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Understanding Freemium:  How to Create & Grow Paying Customers
 

Understanding Freemium: How to Create & Grow Paying Customers

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There has been a lot of buzz lately around the “Freemium” model and many start-ups are gravitating to this approach. However, many are learning some hard lessons and missing way too many ...

There has been a lot of buzz lately around the “Freemium” model and many start-ups are gravitating to this approach. However, many are learning some hard lessons and missing way too many opportunities along the way. This talk will provide insight, examples and a proactive approach to positioning your solution for faster returns and sustainable profits.

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  • SOME SAY FREEMIUM IS THE SAME AS : TRY-BEFORE-YOU BUY SHAREWARE TIERED SERVICE TRIAL LOSS LEADER . . . TO NAME A FEWThe SOMETHING may be a product, service or combination of product and service. I will lean towards using SOLUTION to imply product, service or both.
  • Attention / Attract Eyeballs – the more eyeballs you attract, the valuable the opportunity for selling advertising or consumer information ( MENTION UBER-TWITTER NEWS TODAY )Build Awareness – create and rapidly scale awareness the solution existsNetwork Externalities – the offering becomes more valuable as the number of users increases. Some refer to a critical mass that is obtained which makes the solution more valuable.Create a Standard – catapult their solution to become the next standard. Perhaps first mover, or overcome a first mover.Build Communities – The value of the community is not necessarily the content, instead it is the NETWORK and accessability of connected peoplePath to Follow-on Sales – other than monetizing Attention (eyeballs), this really the only other example on this page that leads to real dollar transactions. This is what most hope for.Gain Competitive Advantage – really this is about forfeiting (or diluting) your value as a sacrifice to gain market shareIncrease Switching Costs (does it really though?) – attempt to create lock-in with “experienced goods” and the fact that consumers are reluctant to change. However switching can be relatively easy now days.Hobby or Charity (not really a business)
  • Value from free users diminish greatly when they stop telling others about your solution. Some users will never pay.Free is not a competitive advantage. Even if you offer more value in your free offering, you are diluting your value of your overall product mix and diminishing the profit potential and overall market you hope to prosper in.
  • Today . . . I am NOT going to dive into the debates, details, frameworks or methodologies to determine if FREEMIUM is the right fit for your SOLUTION.NOTE: I encourage you to first rule out Limited Free Trial, before assuming that Perpetual Freemium is a must.However, many startups are defaulting to the FREEMIUM approach for various reasons and jumping in without any solid understanding or data that suggests FREEMIUM is the right approach to get them where they want to go. In fact many don’t really know what their business objective is and depending on the founders may be more focused on their “product” and frankly ignorant to the legitimacy of their business and market potential.You really cannot side step the fact that to stay in business and generate sustainable profits, there must be a sound business case behind opting for the FREEMIUM approach.That SAID . . . I DO BELIEVE THERE ARE BUSINESSES THAT CAN BE VERY SUCCESSFUL WITH FREEMIUM . . . IF DONE RIGHT . . . AND TACKLED EARLY ON.
  • Don’t get too caught up in features and making it cool or like an existing alternative ( “me too” solution )
  • Start Now and fine tune as you go
  • Think of the customer in terms of JOBS (what they do) and OUTCOMES (why they do what they do)
  • Key NOTE : Discuss importance of leaving BETA . . . Mention Google example
  • Some think that one sure way to FAIL at FREEMIUM is to begin to Charge the User.Reference : JOTT, Pandora, others and how you really want the payingcustomers.
  • Analogy: Consider an Automobile in the Freemium context: can’t only include ability to make left turns and offer Right turns in Paid Version or ability to accelerate and offer braking in Paid Version
  • Analogy: Consider an Automobile in the Freemium context: can’t only include ability to make left turns and offer Right turns in Paid Version or ability to accelerate and offer braking in Paid Version
  • Analogy: Consider an Automobile in the Freemium context: can’t only include ability to make left turns and offer Right turns in Paid Version or ability to accelerate and offer braking in Paid Version
  • Mention limited time, best to let me get through content and tackle questions at the endReally, we all know someone will want to chime in . . . So remind your neighbor if necessary 
  • Mention limited time, best to let me get through content and tackle questions at the endReally, we all know someone will want to chime in . . . So remind your neighbor if necessary 

