Economics of Freemium (Stanford 4/14)

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Economics of Freemium talk at Stanford

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  • 453
  • Economics of Freemium (Stanford 4/14)

    1. 1. The Economics of Freemium Peter Fishman Director of Analytics, Yammer 4/8/14
    2. 2. My Background
    3. 3. Relevant Experience
    4. 4. Who is a data scientist? Product & Communication Programming Statistics
    5. 5. Agenda • Gaming Pricing – Evolution of Freemium – Lifetime Value Model • Pricing Psychology – How do prices affect utility? • Should they? • Bacon Hot Sauce
    6. 6. Gaming Pricing
    7. 7. How do you maximize revenue? P (Value Per Game) D Q
    8. 8. How do you maximize revenue? P (Value Per Game) D Q
    9. 9. Two Part Tariffs
    10. 10. Low “tariff” with multiple types
    11. 11. Evolved Pricing Model
    12. 12. How do you maximize revenue? P DH Q DL
    13. 13. A tale of two travelers 1st Class $2000 $420 Coach $1000 $400 Adam Pete
    14. 14. What happens? • Charge Adam $1999 and Pete $419 for 1st Class tickets. – Airline makes $2418 • Charge $1999 for 1st Class and $399 for coach. – Airline makes $2398 • Charge $998 for 1st Class and $399 for coach. – Airline makes $1397 • Charge $1999 for 1st Class and >$999 for coach. – Airline makes $1999
    15. 15. Can you walk down a demand curve? P DH Q DL
    16. 16. Freemium Model Costs – No upfront revenue – Cannibalization – Risky revenue streams – Difficult to segment Benefits – Lower Barrier to Entry • This drives down discovery costs and risks – Lowers Customer Expectations – Can get cheap feedback and iterate  Premium Features, Advertising, Cross Subsidy
    17. 17. Perfectly Evolved
    18. 18. Invite Friends Virality Buy Things Monetization Use the product Retention The “virtuous cycle” New user Acquisition
    19. 19. Revenue = Users Install/ User DAU/ Install Payer/ DAU Revenue/Pay erx x x x Virality Monetization Components of “lifetime value” = Revenue/User RetentionUser Acquisition Marketing / CRM User Mechanics Tech Investments DAUs
    20. 20. Get the levers right
    21. 21. The Economist • Online-only – $59.00 • Print + Online – $125.00 • Print-only – $125.00 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Online Online + Print Print Only Percentage
    22. 22. Williams Sonoma $275 $429
    23. 23. Choice Set Dependence • Chicken, Fish, Steak – Unwanted items can affect the perception of other goods • Adjacent Offerings Can Impact Preferences – An overpriced option can make a nearby choice seem like a bargain
    24. 24. Geek is the new cool “If you ever go bar hopping, who do you want to take with you? You want a slightly uglier version of yourself. Similar… but slightly uglier.” – Dan Ariely
    25. 25. Free Can Be Helpful
    26. 26. Free Can Be Harmful
    27. 27. What are the last 2 digits of your telephone number?
    28. 28. Are there more or less countries in Africa than that number?How many countries are there in Africa?
    29. 29. Thaler (1980), Kahneman (1984)
    30. 30. Freemium • Which is more important, short-run profits or grabbing land? – How much runway? • Do you get network effects? Or externality benefits like analytics? • Can you deliver a premium experience that is worthy of breaking out the credit card? – Your toughest competition may be yourself • Does the consumer psychology of free enhance your monetization opportunities?
    31. 31. Thank You, Any Questions
    32. 32. Aim, Fire, Adjust
    33. 33. “That which is measured improves” - Pearson’s Law
    34. 34. Why are weather forecasters so accurate? HT: Murphy & Winkler (1974)

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