5 ms·

Here's the mistake: "I have come to the realization that most people who want something for free will never, ever think of paying you, no matter how valuable t

by pg 15y ago

Here's the mistake: "I have come to the realization that most people who want something for free will never, ever think of paying you, no matter how valuable they find your service." This is true, but irrelevant. What matters is the total number of people paying you, not what percentage of your users that fraction represents. https://www.google.com/search?q=dropbox+revenues https://www.google.com/search?q=dropbox+revenues

easp 15y ago
No, not irrelevant, unless "free" users also cost you nothing.
- pg 15y ago
  They don't have to cost you nothing, just little enough that you're net ahead. And since startups that use the freemium model invariably manage to make free accounts cheap, I assumed I didn't have to mention that explicitly.
  - ryanwaggoner 15y ago
    But isn't the percentage of users who pay what determines whether you're net ahead, and not the total number of paying users [1]? If Dropbox has ten million users paying them $10 / month, but they have to support another billion free users for twenty cents per month each, they're screwed. 1. Assuming you're making enough to cover fixed expenses
    - extension 15y ago
      profit = paying users * price per user - total users * expense per user - overhead expenses Business on the internet seems to be much more about driving up total users while driving down expense per user, rather than driving up paying users / total users.
    - pg 15y ago
      Not in practice. Usually startups arrange that the incremental cost of one additional free user decreases as the number of free users increase.
drieddust 15y ago
Why should a business add burden of supporting additional users unless free users bring something to table in some tangible form like free press? I am really curious.
- pg 15y ago
  It's essentially a marketing expense.
  - blantonl 15y ago
    I do agree with this. Especially in this case if you outsource some of your marketing "expenses" to social platforms ("Like buttons", "tweet this", etc)
- radagaisus 15y ago
  That's like a woman in a burka.
- InclinedPlane 15y ago
  If you can't figure out a good reason to support free users too, then don't. Not every app is suitable for a freemium style of business. The big advantage of freemium is lower friction. The people who buy your product don't typically need it advertised or explained to them. They've either already got experience with it due to being free users or they will set aside some time to trial you product for free for a while. Beyond that a free product can build up a strong reputation that carries over to the paid versions. Billions upon billions of dollars are spent every year by companies trying to create familiarity and trust in their brands. Being able to do that with a free version of your actual product is just as worthy of the expense and in many ways a far more honest form of advertising.
- soham 15y ago
  Aaron Levie - Why Freemium Works http://www.youtube.com/watch?v=7hpi5nUhssY http://www.youtube.com/watch?v=7hpi5nUhssY http://techcrunch.com/2009/07/12/guest-post-is-free-the-future-of-enterprise-software-yes-and-no/ http://techcrunch.com/2009/07/12/guest-post-is-free-the-futu...
MatthewPhillips 15y ago
Can freemium work without hitting a home-run ala Dropbox?
- MaxGabriel 15y ago
  Yeah--check out the background of Bingo Card Creator. There's lots of HN discussion on it, too http://www.kalzumeus.com/2011/12/21/bingo-card-creator-etc-year-in-review-2011/ http://www.kalzumeus.com/2011/12/21/bingo-card-creator-etc-y...
- jacquesm 15y ago
  Define 'work'. Figures from several freemium businesses that I am familiar with suggest that this model works on the 'lifestyle' end as well as on the 'more money than you could reasonably spend in a lifetime' ends of running a business, and I presume on many points in between. The trick is not to lose too much money on your free users and to make them pay in some other way, for instance by selling advertising or by engaging them to promote the product to others.
tptacek 15y ago
That's a good point, but it's a startup point, right? At scale, the percentage of the addressable market that is sufficiently served by your free option does matter, doesn't it? I get that this is a startup article, and my thought reading this article was "well, that's conversion math for you." But you're making a broader point.
- keeptrying 15y ago
  You can actually induce your own pressure on the free users by changing your product so that a very valuable piece is now in the paid section. Sometimes you can create your own demand. Have a look at avvo.com. They do it well.
blantonl 15y ago
I do not agree with this. The percentage of users that convert should be a closely watched metric that is very important to any freemium business.
- pg 15y ago
  If you think I disagree with that, you misunderstood what I wrote.
  - blantonl 15y ago
    It is probably a case of us arriving to the same result by taking a different path. As I go back and reread your post with a broader viewpoint thats what I'm thinking?
    - jayliew 15y ago
      It's possible that you could have a company that has 1% paying users that's MORE profitable than a company with 50% paying users. The size of the profit is more important than ratio of paying to non-paying, generally speaking. (And of course, in either case you pay real close attention to the conversion rate and try to get it up higher.)
    - setzer 15y ago
      The total number of paying customers is what determines your revenue. But even then, it's important to track free->paid conversion percentages, e.g. sudden drop offs.
  - sraut 15y ago
    So what you are saying is having free users is better than no users (even though it is an expense) because a greater proportion will convert (hopefully) eventually? Write it off as a marketing expense and hope it attracts more paid users?
sc00ter 15y ago
"What matters is the total number of people paying you, not what percentage of your users that fraction represents." Surely the total revenue from paying customers, relative to the cost of providing service to all users, is what matters^? If so, then this is ultimately a function of the percentage of paying users to free users (assuming cost of servicing paying and free customers are largely similar). The opening statement of the post, that people who want something for free won't think to pay for it, is something of a non-statement. That free users cost (as the post goes on to argue) is pretty much a given, but it still matters. ^Where (I assume) what matters is a profitable business.
- superuser2 15y ago
  Not necessarily true. The largest costs (especially at small scale) are fixed - the vps/dedicated box/rack/EC2 instance. Freemium models tend to scale price with bandwidth/storage usage, which would be the largest variable costs. Is serving a million users with barely any data really that hard once you have the infrastructure to serve a few thousand with lots of data?
viveksec 15y ago
Great point. I wonder how the Freemium model works for something like Splunk. Do free users constitute a completely different universe or there is significant conversion of free to paying users ?
- nodata 15y ago
  Well given that free Splunk won't index any useful amount of data, and the pricing is so high that it can only work for corporations, I can only see Splunk working as a license-enforcing trial.
d_rwin 15y ago
Paul, the notes from the developer is very much relevant and reflect on the model we expect. The values in the freemium model has depreciated. If only you can derive any significant value over time. Dropbox, evernote has already given out the rewards system (towards all). But the one we would like to model is Rovio mobiles Angry birds. Expecting to get paid on a depreciating model is lunatic. Without any metric over such - this model works, but expecting to get paid on a depreciated value, never does.

