The Freemium Model
Jeremy Gislason
http://www.marketingmainevent4.com/blog/mme4-prelaunch

Today we’re going to discuss
“membership marketing”, and how it’s
almost a requirement for a successful
website.

If you’re selling anything online, whether
it’s ebooks, digital products or anything
of that sort, then the membership
system we discuss below can deliver
those products in the most effective
and profitable way.

Business Success Means Avoiding Churn
and Increasing Revenue Per Customer.

To be a business success, you’ll need to
avoid customer churn (or “turnover”).
If you get 100 new members, but 99 of
them quit after 30 days, it’ll be hard for
your business to survive.

In a membership context, it’s the period
of time someone will keep paying their
membership fees. So while it’s vitally
important to constantly acquire new
customers, it’s just as important to
maximize the revenue of each customer
you already have..

So what we’re talking about is the
backend, and the marketing funnel you
have in place

With a subscription membership model –
where you have a recurring billing
system in place - the backend is the
recurring fee itself. The issue becomes
keeping people as members at your
site.

Let’s see examine how this plays out in
the context of three popular business
models:

- Traditional Product Sales.

Let’s first consider the traditional
Internet marketing (publishing and
sales) model, which is used by most
online business owners. In this model,
you create a product and a sales page,
drive traffic to that page, and hope the
traffic converts into sales.

The average for that conversion rate is
somewhere around 1% to 2%.

Assuming you have a $37 product at a 2%
conversion rate, it means that for every
hundred people you send to that page
you’re going to sell two of those
products at $37 ($74 total), and you’ll
have a visitor value for each of those 100
people of $0.74.

- Recurring Membership.

The average conversion rate for a
recurring membership site is often less
than the traditional one product sale
model; it’s generally 1% or less.

So let’s now assume now that you’re
going to charge $17 per month, rather
than the original $37 product price
point. But we start to encounter churn
with monthly billing. In our experience,
the average membership stick rate is
between three and five months.

So for every 100 visitors, we’ll get one
membership sale, and that customer
can be expected to stick around for
approximately four months.

That means you’re going to generate $68
in revenue from that one signup (four x
$17 = $68). That gives you an average
visitor value of $0.68. When you use the
membership model, you can also put
backend offers in place.

So once you already have a paid member,
you can assume additional backend
sales and commissions from that
member – around $5 per month.

Now you have that one member, and
they’re paid the $17 for the first month -
will likely do so for about four months -
and they’re also worth an additional $5
per month over that same period of
time. So now you have $88 from that
signup, and the average visitor value for
the 100 visitors is $0.88.

- Single-Payment Membership.

The next structure is a paid membership
with a single payment. Your conversion
rate will increase because you’re asking
people to make less of a commitment,
and a membership generally has a
higher perceived value than a simple
product sale.

You can expect a conversion rate of 2.5%
to 3%.

Because there is less commitment, you
can charge more still keep the
conversion rate up. So let’s assume a
one-time fee of $37 instead of that $17
recurring. Now your churn goes way
down.

The customers have already paid, so very
few of them will actually terminate their
membership. You’d be safe in
calculating an average stay of 12
months.

So the calculation is as follows: You’re
going to see a 3% conversion rate, and
the total one-time fees are going to be 3
x $37 = $111.

Factoring in the backend offers ($5 a
month per paid member), and over 12
months you’re looking at $180 in
backend sales and commissions, for
total revenue of $291. This brings your
visitor value up to $2.91.

But there’s an alternative model that
blows all three of these out of the water
when it comes to down to making
money for you – the Freemium model.

The Freemium Model.

The Freemium model is basically a free
membership with an upgrade offer.

It works like this: you put a “free” offer
in place on the front end of the site (in
a later article we’ll discuss how to make
this free offer not appear to be “free” –
and why you’ll want to do so), and
you’re likely to see a front end
conversion rate around 35%.

If you then place a compelling offer on
the backend, you could see a
conversion rate between 5% to 10% on
that offer. It can be higher but let’s use
10% for our analysis.

This means that for every 100 visitors -
you’re going to get 35 free members,
and then a 10% conversion rate on
these 35 members on the backend. So
what you end up with on average is 31.5
free members and 3.5 paid members.

On your front end that’s 3.5 x $37 =
$129.50. The paid member back-end
value is $5 x 12 Months x 3.5 People =
$210. The free member back-end value
is $1.50 x 12 Months x 31.5 People =
$567.

Adding these amounts and you have
$129.50 + $210 + $567 = $906.50, so your
average visitor value is $9.06.

That’s a huge difference from the more
“traditional” models we discussed
above (and more than 10 times higher
the most common product sale model)!

Brought to you by:
Jeremy Gislason
http://www.marketingmainevent4.com/blog/mme4-prelaunch