Sign up for my email newsletter

Get new updates, usually once a week – it features long-form essays on what’s going on here in Silicon Valley.

I’ve written 550+ essays which have been featured and quoted in The New York Times, Fortune, Wired, and WSJ. The topics range from mobile product design to fundraising to “growth hacking.”

Thanks for reading. -Andrew

Close

@andrewchen

Subscribe · Featured · Recent essays

3 key ideas from a recent Freemium dinner conversation

Freemium pow-wow!
My friend Charles Hudson and I recently co-hosted a dinner conversation on the topic of Freemium business models. First, a quick blug: if you aren’t reading Charles’s blog, you should check it out! He runs BD at Serious Business up in San Francisco, and also has put on a number of great conferences like the Social Gaming Summit.

Anyway, we had a bunch of interesting people on hand, including folks who were working on monetization from a bunch of companies. The dinner was generously hosted by Bluerun Ventures, and we ate a lot of pizza. We had folks from places like:

  • Xobni
  • LogMeIn
  • YouSendIt
  • Puzzle Pirates
  • Dropbox
  • Imeem
  • Dogster
  • Crazy Egg
  • etc.

There were a couple of key themes in the conversation, which I’ll outline below.

Key idea #1: There’s Consumer freemium, and there’s Enterprise freemium
First off, there was a strong distinction between the usage of freemium in the enterprise versus consumer. In many ways, it was as if there were two completely different conversations going on. In the consumer world, the focus is very much on topics like: payment methods, virtual items, subscription vs microtransactions, etc. In the enterprise, much of the focus is more on the IT infrastructure, departmental structure, expense reports, etc.

I think ultimately the distinction comes down to the fact that in the consumer world, people are spending their own money – as a result, they are much stingier, the demographics are more difficult, and you’re often an entertainment experience competing with other discretionary products. Compare this to enterprise, where the goals are more often utilitarian, and business users can more easily justify an ROI with the tools. Furthermore, because the users live in a broader business ecosystem, you have to deal with the IT organization, as well as the opportunity for people to simply expense their freemium costs.

Key idea #2: Freemium playbook has already been written
Another interesting discussion revolved around the fact that many of the basic tactics in the freemium world have already been documented and used by previous players.

In particular, there are tactics out of the playbook such as:

  • 30-day free trial (with credit card upfront)
  • Free service platform that upsells multiple premium products
  • Freemium service that disrupts existing pay-only product category
  • A/B testing pricing, purchase flows, etc.
  • Achieving purchases by optimizing the new user experience
  • Default to premium product, but allow the user to skip to Free
  • Lifecycle-based discounts and upsells
  • Start with a high price but A/B test coupons to price test
  • etc.

(am I missing any? Please write me a comment! Will drill into these in more detail sometime)

UPDATE: Ted Rheingold from Dogster also added a couple ideas that came up – see the list below:

  • The higher the price point, the less churn/drop-off amongst subscribers.
  • Offer users a 30-day free version of the premium right next to offer to join free service. Put the two free offers side by side so people a) know they are making the choice for the premium version, b) less likely to be concerned about a ‘catch’
  • Offer a money back guarantee period once payment starts.
  • On the consumer side do not overlook the emotional motivation to subscribing. Whether it to feel a part of the club, to show your elevated commitment, or to keep moving up the kicking-ass ladder (see Kathy Sierra) subscribing to even utility services such as LinkedIn can have a very strong emotional component.

Many of these tactics have been used by successful players in the market – the most often used examples are ZoneAlarm, eFax, AVG, and others. In fact, here’s a longer Linkedin discussion with many of those brands and more. Sean Ellis in particular is an expert on this area.

Note, of course, that most of the above tactics and examples stem more from the enterprise world, whereas the consumer folks tend to use different examples – like Skype, Cyworld, etc.

Key idea #3: Freemium products face common design challenges
As a corollary to having a playbook of different tactics, you might also imagine that Freemium products must have similar design challenges as well. In particular, the biggest question of freemium is:

When does Free stop and Premium start?

On one hand, if you give away too much, then your conversion rate from free-to-paid ends up being too low. This means that people are too easily satisfied with your product, and have no reason to convert to being a paid user.

