Freemium: New Software Business Model

Freemium: Implementing the New Software Business Model November 16, 2007

About Rubicon • Help high tech organizations win markets through business and market strategy g gy – Since 1999 – Practices: define, deliver, defend, optimize Project Title Goes Here ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 2

About this presentation • quot;Freemiumquot; – Giving away software products or services in order to software, products, make money in some other way – Many names: Freeware, shareware, etc. y • Understand the freemium business model – Decide when to use it (and when not to) – Anticipate what it does to you competitively – Identify some best practices Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 3

Freemium model: Top three FAQ's • 1. quot;Should I enter the freemium market?quot; – quot;What is the market like? What like?quot; • A. Giving away software for free is a business model, not a market – Every strategy is unique, so every usage of free is unique – Decide your strategy first, then we can tell y how free y gy , you fits – Key points to consider: Current business, product line, market structure, customers, competition ktt t t titi Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 4

Freemium model: Top three FAQ's • 2. quot;What's a good conversion rate?quot; • A Conversion rates vary enormously A. – From 0.1% to 50% – What is a quot;goodquot; conversion rate depends on your good strategy and goals Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 5

Freemium model: Top three FAQ's • 3. quot;Are the freemium software vendors a threat to my business?quot; business? • A. Yes. – Because they're creating very different (and efficient) they re business practices. – It's the new business model that will challenge you, not free itself. Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 6

The fundamental difference between traditional software and freemium • In traditional software, usage of your product is an after-effect of the sale. – It's the end of the process • In freemium, getting the customer to use your product is the front end of the sales process – Thi changes almost every aspect of th b i This h l t t f the business -- product design, engineering, marketing, sales, support, etc. Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 7

The freemium conversion funnel • You lose customers at every step • The most successful free software is designed to drive conversion comprehensively Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 9

There is no standard conversion rate • Depends on many variables – Features of paid version – Effectiveness of reminders – Prequalification of downloaders, etc. Range What's bad? Consumer quot;2% to 50%quot; Below 1% is not good Depends. The higher your price, the lower Enterprise ~0.1% common the conversion rate can be b Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 10

The less focused your distribution, the lower your conversion • Magazine cover CDs – Typical conversion rate from installation to sales is 0.5% • Download through CNET, other major sites – Conversion rate of ~5% for a significant consumer application is considered good Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 11

Typical consumer conversion flowchart At expiration, give Conversion option to buy or Purchase complete downgrade to free Trial of paid app Downgrade Give option to Show animation of Download install trial of paid Visit website features being g software. software Promote software ft removed its extra features. Free application pp Upgrade free app regularly Upgrade requires installation Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 12

Consumer conversion best practices Practice Get on Download.com and other key sites and make sure your traffic is high enough to keep you highly Download ranked. Do not ask for registration information prior to download; it chases people away. Give ad for features of paid version and offer opportunity to upgrade now or to install trial of paid app. Install sta Collect registration information after install has stated. stated This is key. Gently remind user of what the program is doing, and what they could get by upgrading. Do not Usage become invisible. Frequently offer free upgrades of free app, with bug fixes and selected new features. Each time user Upgrades upgrades, run them through install process again to educate about paid benefits. If user downgrades from paid trail to free, show them the extra features being removed. Trial conversion Enable users to also download other apps with which you've made alliances. (This gets you referral fees.) Affiliates Dedicate people to designing the install and conversion process, and k Dd l d h ll d d keep them on it permanently. It's never h l ' Staff done. Change offers and upgrade messages frequently; explore around to find out what works. Experiment Measure uptake and conversion rates every step of the way, and report results frequently (weekly is good). Track Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 13

Strike the right balance • Reminding and incenting people to upgrade drives conversion • Crippleware and nagging lowers conversion • Small, subtle changes can make a substantial change in conversion rate – quot;30% increase.quot; quot;50% delta.quot; Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 14

Three basic free business models • The details vary incredibly – How is the software used, , what's the competition, what's the segment, what's the delivery model, etc, etc. – Most companies mix models • Because they experiment – Every company is unique y py q – Learn the possibilities and tailor a model to your needs y Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 16

The most innovative freemium companies are on the web • They assume free and build up from there • Lines between packaged apps and web apps a eb u are blurring rapidly g ap d y – It's really just a different channel • Already, in our customer surveys, most users don't differentiate – Web app insights apply to all software companies – Over the next several years, packaged software merges with web apps Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 17