Understanding Freemium:  How to Create & Grow Paying Customers Understanding Freemium: How to Create & Grow Paying Customers Presentation Transcript

  • Understanding Freemium
    How to Create and Grow Paying Customers
    Presented by : Chris Hopf
    August 12th, 2009
    $$$
  • A G E N D A
    1. Presentation (me)
    2. Q-n-A (you)
  • T H E B U Z Z
  • The Buzz
    4
    Where is the Freemium Buzz coming from?
    Numerous Articles
    (e.g. – New York Times, Financial Times, etc.)
    Tons of Blog Posts
    (e.g. – Fred Wilson, Andrew Chen, etc.)
    Industry Events / Presentations
    (e.g. – Start Up School, Startonomics, etc.)
    Chris Anderson’s recent book *
    Free: The Future of a Radical Price
    Twitter / FriendFeed
    Tweets and Posts galore
    Understanding Freemium - How to Create and Grow Paying Customers
  • What is Freemium ?
    5
    Give something of value away for free,
    supported by profitable revenue earned
    from the sale of an upgrade
    or complimentary product.
    Understanding Freemium - How to Create and Grow Paying Customers
  • Some of the Main Reason Why . . .
    6
    Attention / Attract Eyeballs
    Build Awareness
    Network Externalities
    Create a Standard
    Build Communities
    Path to Follow-on Sales
    Gain Competitive Advantage
    Increase Switching Costs (does it really though?)
    Hobby or Charity (not really a business)
    Understanding Freemium - How to Create and Grow Paying Customers
  • Reasons FAVORING Freemium
    7
    Reduces perception of risk, giving prospects the opportunity to use and experience the value of the solution (favoring trust & loyalty).
    Costs of distributing and supporting digital content continue to decrease(some say close to $0.00)
    User acquisition is expedited, increasing efficiencies and network effects.
    - Faster adoption - Greater brand awareness
    - Collective intelligence - More defensible (not likely)
    - Large base to spread costs over = efficient marketing efforts
    Understanding Freemium - How to Create and Grow Paying Customers
  • Considerations DISCOURAGING Freemium
    8
    Prospects will make more of an effort to learn about and discover how a solution will benefit them, if required to pay.
    Customers place more value on what they pay for, which also increased retention, renewals and referrals
    You must carefully track ability to convert FREE Prospects into PAID Customers
    Conversion Rates vary by product but typically range
    from 0.05% to 5.0%, with an average of 2.0%
    Depending on your conversion rates, it can be difficult to cover acquisition, support and other costs
    Understanding Freemium - How to Create and Grow Paying Customers
  • TODAY’S FOCUS
    1. Already LIVE w/ Freemium
    2. About to Go LIVE w/ Freemium
  • How to Create & Grow Paying Customers . . .
    10
    Begin with that being your objective
    Understanding Freemium - How to Create and Grow Paying Customers
  • Key Points to Consider . . .
    11
    Start Early
    • Pre-Beta (even better if at concept, fine tune as you go)
    • Launch Beta with a Pricing Page
    Establishes value and reference price early
    • Begin with a forecast
    This requires choosing metrics carefully
    Plan for profitability
    Yes, assumptions will be made but minimize them
    Understanding Freemium - How to Create and Grow Paying Customers
  • Key Points to Consider . . .
    12
    Really get to know your target market(s)
    • Talk to real people (yes, in person)
    • Think like your customers
    What are they trying to accomplish
    How will your solution help them accomplish this
    What are the alternatives to your solution
    • Have a solid understanding of your value proposition
    • This will help you understand what should be included in your Free Offering.
    Understanding Freemium - How to Create and Grow Paying Customers
  • Key Points to Consider . . .
    13
    Design, Develop & Code for Freemium
    • Iterate fast, but smart
    All features tied to benefits users care about
    • A/B Test to understand which features tie to benefits users are willing to pay for
    • Have a roadmap
    That illustrates and validates relationship between targeted customer segments and what is included in your various offerings
    Understanding Freemium - How to Create and Grow Paying Customers
  • Key Points to Consider . . .
    14
    Sign-up / Pricing Page is Critical
    • Craft & Improve Compelling Calls to Action
    Understand & improve your conversion funnel
    Tactics to convert Free Users to Paid Customers
    • Simple Design & Concise Sign-up Steps
    • Include Testimonials
    • Three Offerings Minimum (Free + 2 Paid Offerings)
    Understanding Freemium - How to Create and Grow Paying Customers
