
 Freemium did not work for Phanfare - jasonlbaptiste
http://blog.phanfare.com/2009/07/freemium-did-not-work-for-phanfare/
======
netsp
Interesting Point:

 _We lost the ability to effectively use CPC search marketing (google). When
we had a free trial, it was easy to see which clicks were worth paying for.
But with freemium, the conversion funnel was so long (average of nearly a year
before the person needed more storage) that any attempt to optimize price per
conversion was hopeless. (Try adjusting the shower temperature with a 12 month
delay between knob and temperature change and see how it goes for you. In
control theory parlance, this is known as introducing a delay in the feedback
loop)_

It's very interesting. Anyone used to CPC lives in a world of certainty. That
kind of certainty has rarely existed in marketing. The problem with that kind
of certainty is that taking out risks eventually takes out returns. If you are
selling a dropshipped commodity good, margins drop (cpc bids go up, prices go
down) to more or less 0.

Freemium on the other hand, slots conveniently into the old world of TV
campaigns & billboards. You have no idea if you did good or not. That kind of
risk keeps out the number of competitors needed for 0 margins.

------
jacquesm
Moral of the story: think before you act.

If you decide to go for the freemium model there are several things you should
check before taking the plunge:

\- are other companies offering what you intend to offer behind the pay-wall
for free or not ? \- are you going to be able to monetize your free users in
some other way ? \- what is your expected conversion rate from free users to
paying users and can your business survive on that rate (+ a healthy margin
for safety) ? \- what is the cost of supporting a free user in case the
monetization of a free user is less than the income on that user ?

A fairly simple spreadsheet will give you the answers, if you can't determine
the conversion rate then do a survey with a pledge. That way you get a
ballpark figure, reality should be within 50% of that figure, so to be on the
safe side discount it by a factor of 2.

Last but definitely not least, if your 'premium' package offers nothing of
value to your user (because for instance multiple free accounts give the
equivalent of a paid account) then don't bother trying.

------
omouse
Why would they give 1gb away for free? They could give away a few hundred meg
or whatever and not kill their margins.

They should have thought this through before going ahead with it.

~~~
drusenko
the real trick with freemium is drawing the line between free and paid. as you
start to offer less and less in the free version, it starts to approach a free
trial. as you start to offer more and more, it starts to approach a fully free
service. everybody attempting freemium needs to carefully consider where to
draw the line.

~~~
netsp
IMO, there are two big reasons for freemium.

\- To create a large community with network effects that increase the overall
value. Here it's hard to charge anything at all, especially if you have any
kind of competition. Once you have lots of users, you try to think if any of
them might be willing to pay for something.

\- To give out a Super Sample. Get free users, when a small percent will
convert to paying members. This is Chris Anderson's 95%/5% freemium. Here the
line is fine.

The important point about freemium is that it's interacting with a competitive
environment. You probably cannot become a major photo/video sharing site
without being free, because others are. This is a result of low marginal
costs.

~~~
jacquesm
If you can get 5% of your users to convert you are doing absolutely stellar.

Acceptable is anything over 1:2000, 5% is two orders of magnitude above that
and I have yet to come across a company that uses the freemium model that has
that kind of conversion rate.

Do you have an example ?

~~~
netsp
It depends on your definition of freemium & your definition of user, I
suppose. The 95/5 is Chris Anderson's guess/recommendation, not mine. But I'm
sure you can find examples at all ratios.

I'll look at what I use. Both Weebly & Dropbox (I use the free of both) follow
a true freemium model. IE, they both offer a perfectly usable free version.
I'm not sure what percentage they do, but 1% - 10% sounds about right to me,
especially if you discount those who are really sampling vs those who actually
use.

I also use Gmail & Gdocs. These are theoretically freemium too, but at a much
higher free/paid ratio.

You're going to see quite a lot in the professional/business software
category. My explanation for this is that it is software people pay for. If
you can sell your software/service, maybe can probably sell it with a freemium
model.

If you can't sell it (eg photo sharing/search/etc.), maybe you just can't sell
it. Freemium isn't magic.

The percentage has to relate to your marginal costs in some way. Even 1:2000
can be fine if your marginal costs are zero. You care about conversion rates
only inasmuch as you care about absolute numbers.

*I recoiled a little when I read Anderson quoting an actual ratio. I think that it's a bit off. But I do think segmenting businesses by their ratio would be an interesting way of looking at them. A 5% business isn't following the same model as a .01% one.

~~~
jacquesm
Interesting!

There are a lot of different subsets of products that you could sell using the
freemium model (content, raw infrastructure, access to applications and so
on), I figure there are probably ballpark figures for the conversion rates for
each of these.

What the big question is to me is what the 'optimal' conversion rate is and
what the path to achieving that is.

Another huge factor (and one that the article completely overlooks) is what
the competitive landscape looks like. If you're in the business of providing
some freemium based item (say free email with a 100MB inbox, more is paid)
then you're toast if you get a competitor with deeper pockets that gives away
the same product that you are charging for.

Storage and services related to it (and bandwidth) will converge on '0' so you
will need a _lot_ of users on the input side of the funnel in order to make it
work for the few that will max out your caps and that don't want to game the
system by setting up multiple accounts.

------
alain94040
It's good to hear a counter-point to the freemium pressure. Freemium has its
place, as the article notes properly, but it's not for everyone. It's about
time people speak out :-)

~~~
netsp
Is it really necessary to hear a counterpoint?

The debate has mostly been around whether or not it is a viable business
model, not whether or not it is always the best business model.

~~~
jacquesm
It is for me, and has been for the better part of a decade now, but I have to
admit that it gets harder and harder to squeeze the lemon as time goes by.
Competition is fierce, the only thing that I figure that keeps us going is
customer loyalty.

------
robryan
Another point, I think no matter which model you pick the best way to manage
it is to have it in from the start and stick to it.

People may have no problem paying $10 a month for a service, but when that
same service was previously free or at least free at there usage level there
is going to be a backlash and if you are in an ultra competitive area like
this one that could be a big problem.

------
tezza
A problem with Freemium is that it is easy and worthwhile for customers to
have multiple accounts.

So if you needed 5GB it is relatively easy to use UserName01...UserName05 to
acheive that.

Each additional 1GB faces a slightly reduced problem :: Is it worth coughing
up cash for this service??