User pays for upgrade • Most commonly used in downloadable apps • quot;More featuresquot; are the main reason to upgrade pg consumer – In enterprise, usually support + more features – To consumers support is not as big a benefit unless product is a consumers, specialized tool • Means you expect problems • Security might qualify • Key: Balancing satisfaction with free product vs. inducement to upgrade – Products seen as intentionally crippled are hated Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 19

Example: Google SketchUp • Base product is free – Can be used to create buildings for Google Earth • Paid version: SketchUp Pro, $495 – CAD export – Presentation software – E-mail tech support – Free trial: Eight hours of usage Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 20

User pays for ongoing services • Like trialware, but not tied to time – Get them hooked and then start charging them – Usually a web application tied to volume • quot;Stealth lock-insquot; --Joel Spolsky p y – User's data is stored in the product and hard to get out – User's identity is tied to the product (e-mail address) • Very common in web services for bloggers and websites Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 21

Lock-in software • Gmail – Free until you hit a storage limit – Emerging as a common approach for Google • ClustrMaps – Website traffic counter – Pay when you hit a certain traffic level ff l l • The old AOL – Get you to t y it free, t e you e stuc because your e a address try t ee, then you're stuck you e-mail add ess is there Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 22

User pays for premium services • Base product is free and fully functional, but user can py pay for extra benefits • Very common in enterprise, where web software can be on user's server or hosted – Pay f hosting for h – A variant of Software as a Service – Usually combined with open source development model • Also used sometimes for consumer web apps Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 23

SugarCRM • Base product open source • 30-day free trial on paid version – Support, additional dd l modules • Deployment options: On-demand, appliance, on-site – Different financial models for each • 1m downloads 1k paying customers (.1% conversion) downloads, ( 1% Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 24

MySQL • Database • Paid version includes support, maintenance, deployment help – Annual fee – Must also pay if embedding in commercial product • 6m users 5k customers ( 083%) $34m revenue users, (.083%). revenue. Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 25

SecondLife • Residency is free • Paid account gets a currency stipend, ability to own land, and ability to display products (clothing, etc) Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 27

User pays for support • Heavily used in enterprise and development tools – Anything where users expect to ask questions, where they are customizing or developing – Assumes a very dedicated user • Often used in combination with extra features Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 28

Red Hat Linux • quot;Monetizesquot; 10% of its Linux base • Why it works: efficient distribution – Spends 30 cents to get a dollar of maintenance revenue – Even though maintenance revenue isn't that huge, costs are so much lower that the model works Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 29

User pays for commercial use • Used very often with open source – Source code is given away free for noncommercial use use, but if you use it in a for-profit product you have to pay – Often paired with support and a few extra features Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 30

JasperSoft • Business intelligence software • Base product open source; commercial use ( (resale) requires a l) i license – Paid license also gets support, additional features • 2m downloads, 20k deployments, 5,000 p y g ( , py ,, paying (.25%) ) Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 31

Advertising the user views • The most common for content, communities, and some services – Google, Yahoo, AOL • Works best when there's context on what the user is looking f l ki for – Web search – Communities (best tied to promotions) – Does not work as well when there's no context • Does your application generate context on user intent/interest? If not, maybe it's not right for ad-supported. Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 33

Advertising attached to something the user builds • Very common in publishing tools online • Usual model: Use of tool is free if you let site place ads – Pay if you want ads removed – Ads can be tied to content; increases effectiveness • Example: FeedBlitz – Lets you distribute weblog posts by email -- but inserts ads after them Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 35

SixApart blogging • Three communities, three products, three models • Vox – Easy blogging, self-expression; affiliate and ad-supported • LiveJournal – Intense community, open source, volunteer support – Paid premium features: more photos, surveys, themes, etc. • TypePad – Mainstream blogging – Open source base (Movable Type), paid hosted service (TypePad) and paid support d id t Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 38

•Critical mass •Kill a competitor •Set a standard •Brand B d awareness •Shared revenue •Get help from a community •C tft Create future b buyers Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 40

Create a critical mass of users • Lack of critical mass often hinders adoption of new apps, especially when they benefit from lots of users pp , p y y • Use free distribution to build up an installed base quickly • Frequently used by Microsoft – Example: Sharepoint free add-on for Windows 2003 Server • Key: – How do you monetize it? • Sharepoint helps Microsoft server sales Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 41

