Succeeding With Freemium (Case Studies)

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.