A look at how to suc­ceed with freemium, through a num­ber of case stud­ies:

  • Exper­i­ment with dif­fer­ent freemium mod­els: When Pan­dora offered 10 hours of free radio before requir­ing users to pay an annual sub­scrip­tion, the vast major­ity of their users left once their allo­ca­tion of free time expired. The com­pany then exper­i­mented with a free, advertising-supported model with a pre­mium option avail­able (that also included a desk­top appli­ca­tion, higher qual­ity streams and fewer usage lim­its), and the sub­scriber con­ver­sion rate grew to 1.7% of their 20 mil­lion users.
    Automat­tic doesn’t employ the con­ven­tional tiered pre­mium model, but instead offers “a-la-carte freemium ser­vices”: pre­mium ‘add-ons’ such as domain map­ping. The prob­lem with this, says CEO Toni Schnei­der, is that it can be dif­fi­cult to mar­ket the dis­tinct ser­vices effectively.
  • Dis­cover where your mar­ket­ing costs should go (where are you acquir­ing users?): Drop­box started attempt­ing to acquire users through con­ven­tional search mar­ket­ing, the acqui­si­tion costs of which were thou­sands of dol­lars per cus­tomer (for a $100 prod­uct). Notic­ing that user refer­rals were a big source of growth, the com­pany then changed tac­tics and started offer­ing an incen­tive (more stor­age space) to all exist­ing users for refer­ring friends. Drop­box CEO Drew Hous­ton says that “the big les­son there is if you adopt a freemium busi­ness model your mar­ket­ing cost is the free users” and “search is great for har­vest­ing demand, not cre­at­ing it”.
  • Focus on deriv­ing max­i­mum value from users: After fig­ur­ing out the dynam­ics of their user base (that inac­tive users drop off over time and active users started paying–there was min­i­mum free­load­ing), Ever­note realised good growth and invest­ment inter­est. The company’s CEO says freemium can work for any busi­ness if you have 1) a great long-term reten­tion rate, 2) a prod­uct that increases in value over time and 3) vari­able costs.
  • Beware and identify/remove abusers: Not (nec­es­sar­ily) free­load­ers, but those who use free ver­sions for nefar­i­ous means. MailChimp’s legal costs increased 245 per­cent after abuse-related issues (spam­ming, etc.) increased by 354 in the first seven months of mov­ing to a freemium model. They had to develop ways to auto­mate their detec­tion (a waste of resources).

I also like the intro­duc­tion to this article:

Don’t spend money on mar­ket­ing, do offer flex­i­bil­ity and data export­ing to elim­i­nate buy­ers’ regret, make sure to cap­i­tal­ize on and value good­will, and only charge for things that are hard to do. That’s what some star­tups say is the key to suc­cess in the freemium busi­ness. But the biggest rea­son […] Pan­dora, Drop­box, Ever­note, Automat­tic and MailChimp are doing well is because they have great prod­ucts that peo­ple want. They’ve been able to get those prod­ucts to a broad audi­ence by using the freemium model — that is, offer­ing a free ser­vice with the option to upgrade.