C2C Balloon

Freemium model rocks!

Posted by Horacio Poblete @ April 17, 2009 in c2cballoon

5 comments

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.

Recent posts

• Client2Central is live!
  Posted by Horacio Poblete @ May 7, 2009 in Client2Central
• Client2Central Video Presentation
  Posted by Horacio Poblete @ April 29, 2009 in Client2Central
• Freemium model rocks!
  Posted by Horacio Poblete @ April 17, 2009 in c2cballoon
• Follow us on Twitter!
  Posted by Horacio Poblete @ April 15, 2009 in c2cballoon
• Twitter goes Freemium
  Posted by Horacio Poblete @ April 2, 2009 in Web Applications