Do Freemium models work for B2C services?
A Bootstrapper’s Diary
A reasonable question to ask because once you decide to charge your users for your online service, you are straight away confronting a double whammy. One, you are trying to overcome the general consumer mindset of everything on the net is free and two, you aren’t selling a commodity but feel-goodness and convenience. So, does it work?
The answer to this depends largely on the target market and the expectation in terms of revenues. There are three important factors that determine your revenues: % conversion from Free to Paid, Pricing and the Churn rate (for subsequent years).
When it comes to conversion, however sleek the service is, it is tough to expect anything beyond 2-3% conversion from Free to Paid. Even a 2-3% can be a significant sum if you have sufficient traction in a huge market. The other two challenges are partitioning the Free and Premium features and Pricing. (This itself calls for a separate post. What with all the books written on pricing!). The challenge with Pricing is that there are no standard bench marks available in the market and the whole task of finding what your users perceive as value and how much they are willing to pay for it can be a little tricky. User surveys and A/B testing are generally helpful in determining these.
When it comes to partitioning features, one thing to be kept in mind is that it should be done in a way that the premium service lives up to the ‘Premium’ label. And you should be careful enough not to restrict the free service so much that the ability for your free users to spread your name is lost. The more you are able to give for free and keep the conversion unaffected, the better it is for you. Because the free users indirectly help in increasing visibility for your service through their content.
Here are some interesting stats from Muziboo (Muziboo is an online community for music sharing and discussion). This is our pricing page for reference:
- 2% of our Uploaders convert to Pro
- Revenues doubled after changing the price tag from $25/year to $50/year. Which means conversion% was unaffected even after the price hike.
- Overall conversion to Pro increased after the introduction of a 3rd slab (Monthly subscription)
- Conversion to Pro through Monthly plan increased after the price hike from $5/month to $10/month
- Conversion increased when the upload limit for the Free accounts was brought down from 20 – 10
- Conversion remained the same when upload limit was brought down from 10 – 5 but had a disappointing slide in the repeat visits and number of total uploads. We almost concluded we had reached the saturation point and 10 was the optimum limit.
At this point we decided to carry out yet another experiment. Open up the platform by giving 5 uploads for free every month. We had expected to see a major slide in the Free to Pro conversion and hoped to offset it with more ads on Free pages. With the already mounting back-up and server costs giving 5 away for free every month with the expectation of the conversion going down was a little unnerving. We wanted to run the experiment nevertheless.
Phew, conversion remained the same! Because of the free cushion number of tweets, FB widgets, page views and SEO traffic increased significantly.
The results above to a large extent beat our common instincts and beliefs. There’s only one thing that I can say: Before concluding Freemium models do not work for your service, get bold enough to run experiments. And remember, once you start charging, the backdrop against which you measure your achievements completely changes.