On the other hand, if you force the user to premium too early, then you lose out as well. They may not give your product a chance, and move on to something else, before they start down the path of converting to a premium user. Similarly, the free segment of your audience can help drive distribution and virality, and without that group, it becomes much harder to get meaningful amounts of traffic.

Charles Hudson has a great discussion of this design issue on a recent blog, where he writes:

It is very difficult to properly segment users and features such that you provide enough value to both paid and free audiences. For example, an email service that provided a 10 MB of storage for free and 1 GB for the paid version would have a hard time surviving – the basic offering isn’t sufficiently compelling to get people in the door. Conversely, a service that offered 2 GB for free and 10 GB for the premium service might be giving away too much value in the free product to expect a large audience of people to upgrade. And that’s just one product dimension. Adding more dimensions just makes it that much more difficult to figure out the features for which users would be willing to pay.

You can read more here. The longer blog goes into the discussion of the best way to segment free versus premium, and whether it’s better to go with a trial period with a full premium product, or if it’s better to go with a stripped-down Free product and a separately upgraded Premium product. This segmentation is a key design issue in the Freemium world.

Want more?
If you liked this post, please subscribe or follow me on Twitter. You can also find more essays here.

Special thanks to Hiten Shah for helping me recall some of the bullet points!

Like this post?
Get new updates via newsletter..

  • Matthew

    What role do surveys play in discovering the features for which users would be willing to pay? If I ask a thousand of my users what they'd be willing to pay for, and I have 3-4 clear winners, can I go wrong? Also, is that the minimum viable product, or should I be looking to do only 1 of those features, promise the rest, and start charging immediately?

  • http://informationized.com phillipbaker

    Great post. This is a really interesting area and I think all three of these are key problems to solve.

    #1 is why I think LinkedIn is so cool. It treads the line perfectly as a consumer product that fulfills a professional need. As a consumer Web service it doesn't require enterprise integration, IT group authorization or dealing with long B2B buying cycles. But, because it's professional, individuals that need the premium features have a stronger and perhaps more justifiable reason to spend the money. If they need it for their current job (e.g. biz dev or recruitment) and can expense it all the better for them.

  • http://www.dogster.com Ted Rheingold

    Some other points I also considered highlights:

    * The higher the price point, the less churn/drop-off amongst subscribers.
    * Offer users a 30-day free version of the premium right next to offer to join free service. Put the two free offers side by side so people a) know they are making the choice for the premium version, b) less likely to be concerned about a 'catch'
    * Offer a money back guarantee period once payment starts.
    * On the consumer side do not overlook the emotional motivation to subscribing. Whether it to feel a part of the club, to show your elevated commitment, or to keep moving up the kicking-ass ladder (see Kathy Sierra) subscribing to even utility services such as LinkedIn can have a very strong emotional component.

    @matthew: surveying is critical but you have to discount people's stated interest in paying for services by 50% to 75%. It's been our experience that people are 2x to 4x more likely to say they would pay for something when asked in a survey than when confronted with having to take their credit card out.

  • http://andrewchen.typepad.com Andrew Chen

    I think surveys are just one tool among many different datapoints you can collect about product roadmaps. Others would include:
    - competitive comparison
    - ethnographic research (IDEO style)
    - A/B testing (sell it before you got it, in Steve Blank's style)
    - etc.

    It's a useful tool but I wouldn't overuse it… I personally find surveys more useful once you've drilled pretty far down into your value proposition, and you're asking for very specific things. Otherwise, I generally prefer in-person interviews or phone calls with potential customer candidates.

  • http://andrewchen.typepad.com Andrew Chen

    Ted, i will add your list to the main blog! Thanks for the suggestions.

  • http://andrewchen.typepad.com Andrew Chen

    Yep, I think:

    viral + freemium + $1+ monthly ARPUs + huge market

    is pretty much the Shangri-la of consumer internet startups ;-) Linkedin certainly has some very compelling aspects in its approach.

  • http://bit.ly/id8Mj bruce christensen

    Has anyone tried charging right from the start?
    It seems strange to me that we don't have enough confidence in our product to at least put a value on it.
    If we build a product that is valuable, it should receive a value higher than ZERO.
    Why not start charge something at the beginning?

    The social gaming niche has been around long enough that consumers understand the value of the experience. It is organized entertainment and it has a value. How many baseball games, Broadway shows and movie theaters use a Free or Freemium model for their entrance fee?

