

Value of "free" customers in a freemium pricing model - ashleyreddy

In what way are nonpaying customers valuable in a freemium pricing model.  Let’s get the obvious out of the way:  Yes a certain percentage of them will convert to paying customers and they will tell their friends etc I get that.  Say someone like Dropbox has x million customers and only a 2% of them are paying.  There is a cost associated with the other 98%.  How do you adjust the pricing to cover the cost of those free customers?  Does anyone have any stories they wish to share about how they approached this problem?  Also do big numbers strike an emotional chord when raising successive rounds?
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mgkimsal
"In what way are nonpaying customers valuable in a freemium pricing model"

They keep your user from using a competing service (whether pay or free).

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ashleyreddy
Yes! Good one.

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michael_dorfman
It depends on the product. In some products, there may be "network effects"
where each user benefits by the number of other users in the system-- for
example, if Facebook were to adopt a Freemium model, the paying customers
would benefit from having the free users in the system.

This, of course, is not the case for most apps-- like Dropbox, in the example
you chose. For Dropbox, the free customers have costs associated, but largely
serve as a funnel. In other words, the costs of the free users are just
considered part of the customer acquistion costs, the same as if they were
Adwords costs with a given conversion rate.

I don't think big numbers strike an emotional chord with VCs when it comes to
financing rounds, if by "big numbers" you mean "big numbers of non-paying
users", unless there are plans to improve the conversion rate on these
prospects.

If I were you I'd frame the question another way: given the product/app that
you are planning, what advantages would a Freemium model offer over, say, a
free limited-time trial of a paid-only product?

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maguay
Actually, I think Dropbox has a network effect as well. I'm a paying user, but
my account is more valuable to me because can share folders and collaborate
with free users. Many of them would not use it if it wasn't free (hey, I
started with the free service and later upgraded myself), but since its free
they have seen how awesome it is and are 1000% more likely to upgrade to a pro
plan than if they'd never started using it in the first place. In the mean
time, they make my Dropbox account more valuable to me.

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carbocation
Free customers may add value by virtue of the data that they contribute during
normal use of your product.

In my case, our free users contribute data which, in aggregate, allows us to
peer deeply into the college admissions process and ask questions such as, "To
what extent does applying early to Yale help my chances of admission?"

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dangrossman
You need to figure out what it costs you to support each user, make a ballpark
of how many free users will upgrade (it's less than 2% for most sites that
share their numbers, including my own W3Counter.com), and do the math to see
if freemium will work for you. You might find that you won't be profitable if
your cost to support the free user base is more than the paying users can
cover at prices they're willing to pay. You can't just make the price
arbitrarily high, sometimes freemium really doesn't work for a business.

W3Counter barely gets by as a freemium service. The paying users cover the
servers it takes to run the site, but not enough more to pay even a single
person's salary. I'm always waiting until service degrades to the point
someone starts complaining before I add more hardware, otherwise enough new
users wouldn't have started subscriptions to pay for the expansion.

The next service I built, W3ROI, does not offer a free plan. It's harder to
build traffic to the site, and there are less people talking about it on blogs
and social networks, but each new user it adds pays for themselves. There is
never a risk of not being able to afford the hardware to provide a good
quality of service.

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jeffepp
They are valuable for several reasons:

1) They may give you feedback 2) You can track + analyze their usage 3) They
may refer peers 4) They may become 'paid customers'

In a vacuum, non-paying customers may not be super-valuable. However, if these
non-paying users have good experiences with your product/service, it is
possible they are adding more value to than they cost.

Remember, the marginal cost (per user) for many web apps is minimal.

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MalcUK
From an non-financial perspective, presumably they are useful for testing the
service? Adding experimental features, seeing how they react, not having to
worry about up time on their servers. Understanding how the service scales, in
case you get any enterprise-style customers. Learning what sort of features
are missing etc. Essentially a loss leader to improve the service.

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jlogic77
Aside from the items you've mentioned you should also consider these items:

Proving your market - Attracting and registering large numbers of people prove
it's something people want. If you can't give it away for free, there's a
problem. (Good for funding)

User feedback and "The up sell" - With the right features that non-paying
customer may be a paying customer waiting to happen. You'll also have
collection of emails of people interested enough to try your product, where
you can up sell them to paid later. (Good for your product)

Scalability - Testing your product in the real world with real traffic
patterns, live servers, and people depending on your service is very valuable.
(Good for funding AND your product)

I'm a huge believer in the freemium model. Just don't give the cow away and
try to position your premium product where users feel like they are getting
real value when they have to take out their wallets.

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Paymo
We use the freemium model (Paymo time tracking & invoicing
<http://www.paymo.biz>) it can have the following benefits for your potential
business (in no particular order):

1\. helps spread the word (lower customer acquistion costs) 2\. "free" users
are more likely to give you feedback, which will make your app better over
time 3\. you and your team feel good that you're able to share with the world
something for free (just think of how many free apps help you during the day)
4\. you can convert free users to paying customers. (in our case the app
actually helps the users grow their business) 5\. people seem to be willing to
try out free apps vs trial apps more often

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faust1
I have extensively researched on the software products relating to the PC
maintenance category. What I have found is that you can cover the cost
associated with non-paying customers through advertising,etc. For instance,
Trial Pay is used by many software vendors to let customers pay for essential
things and get software for 'free'. There are other advertising models which
can be adopted. Yet for our product, RegInOut, <http://www.reginout.com> , we
have not yet tries these freemium model yet.

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ramanujam
Ning is one prefect example. They gained lot of popularity with the freemium
model but weren't able to cope up ultimately.

Ning did get into the bad books of many when they pulled the plug and asked
all existing customers to either pay or leave.

Adding to what someone pointed out, the value depends on cost involved per
free user and also if it is worth it in the long run.

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robryan
I think for Dropbox free customers are recruiters, when I recommend it to
someone I usually find that it fits their need perfectly and they love it,
they just didn't know it existed before. Without the freemium model thy would
struggle to reach some of these people and as long as a small percentage want
to pay for more space they keep growing.

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schammy
There are three reasons. You mentioned two of them - word of mouth, and
potential conversion to paying in the future. But there's another one too, and
that's just the total size of your userbase. Either for bragging rights (we're
bigger than competitor X) or for future sale value (the more users you have,
the more money you will likely make from a sale/acquisition of your service,
even if a lot of them aren't paying for your service) - both are good reasons
to offer a free, dumbed down version of your pay service.

