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Freemium model rocks!

Free + Premium = Freemium

We’ve been discussing the weaknesses of ad-based revenue models for web applications. Now we would like to share what, in our opinion, is the best way to monetize a web startup. Let’s remember that startups need to produce positive cash flow, which doesn’t simply mean occasional funds or a second round of venture capital.

We believe that if you have a web application that makes users more efficient,  helps them save money or improves their organization, you should seriously consider adopting the Freemium model. It’s great for consumers to have a free starter account (which is generally for a limited time or with limited features) so they can test the application’s features and learn what it’s all about. For the prosumer market segment you can offer Premium, Pro accounts with enhanced features.

Free = Consumer
Premium = Prosumer

In Freemium model some heavy users are willing to pay for the service and subsidize the costs of running the business. The average conversion rate of free to premium offerings is about three percent. However, it is still important to provide a free service so users can become fans of your startup and help spread the word about your great service. You can offer a basic free service and charge for Premium enhanced features. If you do this it will be ok, but we suggest dealing differently with your free accounts. People don’t want to feel that they are getting a free, “second class” service account. Make them feel respected by giving them all the best features, but in a small quantity. They want a taste of the same high quality as paid accounts.

Apart from “Freemium,” there is also a “donation” model which deserves attention. Let’s check, for example, the Remember The Milk “Pro” account. For only $25 you get a one year Pro account. And what does it mean? Basically that you get “a warm fuzzy feeling for supporting RTM”. So they are not really charging for Premium features but asking for a donation to support their great service. I did it and I was glad, as it is a great web application.

Now let’s do some math. Remember The Milk has more than 500,000 members. Let’s apply an average conversion rate of two percent to this amount. They earn at least $250,000 per year in donations, or, more than $20,000 per month. This is not bad at all, and I’m glad for Bob T. Monkey.

Although it’s our favorite model to monetize a web startup, Freemium model is not a magical solution for every web business. It will not work well under certain circumstances, such as if you have a consumer-facing social network.

Please leave your comments and we can discuss where and when to not apply the Freemium model.

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5 Comments »

  1. Freemium model is so much more powerful than just free. Prosumers don’t care to pay if they really like the product. They will feel more trust and be sure that everything will go fine.

    Comment by Christopher — March 29, 2009 @ 4:28 PM

  2. [...] talking about Freemium model, Twitter confirmed that they will soon sell commercial “pro” [...]

    Pingback by C2C Balloon | Humanizing Technology » Twitter goes Freemium — April 3, 2009 @ 6:49 PM

  3. Remember The Milk is a great example for the Freemium model!

    I think that the decision to apply this model to an on-line app should be based on the ratio between subscriber’s money and the costs of running the thing.

    I can certainly think of apps where 3% paying customers wouldn’t be enough to pay the bills even if they were charged $25 a month…

    Comment by Thiago Cavalcanti — April 5, 2009 @ 9:34 PM

  4. I Loved this article!!!

    How do you see it feet with Chris Anderson Free book? and how do you get the number of %3 in average of freemium users.

    Thank you,
    Sharel

    Comment by Sharel Omer — August 10, 2009 @ 7:54 AM

  5. Thank you Sharel. :)

    I agree with Chris Anderson’s point of view when it comes to the future of web applications prices: subscriptions prices will drop down dramatically and we will have state of the art web apps for free or a couple of bucks. But with cloud computing the cost of an application account tends to zero so we will be ok. We would still have a great a profit margin.

    So I do think in a way Chris Anderson is not helping with this book. We should be focusing on adding value to our web apps and finding ways to charge fair fees for our products. If you have a great application that makes people more organized, make them save money and specially if it’s small businesses oriented… why not charge for it?

    The 3% conversion it’s not a magical number. :) We got it from 35 brazilian web applications we know and deal with. :)

    Comment by Horacio Poblete — August 10, 2009 @ 10:55 AM

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