    I am really new to this social gaming process, but it seems that we are relying to much on advertising to fuel this industry and not enough on the entertainment value of our product.

  • http://avc.blogs.com fredwilson

    bruce – i believe that by charging up front, you limit the number of people who will try out your product/service who will eventually get hooked and become happy paying customers.

    the best social gaming companies give away the game but make their money with in-game purchases by addicted users and they make way more than those who charge upfront

  • http://www.betterlabs.net Vaibhav Domkundwar

    Fred, that's correct. But do you think the same holds true for business SaaS apps?

  • http://twitter.com/jnusser Jeremy

    Freemium / F2P are a powerful trend that a lot of companies are really starting to get comfortable with. The one thing that surprises me is how many companies are focusing on just one monetization path. If you look at traditional retail, there are many paths to purchase, but companies with digital goods and services mostly concentrate on either ad-supported (less so lately), premium, or now freemium. With Freemium (especially F2P gaming), again most of the efforts seem to be around virtual goods or currencies.

    I know that creating different revenue streams takes considerable effort, but the pay-off is more than worth it. Many successful entrepreneurs state they didn't know what worked until they stumbled across the right product that answered the right need and had the right way to monetize. Why not simply approach monetization with experimentation in mind? A “hybrid” model of advertising, premium subscriptions and virtual goods or add-ons for enhanced utility with a strong affiliate channel driving acquisition seems to be a win all the way around. Take the usage data and make informed decisions about the most profitable / popular methods. Of course the trick is to put it all together in a coherent, intuitive experience for the user. Maybe that's the rub?

  • http://andrewchen.typepad.com Andrew Chen

    I think the same holds true for consumer-y business apps that have shown success in freemium. Products like anti-virus, remote desktop, storage, etc., are all productivity areas that can be brought into an enterprise by technologically adventurous professionals.

    Now, I would guess that certain types of products make no sense for freemium, simply because there's no consumer side to it as well. Those are better to be sold direct using big enterprise salesteams, and be premium only,

  • readycontacts

    I agree, but there is a vast majority if enterprise apps and their newer SaaS versions which may not benefit from the Freemium model at all. It may be too much work/cost to maintain not-so-interested free users. It may work for Basecamp like products though – actually I DOES work as we know now.

  • http://www.trafficspaces.com Tech Scorpion

    I respectfully disagree.

    Take Salesforce.com as an example, afaik, that company has always charged its customers from the onset. The value they derived from the service ensured that they continued to renew their subscriptions and evangelize the service to other users.

    Whilst “free” may make sense for consumer web firms like Twitter, it doesn't make sense for startups that provide utilities to businesses. In that world, “real value and ROI” trumps free.

  • http://andrewchen.typepad.com Andrew Chen

    re: “vast majority” – hm, I don't know if I'd go that far.

    I think one of the big lessons that buyers of enterprise software learned after the 90s is to be wary of directly sold products that the people in your enterprise may not like. There's a higher chance of success to see enterprise tools that get traction at the group, departmental, and higher level, and then do a larger deployment across the enterprise.

    Now, I still agree with you guys that freemium is not right for type of enterprise product. I think this is especially true for specialized, feature-rich products that are used by a small number of users within a company. But for products that are widely used by the rank and file, freemium has the nice property that it can help you virally spread within a company.

    It's definitely interesting to contemplate the situations in which freemium is a strong value prop – it's clear that it can go both ways.

  • http://andrewchen.typepad.com Andrew Chen

    A couple points:

    1) What do you disagree with? ;-) My post doesn't really have a specific thesis or point, it is more recounting a bunch of ideas from a dinner. Are you saying that you disagree with freemium, in general, across all scenarios as a potential strategy?

    2) Salesforce actually has a free edition:
    http://www.salesforce.com/products/editions-pri…

    3) My overall point, discussed by the thread above, it's not that freemium is a silver bullet that works for all enterprise products in all cases. It works for some well-defined scenarios, but ones that are more approachable for web entrepreneurs because you don't need a direct sales team.

  • http://www.trafficspaces.com Niyi

    Hi Andrew,

    My apologies. The comment was actually in response to Fred Wilson's comment against “charging upfront”.
    For some reason, the Disqus comments went awry on my laptop.

