3 ms·
The math is fairly simple. There are two cases: viral and non-viral. The viral case is when the value you can offer to paying customers actually increases as
by rmah 16y ago
The math is fairly simple. There are two cases: viral and non-viral.
The viral case is when the value you can offer to paying customers actually increases as more free users join the system. In this case, the free users are the resource and as long as the revenue you can extract from their added value exceeds the cost to support them, you can do freemium profitably.
The second case is non-viral and is where most people are. Here, the basic premise is that the free users may A) become paying customers or B) attract paying customers through word-of-mouth/scale halo effect.
In both cases, you need to estimate the lifetime cost of a free user. Even if it's only $0.25 per year, it will be something and is important. You will also need to estimate the lifetime profit of a customer (lifetime value minus lifetime cost). Don't forget user/customer support costs and overhead.
For case 2A, you then calculate the conversion rate for free users. If the lifetime profit of a customer exceeds the lifetime cost of a free user divided by the conversion rate, you win. If not, free users are a drag on profitability and not worth it.
For case 2B, you again calculate the lifetime profit of a customer and compare vs the lifetime cost of free users divided by the expected referral rate free users generate. If the profit exceeds the referral cost, you win. Otherwise, again, free users are not worth it.
Obviously, the above is very rough overview, and in real life there are many additional complexities. There are various ways these cases may mix, the functions may not be linear, etc. But in the end, it's just math and you can guestimate if freemium is economical for your business.
- axod 16y agoSurely also you have the option to have free users generating advertising income. I've heard that works for some people.
- carbocation 16y agoDon't forget (C): the free users actually contribute something of value (e.g., information) to your business.
- quadnrum 16y ago"[In point A] the value you can offer to paying customers actually increases as more free users join the system. In this case, the free users are the resource" This was point A.
- carbocation 16y agoIt's a very subtle distinction, but I think that really only fits under A if you assume that whatever is being contributed by the free users is valuable to the paying users. It can be valuable in other ways.
- rubeng 16y agoI'm the founder of Bidsketch and the author of one of the referenced articles. An often overlooked (and super important) effect of offering a free plan is that it will decrease the number of paid users signing up to your service initially. In other words: you will make less money upfront. If the free plan is available that's what most people will go for. It seems obvious but it's easily overlooked when trying to calculate whether or not it's worth offering a free plan. If you factor in the initial negative impact of going free as a cost then you're better prepared. Of course, the reason why I wrote the article was that most people (including myself at the time) simply add a free plan because it "works" for [random web 2.0 startup] so they figure it'll work for them too.
- JCThoughtscream 16y agoThat's still model-dependent, I think. If the cost is sufficient barrier to entry that user skepticism remains high, then you'd probably have less initial converts simply by having a smaller pool of potential clients giving you a chance.