by pg 15y ago

easp 15y ago

No, not irrelevant, unless "free" users also cost you nothing.

pg 15y ago
They don't have to cost you nothing, just little enough that you're net ahead. And since startups that use the freemium model invariably manage to make free accounts cheap, I assumed I didn't have to mention that explicitly.
- ryanwaggoner 15y ago
  But isn't the percentage of users who pay what determines whether you're net ahead, and not the total number of paying users [1]? If Dropbox has ten million users paying them $10 / month, but they have to support another billion free users for twenty cents per month each, they're screwed. 1. Assuming you're making enough to cover fixed expenses
  - extension 15y ago
    profit = paying users * price per user - total users * expense per user - overhead expenses Business on the internet seems to be much more about driving up total users while driving down expense per user, rather than driving up paying users / total users.
  - pg 15y ago
    Not in practice. Usually startups arrange that the incremental cost of one additional free user decreases as the number of free users increase.

drieddust 15y ago

Why should a business add burden of supporting additional users unless free users bring something to table in some tangible form like free press? I am really curious.

pg 15y ago
It's essentially a marketing expense.
- blantonl 15y ago
  I do agree with this. Especially in this case if you outsource some of your marketing "expenses" to social platforms ("Like buttons", "tweet this", etc)
radagaisus 15y ago
That's like a woman in a burka.
InclinedPlane 15y ago
If you can't figure out a good reason to support free users too, then don't. Not every app is suitable for a freemium style of business. The big advantage of freemium is lower friction. The people who buy your product don't typically need it advertised or explained to them. They've either already got experience with it due to being free users or they will set aside some time to trial you product for free for a while. Beyond that a free product can build up a strong reputation that carries over to the paid versions. Billions upon billions of dollars are spent every year by companies trying to create familiarity and trust in their brands. Being able to do that with a free version of your actual product is just as worthy of the expense and in many ways a far more honest form of advertising.
soham 15y ago
Aaron Levie - Why Freemium Works http://www.youtube.com/watch?v=7hpi5nUhssY http://www.youtube.com/watch?v=7hpi5nUhssY http://techcrunch.com/2009/07/12/guest-post-is-free-the-future-of-enterprise-software-yes-and-no/ http://techcrunch.com/2009/07/12/guest-post-is-free-the-futu...

