A few notes on the Freemium business model

Milan Vrekic
Oct 7, 2013 · 3 min read

Freemium is sexy and easy. When I say sexy, I mean that most of the recent BIG funding came for the companies doing freemium (look at Hootsuite for example) and when I say easy I mean that it is way to easy for founders not to think too much about their pricing and cost structure and just declare that they will do freemium instead.

There are some clear Pros for the Freemium: Press loves it, it is easy to get early adopters, you get to leverage passive advertising, and you build brand power A LOT faster than in the licensing model. However, that comes at a cost. That cost is a smaller paying user base, higher support costs (all those free users will all the time on their hands will be the major drag on support), free ones rarely convert (3% is considered a better rate in the industry) and you can hurt your positioning.

Before you commit to freemium, you should think and answer the following questions:

How can you monetize “free” users if they never convert into paying customers?

Can “free” users somehow benefit your paying customers? (example of this is linkedIn, paid profiles would be useless without all those millions of free accounts to look at)

Can you gain actionable market intelligence from “free” users?

Can you benefit from a “nothing attracts a crowd like a crowd” notion of a large user base? (this often is an asset if the play from the get go is an acquisition by a 3rd party and not revenue)

What is an average cost of a “free” user on an annual basis? You noticed by this point that I never wrote free. just “free” as only thing that is free is cheese in the mousetrap.

You should play with the model a bit and see what works the best. For example, you could give everyone 30 days of all-access on all features, then once they get used to the good stuff, kick them down to the lower plan and sell them on the value add features on a per-feature basis. This would dis-incentivise (did I spell that correctly?) people to signup for the free plan in the first place.

In B2B play, it is more about the time required to setup and learn the product, than money the customer would save with freemium. Free in B2B is often perceived as having zero value. A startup offering a “free” version of the product that their business is build on would appear to be less stable than the one offering the same product for a fee (the “how do they make money? will they be around next year?” question).

There is a simple formula that you can use to figure out potential customers from a freemium model: Addressable market x Reach % x Signup % x 3%

Example case would be 4200 employees in course-ware industry in Canada x 30% that we can reach x 25% of them who sign up x 3% that convert to paying (3% is the industry standard in B2B SaaS.)

Dropbox succeeded in freemium as they literally have every business out there as their potential client. Those are big numbers…

Increasing price, would allow you to get more revenue with less active clients, but larger average sales price is also more risk for client. More risk for the client results in more clients wanting personal relationship with the vendor and that costs money.

With TitanFile our risk of losing serious confidential data stored on our servers increased sales complexity, and so did increasing the cost (more people then had to approve the purchase).

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