    By referring to Salesforce, I was focusing on the services that were targeted to businesses. The free version is actually for individuals. It is much the same way where Microsoft used to waive or heavily discount their student charges but charged corporate users the full price. It was a long-term strategic decision that companies like MS and Salesforce can afford to make.

    Back to the central point, my personal view is that startups that target businesses shouldn't be afraid to put a price on the value they are delivering. The market will determine if the price/value ratio is balanced. Offering “free” can often be an expensive cop-out.

    To summarize, I guess we both agree that freemium isn't a silver bullet.

  • http://www.betterlabs.net Vaibhav Domkundwar

    I think there is definitely a need to discuss the possible models for enterprise software in a different post that is focused on enterprise software only. I think ZoneAlarm etc. make a great case for consumer/very small business plays and how freemium can be used or rather has to be used as its a volume play. But when you look at software/SaaS apps that are at the next level and onwards the recipes change drastically. It gets more centered around pain points, how much is the pain point costing the company, what are they willing to pay for it, and how it needs to integrate with their other systems and so on.

    I have been part of a couple (successful) enterprise companies as well as a co-founder of a telecom software firm and a lead gen firm for B2B tech companies – Freemium is a tough sell in the enterpise. Having said that, I do believe that the late 90s large enterprise deals are long gone and the sales/lead gen model does need to change. Unfortunately, there isn't as much knowledge base in that area as there is for consumer products.

    I will wait to talk more when/if you decide to write another post on this at a later time :-) Sean's blog was a good find for me – thanks for sharing.

  • http://andrewchen.typepad.com Andrew Chen

    One last nitpick ;-)

    The distinction you are making that Salesforce has a free product targeted in one direction and then paid products targeted elsewhere to me is the definition of Freemium. The fact it's segmented for different audiences is exactly what drives people to upgrade after their usage expands.

    I don't think doing Freemium is a matter of whether or not you can afford it. My view is, creating and supporting the Free product is like a marketing expense to drive usage of the Premium product. The question is whether or not you'd rather spend your marketing dollars there versus buying ads or building out a big sales team.

  • http://informationized.com phillipbaker

    I see it exactly the same way and maybe I just haven't read enough of your posts :-) but I don't think I've ever seen it described in those terms. Free is not a business model, how could it be?! It's marketing, the -mium part is the business model.

  • http://www.leadsexplorer.com Engago Team

    The new form of Freemium: monetizing all services http://bit.ly/hPJT

  • http://heartcomealive.blogspot.com Jonathan

    Great post. Nice talking to you yesterday. I'll stop by often to read about your thoughts all other stuff too.

  • http://www.vastpark.com Bruce Joy

    Timely food for thought for my team as we're working on an unannounced freemium project for business.

    I've noticed that some SaaS solutions such as the wonderful Freshbooks mix the 30 day free trial offer on the premium versions along with a free forever version. Because they've segmented their offering so elegantly, I think there's a natural upsell once you start using the product and your requirements continue to expand. Nice work guys!

    Andrew, thanks for an informative blog.

  • sharadjha

    No Win No Fee Solicitors – Making a No Win No Fee* claim is a civil and legal right but often, people do not use this right to make a compensation claim, fearing there may be hidden costs involved as well as being lengthy and complex. Accidents Direct make claiming compensation a very simple process. We have the leading panel of solicitors nationwide making us the choice of the consumer when looking to make a claim.

  • sharadjha

    No Win No Fee Claims – Making a No Win No Fee* claim is a civil and legal right but often, people do not use this right to make a compensation claim, fearing there may be hidden costs involved as well as being lengthy and complex. Accidents Direct make claiming compensation a very simple process. We have the leading panel of solicitors nationwide making us the choice of the consumer when looking to make a claim.

  • http://www.tbmdb.com Sundelin

    Great post and great initiative! Thanks for documenting for us living far far far away.

  • http://www.facebook.com/people/Dean-Collins/674616722 Dean Collins

    Andrew, I didn't see any free editions of salesforce on the link of yours…..?

  • http://www.facebook.com/people/Dean-Collins/674616722 Dean Collins

    Andrew, I didn't see any free editions of salesforce on the link of yours…..?

Want more? Featured essays and book recommendations