  • Key Points to Consider . . .
    15
    Free Offering Details (What’s Included)
    • Must be crystal clear and easy to understand
    • What is in the Free Offering
    Consider including Premium Features for limited time in Free Offering, after which bumps down to only Free features
    • How will you release new features (benefits)
    Consider making new features available to ALL offerings for limited time, after which only available in the PAID offering you target them for (ref: roadmap)
    Understanding Freemium - How to Create and Grow Paying Customers
  • Freemium is best . . .
    16
    • in markets with low or no variable costs
    • stronger the network effect, the more valuable and defendable the product offering will be
    • best with unique solutions with very little alternatives or substitutes
    Understanding Freemium - How to Create and Grow Paying Customers
  • Freemium is best . . .
    17
    • if there are many providers of same solution, then a free version may underscore the commodity nature of the solution and reduce profits for the entire industry/market
    • many users get use to not paying anything and tend to be motivated to search for cheapest available
    • if you give something away for free, you need to realize profits from some other source / means
    Understanding Freemium - How to Create and Grow Paying Customers
  • LIVE w/ Freemium Examples
    18
    Dropbox
    Understanding Freemium - How to Create and Grow Paying Customers
  • LIVE w/ Freemium Examples
    19
    Dropbox
    Understanding Freemium - How to Create and Grow Paying Customers
  • LIVE w/ Freemium Examples
    20
  • LIVE w/ Freemium Examples
    21
    Understanding Freemium - How to Create and Grow Paying Customers
  • LIVE w/ Freemium Examples
    22
  • LIVE w/ Freemium Examples
    23
    Pricing Observer
    A Collection of Approaches to . . .
    • Pricing Strategy
    • Pricing Structure
    • Conversion Process
    http://pricingobserver.com
    We capture and monitor the pricing evolution of a variety of products, services and solutions over time. 
    Understanding Freemium - How to Create and Grow Paying Customers
  • How to Create & Grow Paying Customers . . .
    24
    Focus on your customers
    All employees clearly understand who the target customers are, what the customers' wants and needs are all about, and what your company does to create and deliver value to those target customers. 
    Understanding Freemium - How to Create and Grow Paying Customers
  • How to Create & Grow Paying Customers . . .
    25
    Focus on your competitive advantage
    All employees understand how your organization creates value in a way no competitor does and how your products and services set your company apart.
    Each employee clearly understands their individual role in communicating and delivering this differentiation.
    This is your competitive advantage.
    Understanding Freemium - How to Create and Grow Paying Customers
  • How to Create & Grow Paying Customers . . .
    26
    Focus on your strategy
    All employees are clear about what the organization does and does not deliver to each target customer segment, and why each unique offering delivers value to the target customers.
    Further, all employees see how their individual jobs contribute to delivering and communicating the particular variations of each unique offering.
    Your strategy makes it clear what the company's objectives are and what success looks like. 
    Understanding Freemium - How to Create and Grow Paying Customers
  • How to Create & Grow Paying Customers . . .
    27
    Focus on profitable pricing
    All employees understand how their individual jobs contribute to the financial success of the organization.
    They clearly see the link between prices, margins, retained margins, cash flow, market growth and profitability.
    Understanding Freemium - How to Create and Grow Paying Customers
  • How to Create & Grow Paying Customers . . .
    28
    Focus on consistent execution
    Successful strategy execution requires aligning the entire organization to strategic objectives.
    All employees must be in synch, appropriately equipped and focused on delivering value in every customer interaction - everyday - every transaction.
    Understanding Freemium - How to Create and Grow Paying Customers
  • Thank You!
    Q-n-A
    Contact Info
    http://pricingwire.com
    chris@pricingwire.com
    @pricing
  • A P P E N D I X
  • Find out more about Freemium . . .
    31
    Great Presentations to watch (videos) :
    http://www.omnisio.com/v/ZW4WTUGdjhG/david-heinemeier-hansson-at-startup-school-08
    http://carsonified.com/blog/web-apps/how-to-choose-a-business-model/
     
