Download PDFWe’re big fans of the Freemium model, when it makes sense. The beauty of the Freemium model is that it boasts two key ideas about your company or product:
- Willingness to create value for everyone - the free part
- Confidence in the value of your whole offering - the premium part
The most difficult challenge when implementing a Freemium model is determining which vector to use as you lasso off the features that matter most. Currently, most will impose limits on:
- Usage - how much of the system you can utilize
- Features - which specific tools and services are available to you
The good news is that, if you truly have the mixture right, you can have some pretty compelling revenue. Don Dodge reports on some of his findings from the DealMaker Forum:
The companies presenting at DealMaker Forum are seeing 1.5% to 5%, with most of them averaging around 3%. Doesn’t sound like much but they are reaching tens of thousands of users…sometimes well over 100,000.
Do the math. 100,000 free users convert to 3,000 paid users. They pay between $10 to $50 per user per month. Lets use $25 as an average. That is $75K a month or $900K per year. That is an excellent revenue stream for companies that typically have 3 to 5 employees. And, it is an annuity stream that continues to grow every year. By the 3rd or 4th year these small companies can be generating $3M to $5M a year, still with less than 10 employees. Most of these small companies don’t take Venture Capital so they own the whole company. pretty good cash flow business.
Source: Don Dodge, on the Next Big Thing, “Freemium - Free to paid conversion rates”
The key question, of course, is if you can generate 75K on 100K users, or some variant of that, does your infrastructure stay standing at that level.
Technorati Tags: don+dodge, freemium, monetization, rapid+prototyping, startup, startup, startups
May 17th, 2007 at 1:27 am
I totally agree with you ….when services are offered free …companies tend to form communities where user submit bug reports ,generate ideas interact with company on forums and wiki etc and which also act word by mouth publicity campaign !! One good case study would be Skype ..started off a very small VOIP …created a huge user base with its free and easy to use pc to pc VOIP and premium PC to Phone …. it popularity spread only word by mouth (viral marketing) and users/companies started own blogs, websites , plugins and product based on skype while skype pockted billions (skype ebay deal)
May 17th, 2007 at 3:33 am
Thanks for the intro into the numbers behind the model Greg. The freemium model has definitely been proven time and time again.
I will never forget all those darn AOL CD’s that seemed to show up every where from my physical mailbox, to the post office, to retail stores. I ended up using the CD’s as coasters, but the freemium strategy proved successful in getting millions upon millions of users in this example.
Today, Web 2.0 companies like 39signals.com is yet another example of the continuation of the success of the freemium model.
May 20th, 2007 at 11:22 am
We have all seen excellent examples of freemium with Flickr which is doing extremely well in my opinion!
Congratulations on the new design! Looks great!