Home Freemium: Everyone’s Doing It, But How?

Freemium: Everyone’s Doing It, But How?

The Freemium Summit, an event focused on discussing the ever popular business model and how new companies can best take advantage of it, was held last Friday in San Francisco, and since then, interesting stats and bits of information have been popping up on blogs and news sites. New business models have been a hot topic of discussion lately as we’ve debated both the benefits of freemium and it’s possible replacement model, subscriptions. For any company taking its first steps into the freemium model, it takes careful consideration when deciding how to structure a freemium model, from how much to charge, to which services to charge for.

ZDNet writer Tom Foremski recently published an article on his blog “IMHO” about some lessons he learned during a discussion with a handful of freemium startup executives that could be useful to a startup looking to adopt the popular business model. The execs, all from companies in Emergence Capital’s portfolio, were from Yammer, YouSendIt, SurveyMonkey, InsideView and Echosign, and provided some key tips for getting into freemium.

Foremski provides us with ten points he gathered from the discussion, and at the top of the list is a wise suggestion: “Don’t try and guess how your users interact with your service, and which features to offer, perform multiple tests of usability, features, and pricing. Intuition is the starting point but test it out against multiple variants.”

This lesson points to the fact that no matter how you plan your site, or how you intend people to use it, they will undoubtedly find alternative uses and features for the site that you either hadn’t thought of or hadn’t though were as important as other parts. If your company is launching out of the gate with a freemium model in place, be sure to carefully review feedback and statistics from your users and don’t be afraid to mix up the model if things aren’t working right.

Others might choose to launch without the model in place to see which features are more popular, or to see what customers want that the site doesn’t yet offer. Either way, it may be best to beta test the model before releasing it in order to gauge your customers’ reaction. Also remember that customer reactions to changes tend to be a little extreme at first, so take them with a grain of salt, but engage them and find out what their feelings are.

Another thought to consider that Foremski points out is that most companies offering a freemium service can often find themselves profitable even if only a few percent of their users are premium subscribers. Pandora CTO Tom Conrad recently revealed that less than 2% of the service’s users are paid subscribers, but that they are expected to bring in 15% of the company’s revenues this year. Foremski says to look at the glass as half empty (or mostly empty) waiting to be filled with new customers.

“For some businesses as few as 4 per cent of premium users can create a profitable business, you then have 96 per cent of upside — users that you can potentially convert,” he says.

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