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Blog of Roman Trytyachenko

Freemium rethinking — Part 2

Read our first part about Freemium business model.

Advantages of Freemium

Of course, Freemium has important advantages that can not be denied.

Theoretically, it is easy to make upsell — to sell something else. They are already using your system, so with the help of a special offer, changing the payment model, or simply as a result of the fact that the user has outgrown the «free» version, there are many ways to get users to pay. Few other business models have such an advantage.

Statistics for sales. Very cool, when on your site or landing page you can write «Join 1,000 of our satisfied users». This is the so-called «social guarantee» of the attractiveness of your product, such as a blog subscriber counter, which seems to tell you «if 40,000 people think that this content deserves to be read every week, it probably costs your time too». The numbers of users can also be useful when you are enticing larger customers. Because they prove that your product can easily scale, both in the technological sense and regarding learning new users.

It's easy to get started. Even a «30 day trial period» or «Money back guaranteed» is a much greater barrier for new users to start working with your product than a simple «Free» statement. To force a site visitor to stop reading the product description and finally register is a critical step in any process of attracting customers. With the help of «Free» you just lowered this barrier as much as it is possible at all.

Take away users from competitors. Well, your free users can still use a competing product, but at least you are also «in the game». Plus one user for you — minus one for a competitor.

So, looking at these pros and cons, how do you decide if Freemium is right for you, and if appropriate, how do you use this business model to benefit and minimize risks?

Take money for Freemium from the marketing department

Have you noticed something common with all these pluses? It's all about marketing. This is lidogeneration, reducing barriers to conversion, and competitive advantages.

Change your view of Freemium: these are marketing costs. They are higher than you initially think, but perhaps it is Freemium — the best of your marketing strategies.

How do you decide if these costs are worth the benefits? My approach is called «getting the marketing department to pay», just like for AdWords or any other way of lending, measuring the total cost of attracting paying customers.

The reason is this: you have a theory that by spending money to support these free users, you are paving the way for real, paying customers. This goal — revenue — can also be achieved in other ways: contextual advertising, content marketing, or any other marketing activity. Therefore, as with any other marketing campaign, the marketing department must bear these costs, measure the results achieved, and compare ROI with other methods of attracting customers.

And do not forget that costs should be significantly lower than the revenue received. It is an equation that most startups never come up with. Precisely because they do not want to assess the cost of attracting customers for themselves honestly.

How much should the marketing department pay? Imagine that all your free clients have started paying. But only in an amount sufficient to cover your expenses without bringing in additional profits. Calculate your expenses for the server and support of free customers. And you will come out at a real cost Freemium tariff plan for you.

That's how much all these free users have to pay to you (and this is at least not counting the necessary profits). That's exactly what the marketing department «owes» to the rest of the company.

It is clear that you should not dive too deep into the jungle of accounting in this matter. But you have no excuse not to measure the cost of attracting customers, so use Freemium with a clear understanding of the situation and comparing this approach with other forms of marketing.


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