Should Your Startup Go Freemium? Editor’s note: Jules Maltz is a general partner at IVP and focuses on later-stage venture investments in rapidly-growing Internet and software companies. Follow him on Twitter. Daniel Barney is a senior associate at IVP and focuses on later-stage venture investments in digital media and information technology. Follow him on Twitter.
Over the last several months, there has been an intense debate about the viability of freemium business models. While we’re not Samurai sword fighters at IVP, we believe that freemium is massively disruptive and needs to be understood. 1) Start With The Product Over the course of our interviews, one point came up again and again: make sure your No. 1 priority is your product. Typical freemium companies convert between 1 percent and 10 percent of users into eventual paying customers. Furthermore, the simplicity and quality of your product must be consistent across both free and paid offerings. 2) Know Your Customer: Is Freemium Right for Them? 2. 2. 1. 2. 1. IVP Freemium white paper. The Complete Guide To Freemium Business Models. Editor’s note: This guest post was written by Uzi Shmilovici, CEO and founder of Future Simple, which creates online software for small businesses.
The post is based on a study done with Professor Eric Budish, an economics professor at the University of Chicago Booth School of Business. It also includes ideas and comments from Peter Levine, a Venture Partner at Andreessen-Horowitz and a professor at Stanford GSB The idea of offering your product or a version of it for free has been a source of much debate. Pricing is always tricky. Unfortunately, many entrepreneurs don’t give it enough thought. They will often copy the pricing strategy of similar products, base their decisions on pompous statements made by “experts” or rely on broken rationale (we worked hard so we should charge $X). The Law of Marginal Cost Pricing plays a huge part in competing for customers. Guess what? An Experience Good At the core of the “Free” models are the products or services being offered to the customer. The product qualified lead (PQL) Segmenting customer pipelines. When building a freemium SaaS company or an ecommerce company or any product that requires users to move through a funnel towards an objective, it’s important to track this funnel to understand where the funnel can be improved.
But tracking one funnel may not be enough. The aggregated funnel may be masking conversion differences across customers segments. For example, at Expensify conversion rates to paid vary quite a bit across customer size. But the total conversion-to-paid rate hides these nuances. It’s critical to understand each segment well. For each, which features are missing or are too complex? This understanding is ultimately critical to the success of the product and marketing teams who must determine how to serve the different segments of the customer base effectively and efficiently. We recently built a segmented marketing funnel at Expensify.
Identify your segments. The Freemium Business Model. I wrote a post last weekend called My Favorite Business Model. I posted it earlier today. Here is how I described the business model: Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base. At the end of the post I asked for some suggestions of what I should call this business model. I’ve gotten 33 comments already which may make this the most commented post I’ve ever written, surely its the most commented post in the first day I’ve ever written. And at the risk of calling the game before it’s over, I have to go with Freemium. So from here on in, I will refer to this business model as the freemium business model. Essential Companion Guide to Freemium Article.