
Will Freemium Work For You? Questions To Consider - rahulvohra
http://blog.rapportive.com/is-freemium-right-for-you
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rmah
The math is fairly simple. There are two cases: viral and non-viral.

The viral case is when the value you can offer to paying customers actually
increases as more free users join the system. In this case, the free users are
the resource and as long as the revenue you can extract from their added value
exceeds the cost to support them, you can do freemium profitably.

The second case is non-viral and is where most people are. Here, the basic
premise is that the free users may A) become paying customers or B) attract
paying customers through word-of-mouth/scale halo effect.

In both cases, you need to estimate the lifetime cost of a free user. Even if
it's only $0.25 per year, it will be _something_ and is important. You will
also need to estimate the lifetime profit of a customer (lifetime value minus
lifetime cost). Don't forget user/customer support costs and overhead.

For case 2A, you then calculate the conversion rate for free users. If the
lifetime profit of a customer exceeds the lifetime cost of a free user divided
by the conversion rate, you win. If not, free users are a drag on
profitability and not worth it.

For case 2B, you again calculate the lifetime profit of a customer and compare
vs the lifetime cost of free users divided by the expected referral rate free
users generate. If the profit exceeds the referral cost, you win. Otherwise,
again, free users are not worth it.

Obviously, the above is very rough overview, and in real life there are many
additional complexities. There are various ways these cases may mix, the
functions may not be linear, etc. But in the end, it's just math and you can
guestimate if freemium is economical for your business.

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carbocation
Don't forget (C): the free users actually contribute something of value (e.g.,
information) to your business.

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quadnrum
"[In point A] the value you can offer to paying customers actually increases
as more free users join the system. In this case, the free users are the
resource"

This was point A.

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carbocation
It's a very subtle distinction, but I think that really only fits under A if
you assume that whatever is being contributed by the free users is valuable
_to_ the paying users. It can be valuable in other ways.

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seiji
Simplify it down to one question: Do you have enough traffic/users where a 2%
to 3% conversion rate will sustain your business?

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jhrobert
Simplify further: Do you have 100k active users.

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nl
That depends on how much you can charge.

For example, you could argue that Google Analytics is a Freemium version of
Google Urchin. That costs $9995: <http://www.google.com/urchin/pricing.html>

(Of course, Google has a different business model for Analytics - basically
they want to commoditfy the complements to their advertising business. But my
point here is that freemium can work well in enterprise software with less
than 100K active users if the pricing is correct)

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jacquesm
Great article, really. The hard ones are the edge cases. If you can answer
these questions in a clear-cut way then you probably already know whether
freemium is for you or not, if you're on the edge the only answer is probably
try and see where it leads you, stay flexible and you might be able to push an
edge case in to a 'yes'. But be prepared to do a lot of work.

<http://jacquesmattheij.com/Handbook+Freemium> <\- shameless plug.

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MicahWedemeyer
_What is your market like? If you are targeting a large unmet need, you should
make your product free._

I'd argue the opposite. Get in there and start charging right away. Get as
many customers as you can before some buffoon comes in and gives it away for
free. If you're lucky, you'll establish that the market price is > 0, and
future competitors will charge in a likewise manner.

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raquo
The primary reason to make your product free are positive network effects (no,
it's not only about social networks, e.g. making .pdf a de facto standard also
counts). The other reason is that the product is useless. The two should never
be confused.

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nl
I like the first comment on that:

 _You missed what I consider the most important question of freemium -- does
having a large user base, in and of itself, offer value to the users. I come
from the dating site world. Let me tell you, on any social site, if you have a
million free users and 10,000 paying users, you're fine; if you have 10,000
paying users and no free users, you're dead: the paying users have nobody to
talk to._

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RyanMcGreal
The second question sounds like a restatement of the first. If users find your
service becomes more valuable over time, why would they stop using it?
(Conversely, if users stop using your service, did they really find it
increasingly valuable?)

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zecho
Products don't exist in a vacuum.

In one case we could assume no competition or weak competition in the
product's market.

Over time, one can imagine a case including competition that disrupts a once-
increasingly-valuable product to suddenly drop users.

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duck
After reading those good points I have to ask - would freemium work for
Facebook?

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martinkl
Facebook is an example of a product with distinct modes of use for different
audiences (the users and the advertisers). One audience pays, the other does
not.

