Why study Freemium?
Pricing is tricky...
how should we
think about the
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Don’t rely on buzzwords - think through the problem
People say stuff
“As for me, all I know
is that I know nothing”
The Psychology of Free
• “Zero as emotional hot button - source of irrational excitement” - the
• Free removes the psychological barrier of the downside
(automatically make us think that there’s no risk involved although
there might be)
• The Penny Gap - it is much harder to get someone to pay the first
penny than to upgrade them from a penny to 20 cents.
The Economics of Free
In economic theory - a software product is an experience good -
a product or service where product characteristics such as
quality or price are difficult to observe in advance, but
these characteristics can be ascertained upon
“The fact was that Dropbox was offering
a product that people didn’t know they
needed until they tried”
Shapiro - “Optimal Pricing of Experience Goods”
Contribution to current
Favorable quality information augments future demand
“The seller can mitigate the problems of skeptical consumers by using a low
introductory price, and it is optimal to do so. The seller's optimal policy consists
of a low introductory price followed by a higher price which is maintained
How Freemium worked for LinkedIn
Premium Subscriptions. Revenue
from our premium subscriptions is
derived primarily from online sales
of our Business, Business Plus and
Executive subscription products.
These products provide our
members, acting as individuals
or on behalf of their enterprises
or professional organizations,
with access to more tools and
features than our free
membership, including enhanced
search results, enhanced
functionality and priority
How Freemium worked for Dropbox
Broken Economics - LTV of $99 on $300 CAC led
to focus on Freemium + strong referral program
A framework to think through freemium
Direct Revenue from free
(Advertising, selling data)
Inherent value to
Value added to
No value added to
Promotional value from
They are telling you only a part of the story...
Word of mouth?
The 8 types of virality - inherent
Best kind of virality. Users invite
other users because this is the
only way they can use the product.
Causes very strong network
The 8 types of virality - collaborative
Users invite other users because
they want to collaborate with them.
In this case - the product is still
useful as a stand alone.
The 8 types of virality - communication
Riding a communication channel
with a digital signature. Every
message that is sent is spreading
the work about the product.
The 8 types of virality - incentivized
Users invite other users because
of an incentive. In Dropbox’s case
- extra space. For Gilt - $25.
The 8 types of virality - embedded
Works well for content websites /
products. Creating a “widget” that
can be embedded in other
websites and helps spread the
The 8 types of virality - signature
Great for products that are used
off site (Kampyle, Uservoice). In
this case there’s a logo signature
that promotes the product. This
will many times be removed for
The 8 types of virality - social
“Riding” a social network can lead
to exponential growth. Users are
spreading the word by simply
using the application. Their
activities are broadcasted to the
whole social graph (think Zynga,
The 8 types of virality - pure word of mouth
Sometimes, when the product is
special or adds a lot of value,
there’s a pure word of mouth
effect. This was very strong in the
early days of Groupon (especially
since it started locally).
There’s a clear formula for virality
with which you can calculate the
The two important parameters are:
K - Viral Coefﬁcient. How many
new users each user brings?
p - Cycle Time. How long does it
take a user to bring in new users?
You can then calculate how many
users you will have in time t given
the users in time 0.