I’m currently writing my thesis focusing on freemium, and I’m just finishing up my interviews. From these interviews — is should be noted that this is said before my actual analysis of them — there seems to be a clear focus on using free to market the product. Several of these companies had used nearly nothing on marketing ever — and these are highly successful companies. Then, of course, the question becomes how you use free to market the product.
First of all, the product must have some form of virality to it. It must induce people to spread the product. Generally I think word-of-mouth is one of the key aspects of having a free component to a business model (However, you don’t necessarily need network effects.).
Secondly, remember to not give away something that is too expensive for you to give away. That is, where you can’t get enough value back. You don’t need to have a marginal cost of zero as long as the free users have considerable value. Look at Square who is giving away their card reader for free. But be sure to keep your eyes on the numbers — if you don’t get enough value back by giving stuff away, stop giving it away. Look at Chargify, they had a free plan that proved to expensive, so they changed their model. They had some backlash, but they are kicking ass now.
And that brings me to my third point — numbers. One of key points of free is the numbers. I think too many people focus on conversion rate, but I don’t think that’s the most important metric. The most important metric is the lifetime value of the user. Of course, you should still think a lot about your conversion rate, but don’t focus too much on it. It doesn’t matter if you conversion rate is 70% if your lifetime value per user is too freakin’ low. Most would say more than 10% conversion is a success when you’re using freemium, but if you can’t sustain your business when you have less than 30% you’re shit out of luck. So watch ‘em numbers!
Also, give something that has value. Otherwise people will go somewhere else. If you don’t show value in the free version, why should someone stick around and actually give you money?
From my interviews these points have been mentioned time and time again, so there must be something about them. When in finished analysing my interviews I’ll come back with a much better, and more in depth, discussion about freemium.