react is probably wrong.  A good book to read is  Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions. Your company must be agile and flexible enough to listen to customer feedback and adjust the business accordingly.

It’s much easier to raise prices than lower prices.  If you raise prices, customers feel like they got a deal.  If you lower prices, those customers get pissed off.  Start with low prices, then slowly raise prices and measure the incremental average revenue per customer on a weekly basis.

Dave McClure: On Pricing: if there are no competitors in the marketplace, “Charge through the fucking nose.”

The Importance of Analytics and Measuring User Behavior with the Freemium Business Model

Brad Feld: Every company should be obsessed with daily metrics/analysis on the product usage.  Daily and Monthly active user.  Understanding how that changes over time especially when new features are added.  Why are certain features being used more than others?

Joe Kraus: Don’t make people think hard.  Pay as you go model makes people think about how much they will use your product.

Joe Kraus: Famous HP Phrase is, “you make what you measure.”  Before you launch a product, make sure you have analytics ready.  It happens far too often that companies do not track customer usage when the product is launched.

Watch “Making Freemium Work” Live

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