About Freemium Monetization Model

Freemium word-building appeared in the language of investors and developers not so long ago - it was introduced into use by Fred Wilson in 2006. This concept came about from the merging of two words - Free and Premuim, and means, respectively, such a model of service provision, when the user gets the basic capabilities of the service for free and then has the opportunity to expand them by paying for a Premuim account.



The question is whether this model is suitable for everyone, and how to make it work. I will try to answer these questions in this article.

How does the freemium model work

1. Free high-quality service allows you to dial the initial user base project.
2. As the service is used, the attractiveness of the service and the user's loyalty increase (as a rule, this happens due to the actions of the user himself - he uploads files, accumulates data, gets used to using the service).
3. Then the user understands that he lacks something in the basic service (restrictions can be both natural and artificially created), and some users acquire advanced premium services in order to remove these restrictions.
4. The income received from sales of premuim services covers business expenses including the provision of free services. And if the business creator was not mistaken in the calculations - the business becomes profitable.

What business is best for Freemium?

It should be understood that Freemium is a long-term business strategy, which is more suitable for the “big guys” than any bootstrapping startup. Marked sales of premuim accounts do not begin immediately, and often not even in the first year of the project’s existence. All this time it must be maintained and developed - for this, the project creators must have a serious margin of safety.

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In addition, the freemium model is not suitable for any service. The main principle is that the service should become more attractive to the user, the longer he uses it. The accumulation and storage of large amounts of user data by the service is very well converted into premium subscriptions. (In addition, the cost of data storage with the development of technology is gradually reduced, which gives additional chances for investors who are ahead of the curve.)



Among the services that are most often offered in premium versions, one can still highlight:

• removal of any functional limitations of the basic version (as a rule, this concerns complex projects rich in functionality);
• reduction or complete removal of the advertisement displayed to the user;
• extended support service;
• advanced security / privacy settings;
• visual selection of premium users among the rest.

Another thing to note is that the viability of the Freemium model requires good performance in retaining the audience. If your project offers a one-time service, and the percentage of repeated calls is too small, it will be difficult for you to grow the core of premium clients among such audiences.



And of course, your service should be able to crush to free and premium-services. With this, I think everything is clear.

The most famous web-projects on the freemium model

The first thing that comes to mind is Gmail . Mail from google now provides a free mailbox of up to 7.5Gb (and gradually increases this volume - in 2004, if you remember, it all started with 1 Gb), and if you don’t have enough of it - you can purchase an additional 20 Gb in just 5 $ per year. The same goes for Picasa - photo hosting from Google (they use a single limit of disk space with Gmail).



This is an example that is in full view, but apparently, Google has not seriously set a goal to earn on premium accounts (probably, freemium is well complemented by an advertising model here).



Among other well-known mass services built on freemium:

• Flickr (photo hosting, owned by Yahoo) - premium options remove restrictions on the number of uploaded photos and their size, on the number of created albums, and also provide additional statistical services.
• Evernote (personal note storage service) - in premium accounts offers higher limits on the amount of monthly downloadable data, work with additional file types, synchronization via SSL and advanced collaboration tools.
• Dropbox (file storage and file sharing) - here premium-account simply increases the amount of available disk space.

Two freemium cases with numbers

In an interview in 2009, Phil Libin ( Evernote ) shared curious figures. So, according to him:

• in the first 18 months of the project’s life, 1.4 million people used the service at least once;
• about 75% of users leave within the first 4 months;
• more than 4,500 users are registered every day (figure for summer 2009);
• revenue from 500 thousand active users is growing at a higher rate than the total number of users;
• only 0.5% of users buy subscription to premium-service in the first month after registration;
• but a year later, this conversion rate rises to 4%;
• Libin himself calculates that over time this figure will rise to 22%;
• in the first month of use, the average income per user is only 3 cents, but after a year this figure rises to 35 cents;
• Evernote's premium subscription earnings for June 2009 were $ 79,000;
• and in the spring of 2010, the number of premium users exceeded 50,000;
• Libin plans to reach operational payback in early 2011 (3 years after launch).

A few more numbers on Dropbox :

• the project was also launched in 2008;
• at the beginning of 2010, the project had about 4 million registered users, a staff of 20 people and stored several petabytes (thousands of terabytes) of information in the Amazon S3 cloud;
• about half of them were active (that is, they used the service in the last month);
• in 2010, the audience of the project grew by about 4-5 times;
• because the project essentially formed a new market, it faced the high cost of attracting a free user - it gained a referral program, which in 2009 brought up to 30% of new user registrations;
• and the end of 2010, the startup received an investment of $ 7.25 million (in 3 rounds);
• project financial indicators are not published, but according to some estimates, premium accounts acquire about 2% of all users;
• that in terms of current audience should give an annual revenue of $ 30-40 million