Kill a competitor • Give away equivalent to competitor's cash cow and wait for them to go broke g – Can get you sued, but very effective if you're a larger competitor – Often combined with open source today • Cl i Classic: – Microsoft Internet Explorer vs. Netscape • Today y – Google apps, Google Android, Sun + Open Office, IBM + Linux Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 42

Set a standard • Frequently used with quot;runtimequot; players – Flash PDF, QuickTime, Microsoft Silverlight Flash, PDF QuickTime • Company usually makes money from tools, or is pushing a standard that protects its other businesses • Sub-example: Set a standard and then charge Sub example: – Flash is free for PCs – Flash costs money on mobile devices Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 43

Set a standard before Microsoft arrives (1) • VMware: Virtualization software – Mi Microsoft is working on virtualization features to be bundled i ft i ki i t li ti f t t b b dl d in Windows for free • Answer: give away the base product – Get embedded in IT and in the minds of computing students • If they're used to VMware, they'll continue to use it – Paid versions have support, administrative tools pp , • Key: Move through adoption curve fast, monetize later Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 44

Set a standard before Microsoft arrives (2) • AOL: Consumer online services • Before the Internet killed private online services, AOL beat Microsoft – Was the leading dial in service dial-in – Knew Microsoft was coming – Flooded the country with CDs offering free trials y g – Extremely successful: MSN never met its goals Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 45

Brand awareness • Free software is a substitute for advertising • quot;We have an installed base of 6 million out there. This is our marketing department.quot; – Marten Mickos CEO MySQL Mickos, CEO, Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 46

Build brand awareness • Distribute a free version with OEM hardware in order to create brand presence p – quot;OEM upgrades are just a bonus; the main goal is building brand awareness so they'll buy from us later.quot; – 1% conversion rate on an OCR program bundled with scanners • 80% of OEM customers who used the app did so only once a year • Key: Potentially useful for an unknown brand with enough resources t wait h to it – More targeted than most advertising Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 47

Shared revenue • User and developer collaborate to produce value, value and share revenue – eBay • Also often used with art, crafts – iStockPhoto (stock photography), deviantArt (artwork), Threadless (t-shirt designs) Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 48

Get help from a community • In exchange for a free core product, community adds value to it – Documentation, software drivers, support, evangelism, localization – Enables a small company to scale faster, a large company to hit niches • Core with value add is leveraged to make money in other ways – Often used with hosted services Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 50

WordPress • WordPress.org – Free weblog creation g software, well documented and supported with help of community – Lots of third party plug-ins • WordPress.com – Commercial paid service to host a weblog for you – Uses WordPress code base, documentation, plug-ins, and support – Free software community cuts expenses of paid service Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 51

Create future buyers • Get young people locked in for free, so you can charge their schools and employers later • Can be used in schools • A long-time tactic by Microsoft and Apple long time Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 52

Three tasks • Understand how freemium could be used to attack your business • Understand how you could apply freemium • Learn to think like a web app company Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 55

How could freemium be used to attack you? • Are freemium companies targeting parts of your market already? • Are there online communities of your users that you don't control/participate in? don t • Are overhead and development costs preventing you from serving some segments/regions? Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 56

How could you apply freemium? • Do you have employees who understand the model? • What parts of your company have to change, and how? • Can you organize a small/low cost team to experiment? • Which freemium model(s) fit best with your p product and market? Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 57

Think like a web app company • Drive traffic first, then monetize • What are your user communities? • How can you get them to hang out with you? • What problems do they share? p y • Can you solve those problems -- even if they're not related to your software? • What can you monetize once you h h i have the traffic? h ffi – Example: Who else would like to market to your users? Can you charge them for access? Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 58

For more information • How to apply the lessons to your situation • What skills and practices you need to change • Vulnerabilities to free competitors • Visit us at www.rubiconconsulting.com • Or call 408 395 3910 Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 59

Win Markets Trusted Advisors to high-tech fi T d Ad i hi h h firms seeking ki to transform their visions into strategies, strategies into plans, and plans into results. Practices: Define / Design / Defend / Optimize Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 60

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Freemium: New Software Business Model

by Nilofer Merchant on May 12, 2009

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