The ‘Freemium’ cost to ISV’s

Posted on March 18, 2013


Most of you reading this will no doubt at some point have tried a ‘Free’ service or online product offering from a vendor website.

Free in most cases means ‘Freemium‘ = a limited service offering designed as a ‘Hook’ to get users to consume a service or product. The ‘Free’ service or product offering just enough features and or resources to make it useful for users. The ultimate goal of course being to get subscribers to the ‘Free’ versions to upgrade to a premium or professional paid-for version of the product or service that gives more functionality and or resources.

For new Cloud Start-ups and ISV’s looking to create market this sounds like a great way of attracting a user base and the techie business start-ups flock to this model with little real awareness of the poor returns this can offer. The challenge lies in the conversion rate of subscribers from ‘Freemium’ to ‘Premium’ paid-for usage. The conversion rate is not encouraging. Compare high user volume applications with low and you get to see the hard facts:

  • 560 million user base – Skype = 8%
  • 300 thousand user base – Ning 5%
  • Pandora, Dropbox and Evernote conversion rates are in the range 0.5% to 4%.

What is clear is there is these are not impressive and no ‘Average’ can be used as a rule of thumb, it largely relates to the value proposition for the users and that is the quandary for ISV’s looking at this model.

A full understanding of the Freemium dilemma for ISV’s going online is well laid out in the article by Kim Joar Bekkelund ‘Understanding User Acquisition in Freemium’ Kim interviewed 10 companies that use Freemium and provides an insightful analysis of the success of this model.

To achieve even the ‘Freemium’ subscription rate from which you hope to convert users there are some clear rules that are appearing to maximise this potential. Some top tips that are not rocket science but aim to lower the bar of entry to get users to sign-up and convert:

  1. Remove as much ‘Threat’ and friction as possible:
    1. DO NOT demand a Credit Card or other payment method upfront for a Freemium or Trial. This will immediately reduce your sign-up rate to a trickle. Handing over payment details is the biggest decision for the users, so make sure you get them right to the wire first.
    2. Do use a third party authentication channel such as Microsoft Account (Former Live ID) or LinkedIn, Twitter etc This reduces time to sign-up and through association makes the process less threatening. Great for doing user marketing research as you will get more perspective from these login resources which often expose more information about users across other systems helping you to build up your customer knowledge.
    3. Automatically sign-users up to receipt of customer support and training as part of the quid pro quo for the ‘Freemium’ offering.
    4. Have a clear Privacy Policy statement that make sit clear what you do with users supplied data.
    5. IF you solution stores data in The Cloud, state clearly where and the nature of the security of that storage. Is it encrypted (ideally).
    6. If your service application stores data, have a European data location option. This is not expensive in the new Cloud world and will be a green light for offerings into a Professional user base who will be more data compliance aware.
    7. Provide a Contact form on the website for users. You don’t have to respond, its good to, but it is critical you provide a means of connection.
  2. Conversion MUST DO’s:
    1. Get to know your market so you can communicate to users and gain mindshare.
    2. Follow-up by reaching out to your new subscribers within a week of sign-up. If users do not engage the resource in this timescale they are unlikely to, so stimulate action.
    3. Use training tips and videos to encourage user adoption of the ‘Freemium’, a great method of increasing the traction of your offering and to dangle Premium features.
    4. Use your ‘Freemium’ audience as voluntary testers of BETA ‘Premium’ features. Remember Google apps etc for years had BETA stamped all over them.
    5. Use support as a channel into ‘Premium’ if you have a business audience. According to David Skok, business users want professional customer support and are willing to pay for it, consumer users are less likely to pay for support.
    6. Make it easy and simple for users to get to ‘Premium’, some tricks include:
      1. In app free 30 days activation of premium features. Can be re-activated again IF user signs up to BETA test for example.
      2. Delay payment prompts till the last moment. I repeat, handing over payment details is the biggest decision for the users, so make sure you get them right to the wire first.
      3. Provide 7 days free email support. Be proactive if they call on it, you can charge for this afterwards so make it appealing. As existing Freemium users they are unlikely to need it but it’s a comfort factor that plays to the Professionals more than consumers.
  3. Evolve and adapt:
    1. LISTEN to your users, let them show you the way forward and drive features. Just because you think you know what they want does not mean it’s right!
    2. Use surveys to reach out to users. Many users like to provide feedback and feel they can influence a toolset they are adopting.
    3. Adapt your Freemium offering to maximise adoption. Existing users will see this as a bonus (they either retain functionality or gain), new users may need this to get them on the Freemium conveyor belt and or into Premium.
    4. Do be a good data citizen. Secure your user data online PROPERLY, and don’t sell contact details. If you get compromised or found out you have just killed your credibility.
    5. PARTNER – The new world of Cloud Computing allows you to extend functionality quickly and cost effectively. API’s (Application Programming Interfaces) allow you to tie in niche features from third parties quickly and in so doing add value and give yourself a Premium revenue option. Yes you will have to share revenue with the partner but then you do not have the development costs but hopefully will get the marriage value incremental gain with your offering.

This is by no means exhaustive in detail or exclusive. Make sure you manage a detailed conversion pipeline, a finger on the pulse of your cost of conversion will save you from any unpleasant surprises and keep you firmly rooted in the realms of reality.

Good luck!