The conversion funnel as a competitive advantage
Understanding Evernote’s successful growth strategy
One of the perks of teaching at a well-known business school is being able to invite senior executives from companies with interesting strategies so that your students can talk to them. Given that the men and women from these companies understand that the worst thing they can do with the chance to talk to 30 or 40 brilliant students from around the world is to give them the official spiel, the result of these encounters tends to be interesting, and highly valued by my students.
Last month I invited Evernote to my International MBA class. I was looking for a way to illustrate strategic concepts to do with cloud computing, and virtually cold called the company, imagining that at best they would agree to give some kind of session via Skype or Google Hangout. Instead, John McGeachie, the company’s VP of Sales, agreed to stop over in Madrid during a trip to Europe, along with Emma Page, the head of Business Accounts at EMEA, to share with my students a huge amount of interesting details on the company’s strategy.
Some of what emerged during that session helps to understand recent news about the company, particularly its its agreement with Teléfonica that will allow the teleco to offer Evernote premium accounts to its 274 million clients around the world, starting in Brazil. The deal is simply the latest in an aggressive expansion strategy that has produced similar agreements with other telecos such as Taiwan Mobile, Deutsche Telekom and NTT DoCoMo, and which implies, to all intents and purposes, giving away an infinite number of premium accounts, the company’s main product, and the basis for the vast majority of its turnover.
So why would a company pursue a long-term strategy that involves giving away its product to a huge number of non-paying customers? The answer is simple: Evernote understand the conversion funnel. The company is pursuing the classic freemium strategy: downloading its application is free, and comes with extremely generous limits on the amount of services users can access (60 MB/a month), not just in relation to the use of Evernote itself, but of the many applications developed by a range of developers attached to it, and that are available via Evernote Trunk. Upgrading to its premium service costs just 5 dollars a month, or 45 dollars a year.
Companies based on a freemium model must be very careful about their cost-structure: chaotic growth can mean fronting the costs of huge numbers of users taking advantage of your infrastructure without paying for it. Which is why it is so important to understand how to convert those clients into paying customers, at the same time as creating a sufficiently contained cost structure. How successful has Evernote been in reducing its service costs per customer? John McGeachie told my students that the figure is between five and seven cents per customer.
On average, it takes around three years for a customer to upgrade to a premium service. Over the course of a client’s life, the company can monitor variables such as overall use of the service it offers, the number of devices it is using the service from, intensity of use, etc., to evaluate the likelihood of upgrading. In the case of steady users of the service, this tends to happen around year three, the point at which they see, in the case of Evernote, that they have become sufficiently attached psychologically and professionally to the service to think about paying an annual fee. It is highly likely that by having started out as a premium user they are more inclined to make the move up sooner. In other words, once they have had access to virtually unlimited use, returning to a free, but basic service, even if it is generous, is unlikely.
Evernote’s strategy so far consists of giving premium accounts to as many users as possible. In response, Google has launched Keep, but to no avail: downloads of Evernote just kept growing. Combine that with a healthy capitalization, and you get an brilliant strategy, aimed precisely at competing with the big boys: a perfect illustration of how to understand the conversion funnel as a competitive advantage.
