Monday, July 19, 2010 at 3:20PM Going from "free" to "fee" and making money on the world wide web: How the freemium model works.
"Easiest way to get 1 million people paying is to get 1 billion people using."
It's a challenge to more than a few online businesses: How does one go about making money by charging for something that used to be free--but no longer is? Let's face it, no matter where you run a business in terms of either brick or clicks, it's imperative that you make a profit--at least eventually! Since so much content and so many services during the pioneering days of the internet were for free--still are for "free"--prospective customers represent a pretty difficult bunch to convert to paying customers. The conundrum is: How do you make real money in a world that thinks free? In other words, how to does one get "free" to help you make money?
Enter Phil Libin, CEO of Evernote, an online service that helps you organize your life and store the "content" of it--such as Web articles, text notes, voice records, photos, and so on--in the cloud. For many, Evernote's services are free, but for others there's a cost; these two categories constitute the guts of what's called the "freemium" model; this is where you give your service away to most of your users and make money when some decide to pay for addition benefits.
What's needed to make this succeed is the potential of a large audience, low operating costs, and an attractive package--at least to some--of "must-have" premium services. For Evernote, what's involved is a three-part process: First, win millions to the free services; then, convert active users to premium status over time; and, finally, keep your operating costs low.
How does Evernote succeed?
After thirty days as free users, about .5% of convert to premium users, paying $5 a month [or $45 a year]; after 6 months conversion rate double to 1%; after 2 years about 6% have started paying for additional services and privileges. In the operation of Evernote, this breaks even at a 1% rate of premium conversion. What's an especially interesting point for some is how Libin strives to stay under a conversion rate of 5%; if he achieves a higher rate, "that means our free products isn't good enough--and if our free product isn't good enough, what's the point of being freemium?"
In a historical sense the freemium model shrewdly combines the various marketing strategies of product sampling to gain trial, attention to product innovation to gain competitive edge, and using word-of-mouth to promote the product in a way that starts the cycle of exposure to [free] trial to [premium] adoption all over again for a new round of customers.
It is possible to make money from free!
If costs are held down, and the price is "right," the premium users allow the firm to make an attractive offering in the marketplace of products, further refine a product package that is market responsive, market effectively, and, above all, make a profit--by mostly selling "free."
I don't know about you, but I buy more than one such freemium product. The one that comes to mind is YouSendIt, a company that allows users to make overly-large eMail transmissions for free--but with streamed advertising during the up-load and down-load process; if you elect to pay a small fee [monthly or annually] you get additional benefits, including avoiding the advertising while the transmission is being made. [I, obviously, choose to avoid the commercial messages that I send being seen by my clients and eMail recipients.] There are others, but that's beside the point.
The internet has been a particularly seductive siren of commerce in the sense that it offers the chance to segment and target pretty carefully and, at the same time, to reach customers at virtually no-to-negligible cost. Many firms have broken up on the rocky shoals of starting with or departing from a strictly "free" basis of patronage to one where money needs to be transacted. A better understanding of the freemium model would have saved them.
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Reader Comments (1)
I think that for the freemium model to succeed, the "paid product" must offer value that is not otherwise available for free. This is where I see the Wired Magazine, Sports Illustrated and Time iPad apps failing. They all charge a premium, in the neighborhood of $5. However much of the content they sell is available on their own web sites for free. These sites are easily browsable on the iPad. Additionally, one can obtain a subscription for the paper magazine that reduces the per-copy cost to less than a dollar.