    Wikipedia :  http://en.wikipedia.org/wiki/Freemium 
      
    2001 CNET article titled Snapfish scales back free pricing model :  http://news.cnet.com/Snapfish-scales-back-free-pricing-model/2100-1017_3-253832.html
     
    July 15, 2009 New York Times article titled Xobni Takes the ‘Freemium’ Route, example of launching paid version later http://bits.blogs.nytimes.com/2009/07/15/xobni-takes-the-freemium-route/
     
    Tyner Blain blog post :  http://tynerblain.com/blog/2009/02/24/freemium-model/
     
    Fred Wilson blog posts: http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html
    http://www.avc.com/a_vc/2006/03/my_favorite_bus.html  and  http://www.avc.com/a_vc/2009/07/freemiumandfreeconomics.html  and  http://www.avc.com/a_vc/2006/03/the_freemium_bu.html
     
    Mark Evans blog post :  http://www.markevanstech.com/2008/10/17/freemium-is-not-a-business-model/
     
    June 2008 Mashable article :  http://mashable.com/2008/06/13/freemium/
     
    May 2008 CenterNetworks article :  http://www.centernetworks.com/clicky-web-analytics-visualization-tools
     
    Erick Ries blog post :  http://startuplessonslearned.blogspot.com/2009/01/three-freemium-strategies.html
     
    Andrew Chen blog posts :  http://andrewchenblog.com/2009/01/19/how-to-create-a-profitable-freemium-startup-spreadsheet-model-included/
                                                       http://andrewchenblog.com/2008/11/17/how-to-calculate-cost-per-acquisition-for-startups-relying-on-freemium-subscription-or-virtual-items-biz-models/
     
    David Semeri blog post :  http://lmframework.com/blog/2009/06/freemium/
     
    Phil Wainewright, ZDNet article :  http://blogs.zdnet.com/SAAS/?p=706
     
    Financial Times articles :  http://www.ft.com/cms/s/0/350370f2-66a0-11de-a034-00144feabdc0.html?nclick_check=1 
    http://blogs.ft.com/gapperblog/2009/07/why-venture-capitalists-like-the-idea-of-freemium/
     
    Peter Froberg’s blog :  http://www.freemium.org/
     
    Anders Sundelin, The Business Model Database blog :  http://tbmdb.blogspot.com/
    Dan Zambonini blog post :  http://www.boxuk.com/blog/monetizing-your-web-app-business-models
    Brad Burnham blog post :  http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html
     
    Predictably Irrational blog post :  http://www.predictablyirrational.com/?p=653&date=1
     
    Broadstuff blog post :  http://broadstuff.com/archives/1816-Will-zero-friction-ecosystems-destroy-value.html
     
    Seth Godin blog post :  http://sethgodin.typepad.com/seths_blog/2009/06/malcolm-is-wrong.html
     
    The Free Debate, SquidooLens :  http://www.squidoo.com/the-free-debate
     
     
  • Hierarchy of Business Problems
    32
    Source: A. Abela @ www.extremepresentation.com