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That's the number of users who are paying. He mentions that he has over 100K total users. That raises an issue with this sort of model that I've never really u

That's the number of users who are paying. He mentions that he has over 100K total users. That raises an issue with this sort of model that I've never really understood: if only ~1% of users are paying, it seems like very small changes in conversion rate could make or break the business. Suppose the conversion rate goes down by just 0.3%. That would be a 30% reduction in revenue while you still have to run the infrastructure to support all the free users who didn't convert. Would the business still be financially viable? What's the best way to manage that risk?

basseq 9y ago
Very small absolute changes in that metric are very large relative changes. A conversion rate dropping from 1% to 0.7% is—as you point out—a 30% change in that metric. Or, put in different terms, a drop from 1,000 paying customers to 700 is material and more than a "very small change".
AznHisoka 9y ago
That's not a real risk. That's an outcome. A risk is something that LED to that drop in conversion. It could be a competitor coming in with the same feature set, or something else. But a drop in conversion is not a risk, it's an outcome.
- learc83 9y ago
  The risk part is the small margin that means you can't survive small bumps that lead to a drop in conversion.
  - AznHisoka 9y ago
    as the person who responded above me noted, that's not a small margin at all. That's a huge relative change.
    - learc83 9y ago
      I'm not talking about the previous posters 30% drop being a small margin. I'm saying that 1% paying customers is a risk and it's likely to get lower than that, the more exposure it gets.
      - AznHisoka 9y ago
        First, why is 1% paying customers a risk? That's actually a fairly average/normal conversion rate for a freemium product. Trello, I wager gets way less than that. Second, why is it likely to get lower the more exposure it gets?
        learc83 9y ago
        I'm not an expert. I've never ran a SaaS business with a freemium model (I have ran SaaS businesses with other pricing models). But, everything I've ever read on the subject indicates 1% is either bare minimum or too low. [1,2] >Second, why is it likely to get lower the more exposure it gets? In my experience the more hype you get, the lower your conversion rate all other things being equal (in my case conversion rate after free trial, vs freemium) because people who had to search you out to find you are more likely to convert than people who are just checking out the hottest new thing they saw on HN. That's obviously not always true, and it may not be true in their case, but if I were the CEO, I'd be very focused on increasing my conversion rate. 1. https://hbr.org/2014/05/making-freemium-work https://hbr.org/2014/05/making-freemium-work 2. https://techcrunch.com/2012/11/04/should-your-startup-go-freemium/ https://techcrunch.com/2012/11/04/should-your-startup-go-fre...
justboxing 9y ago
> only ~1% of users are paying, it seems like very small changes in conversion rate could make or break the business. Agreed. 4% to 5% seems to be the minimum for this sort of model to sustain and not die. > Chris Anderson in his book “Free” explains that Freemium works on the 5 Percent Rule - where 5% of premium customers support the remaining 95% of free users and also the cost of servicing the 95% is close to zero. Source: https://www.chargebee.com/blog/freemium-business-model/ https://www.chargebee.com/blog/freemium-business-model/ When Dropbox launched they were surviving on their 4% of users who had converted from free subscription. Now their conversion rate is around 25% which is very impressive for a fremium product / service.

basseq 9y ago

Very small absolute changes in that metric are very large relative changes. A conversion rate dropping from 1% to 0.7% is—as you point out—a 30% change in that metric. Or, put in different terms, a drop from 1,000 paying customers to 700 is material and more than a "very small change".

AznHisoka 9y ago

That's not a real risk. That's an outcome. A risk is something that LED to that drop in conversion. It could be a competitor coming in with the same feature set, or something else. But a drop in conversion is not a risk, it's an outcome.

learc83 9y ago
The risk part is the small margin that means you can't survive small bumps that lead to a drop in conversion.
- AznHisoka 9y ago
  as the person who responded above me noted, that's not a small margin at all. That's a huge relative change.
  - learc83 9y ago
    I'm not talking about the previous posters 30% drop being a small margin. I'm saying that 1% paying customers is a risk and it's likely to get lower than that, the more exposure it gets.
    - AznHisoka 9y ago
      First, why is 1% paying customers a risk? That's actually a fairly average/normal conversion rate for a freemium product. Trello, I wager gets way less than that. Second, why is it likely to get lower the more exposure it gets?
      - learc83 9y ago
        I'm not an expert. I've never ran a SaaS business with a freemium model (I have ran SaaS businesses with other pricing models). But, everything I've ever read on the subject indicates 1% is either bare minimum or too low. [1,2] >Second, why is it likely to get lower the more exposure it gets? In my experience the more hype you get, the lower your conversion rate all other things being equal (in my case conversion rate after free trial, vs freemium) because people who had to search you out to find you are more likely to convert than people who are just checking out the hottest new thing they saw on HN. That's obviously not always true, and it may not be true in their case, but if I were the CEO, I'd be very focused on increasing my conversion rate. 1. https://hbr.org/2014/05/making-freemium-work https://hbr.org/2014/05/making-freemium-work 2. https://techcrunch.com/2012/11/04/should-your-startup-go-freemium/ https://techcrunch.com/2012/11/04/should-your-startup-go-fre...

justboxing 9y ago

> only ~1% of users are paying, it seems like very small changes in conversion rate could make or break the business. Agreed. 4% to 5% seems to be the minimum for this sort of model to sustain and not die. > Chris Anderson in his book “Free” explains that Freemium works on the 5 Percent Rule - where 5% of premium customers support the remaining 95% of free users and also the cost of servicing the 95% is close to zero. Source: https://www.chargebee.com/blog/freemium-business-model/ https://www.chargebee.com/blog/freemium-business-model/ When Dropbox launched they were surviving on their 4% of users who had converted from free subscription. Now their conversion rate is around 25% which is very impressive for a fremium product / service.