The Freemium Game Plan

I love freemium businesses. I have met with many of them, work with one and if I were to start one, this would be my game plan, the characteristics of the product, market, distribution channels, conversion point and team.

Product Characteristics

The existing solutions are either email and spreadsheets or software architected before the turn of the century. In either case, the alternative is painful to use, so excruciating in fact, that individual employees are willing to circumnavigate IT’s policies in search of something better.

The product has a 2 step value proposition. The first proposition is a dead-simple single user experience, ideally in the form of a mobile app. The second proposition is a network effect proposition or multi-player experience. This is key to fast growth and high retention.

Mobile games have a wonderful single player user experience. Very few have the network effect. On the hand, Salesforce has both. A salesperson signing up to Salesforce is able to keep track of a customer lead funnel. A manager is able to aggregate data from across all his sales people to better understand and manage the sales team. It’s logical, simple and useful for the manager to pay to access and manage his teams' data.

Market Characteristics

The market offers either tens of millions of users at low price points or millions of users at higher price points.

Freemium funnels typically convert only 2 to 4% of users who try the product. At $10 per seat per month, a startup needs about 10M accounts converting at 4% to reach $50M in revenue. At $100 per seat per month, a startup needs 100,000 accounts.

Distribution Tactics

My target segment of users has a strong, active community. Freemium’s core growth engine is social proof aka word-of-mouth marketing. To drive word of mouth marketing, a freemium business needs a community, typically an existing one which falls in love with the business’s product. Harnessing this community starts with building a great product. Then, a startup must cultivate and grow their community.

Second, hackable distribution channels are a sine qua non. Freemium business must either leverage new distribution platforms or develop novel tactics on existing distribution platforms. In sailing, the first place boat always copies the second place boat’s movements to keep the distance between them the same. So the second place boat has to do something radical - act in a way the first place boat would never dare.

Danielle Morrill articulates this point beautifully in Creating an Unfair Distribution Advantage

Conversion Point

The conversion to paid point feels natural because a user derives enough value from the product that living without it is too painful. Successful freemium products have a conversion point to paid at the point the customer understands the value proposition and is already committed to the product. I think there are 4 ways to trigger conversion to paid:

  1. Limited time trial: user pays after 14 days or 30 days after enough time has passed to kick the tires on the product.
  2. Money back guarantee: user pays on sign up but can cancel at any time.
  3. Utility upsell: user pays after a certain amount of data has been uploaded into the system, or a certain number of seats in a given company have been activated.
  4. Limited functionality: user pays to integrate into other systems or to access pro-level features like exporting data or collaborating with a team.

Passion

Above all, the team must have conviction and passion about the problem they are solving. Freemium businesses often take years to grow linearly before reaching exponential growth. Through it all, dedication to building the best product for the customer is essential.

Published 2012-08-21 in SaaS  Sales  Marketing 


I'm a partner at Redpoint. I invest in Series A and B SaaS companies. I write daily, data-driven blog posts about key questions facing startups. I co-authored the book, Winning with Data. Join more than 18,000 others receiving these blog posts by email.

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