Should I use freemium model? Part 2

We continue to write about the freemium model. In the last publication we talked about the properties of the product, about whether your product is necessary for the market, as well as about the qualities of the representatives of the target audience. It is time to touch on three more important aspects.

4. Make sure your math works.

Let's talk about two things that you must analyze:

Market size: freemium works only in large or rapidly developing markets (in confirmation, it is enough to understand what Dropbox and Evernote are focused on). Assessing the cost to zero, you put yourself on the path of gratuitous "donation" to many. And due to the fact that most of your customers do not pay, you have to collect them by the millions in order to convert as much of them as “paid” ones and keep your business afloat. As mentioned earlier, the conversion of most freemium companies ranges from 1% to 10% (on average 2-4%). Now imagine how many users you need to build a multi-million dollar business, provided that a customer spends no more than a couple hundred dollars a month?

Conclusion: there is no global market - do not use the freemium model!
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Freemium ROI: in addition to striving for global markets, it is important to ensure that the total revenue from “paid” customers allows you to cover the income for servicing everyone! As noted earlier, freemium works only when the cost of the product and its service are comparable to the cost of each additional user.

If the fremium model is right for you, then the ROI after 1 year of work should be positive.

Take into account these two aspects, as well as optimize business processes associated with them - perhaps the most difficult tasks that need to be solved to build a successful freemium business. Pricing and defining the boundary between paid and free service is what will affect conversion, virality, income and ROI. Of course, finding the right solution can only be through trial and error, however, a rigorous calculation of the basic mathematical indicators will help you achieve maximum results.

5. Performance: love your customers.

All investors love a business that can provide a large amount of statistics regarding users. Why? It's simple: such statistics reflect the current state and future prospects of the company. Dividing customers into groups based on time intervals (per day, per week, per month, etc.) helps the freemium business to identify patterns and trends in the process of attracting users, as well as their involvement, conversion and stability / loyalty.

This statistic is also important because the time period from a subscription to the absolute conversion of a user into a paid unit can be very long. In the traditional model of licensed software, the user pays money in order to instantly gain access to the software - in fact, the process of interaction stops at this. As for the freemium business, the "free" user can start using the product several years before the first spending! The only way for a company to understand how “graphically” it is in terms of qualitative and quantitative growth in the number of users is to keep statistics at intervals and track dynamics.

Note : Please note that someone likes to love reporting in excel format, while someone loves a couple of slides with main figures. However, in both cases, it is important to highlight precisely these two advantages:

a) Insight conversion and loyalty: statistics of customer groups allows the business owner to understand the insights, invaluable, in comparison with the information he receives in the process of developing and implementing a product, as well as setting the price for it.

For example (evaluation of key metrics, such as):

• What is the typical user behavior 3 months after the first “contact” with your service? In a year? After 3 years?
• What is the value of a free client for your business?
• Attracted by different channels users - do they show different dynamics?
• How do product modifications and additions change user behavior?
• How do price fluctuations affect the conversion of free users into paid ones?

b) Visibility: using quality statistics of freemium users, a business can become predictable in the growth process (something that both CEOs and investors adore). In a given period, a freemium business makes a profit through 3 channels:

• "Paid" users, converted since the beginning of the use of a product or service.
• "Paid" users who have become such over time.
• New users, which in essence can be both the first and second.

Armed with statistics from previous periods, the founder of the freemium business can, with a high degree of probability, predict how many users will spend their hard-earned money in the next quarter.

6) And what about freemium?

Even though the freemium business can be super scalable and highly profitable, such a model should not be perpetuated in your mind. Many successful software companies have moved away from such a model and adapted their business to the needs and demands of the client, using other strategies. They insisted on the following postulates:

a) Sales is not the enemy of this business. While freemium companies successfully created “light” products that immediately turned users into customers, they suffered from a lack of a good sales person in the state. After Dropbox and others moved into the category of “corporate” services, they quickly realized that the sales department had to enter into transactions.

Study your client! Even if your sales model does not match his expectations - adjust. Freemium companies have the potential to build a strong sales system around their product. Moreover, the freemium business has an advantage over its “paid” counterparts in the form of thousands, or maybe millions, of customers in love with the product. For example, Dropbox has a huge number of loyal customers who, potentially, can purchase and paid services of the company.

b) There are companies that take advantage of the freemium model, without actually offering a product for free! They simply give the customer trial periods for using the service or product, which, combined with a reasonable price and high quality, creates a powerful “self-selling” tool. Of course, they lose a little in the number of users, in comparison with the classical freemium model, but this does not prevent them from building a rapidly growing and profitable business.

Instead of a conclusion.

Freemium - of course, a model that is not suitable for every company. However, competently using it, you can take a worthy place in the market. In the near future, there will surely appear companies that will become major players due to the correct application of the basic tricks of freemium and the experience of their predecessors, which is described in this article.

Our last piece of advice: before you become the free future of freemium business, make sure that you, like all successful startups, above all, offer a product of the highest quality that solves the pressing problems of a large number of people on the planet.

Good luck!

UPD: I would be grateful if you tell me about the personal experience of using the freemium model, the markets of Europe and China are especially interesting.