MatthewPhillips 15y ago

Can freemium work without hitting a home-run ala Dropbox?

MaxGabriel 15y ago
Yeah--check out the background of Bingo Card Creator. There's lots of HN discussion on it, too http://www.kalzumeus.com/2011/12/21/bingo-card-creator-etc-year-in-review-2011/ http://www.kalzumeus.com/2011/12/21/bingo-card-creator-etc-y...
jacquesm 15y ago
Define 'work'. Figures from several freemium businesses that I am familiar with suggest that this model works on the 'lifestyle' end as well as on the 'more money than you could reasonably spend in a lifetime' ends of running a business, and I presume on many points in between. The trick is not to lose too much money on your free users and to make them pay in some other way, for instance by selling advertising or by engaging them to promote the product to others.

tptacek 15y ago

That's a good point, but it's a startup point, right? At scale, the percentage of the addressable market that is sufficiently served by your free option does matter, doesn't it? I get that this is a startup article, and my thought reading this article was "well, that's conversion math for you." But you're making a broader point.

keeptrying 15y ago
You can actually induce your own pressure on the free users by changing your product so that a very valuable piece is now in the paid section. Sometimes you can create your own demand. Have a look at avvo.com. They do it well.

blantonl 15y ago

I do not agree with this. The percentage of users that convert should be a closely watched metric that is very important to any freemium business.

pg 15y ago
If you think I disagree with that, you misunderstood what I wrote.
- blantonl 15y ago
  It is probably a case of us arriving to the same result by taking a different path. As I go back and reread your post with a broader viewpoint thats what I'm thinking?
  - jayliew 15y ago
    It's possible that you could have a company that has 1% paying users that's MORE profitable than a company with 50% paying users. The size of the profit is more important than ratio of paying to non-paying, generally speaking. (And of course, in either case you pay real close attention to the conversion rate and try to get it up higher.)
  - setzer 15y ago
    The total number of paying customers is what determines your revenue. But even then, it's important to track free->paid conversion percentages, e.g. sudden drop offs.
- sraut 15y ago
  So what you are saying is having free users is better than no users (even though it is an expense) because a greater proportion will convert (hopefully) eventually? Write it off as a marketing expense and hope it attracts more paid users?

sc00ter 15y ago

"What matters is the total number of people paying you, not what percentage of your users that fraction represents." Surely the total revenue from paying customers, relative to the cost of providing service to all users, is what matters^? If so, then this is ultimately a function of the percentage of paying users to free users (assuming cost of servicing paying and free customers are largely similar). The opening statement of the post, that people who want something for free won't think to pay for it, is something of a non-statement. That free users cost (as the post goes on to argue) is pretty much a given, but it still matters. ^Where (I assume) what matters is a profitable business.

superuser2 15y ago
Not necessarily true. The largest costs (especially at small scale) are fixed - the vps/dedicated box/rack/EC2 instance. Freemium models tend to scale price with bandwidth/storage usage, which would be the largest variable costs. Is serving a million users with barely any data really that hard once you have the infrastructure to serve a few thousand with lots of data?

viveksec 15y ago

Great point. I wonder how the Freemium model works for something like Splunk. Do free users constitute a completely different universe or there is significant conversion of free to paying users ?

nodata 15y ago
Well given that free Splunk won't index any useful amount of data, and the pricing is so high that it can only work for corporations, I can only see Splunk working as a license-enforcing trial.

d_rwin 15y ago

Paul, the notes from the developer is very much relevant and reflect on the model we expect. The values in the freemium model has depreciated. If only you can derive any significant value over time. Dropbox, evernote has already given out the rewards system (towards all). But the one we would like to model is Rovio mobiles Angry birds. Expecting to get paid on a depreciating model is lunatic. Without any metric over such - this model works, but expecting to get paid on a depreciated value, never does.