Free to Freemium: 5 lessons learned from YouSendIt.com
Free to Freemium: 5 Lessons Learned
by Ranjith Kumaran
Introduction
A tech reporter recently asked me if YouSendIt.com had made the switch from a free ad-based business model to a subscription-based freemium model “just in the nick of time”. After
all, with death chasing every ad-revenue-fueled startup these days,
surely we must have been scrambling over the last few months!
The truth is that we got our first paid subscriber at YouSendIt on the night of February 28th, 2006, over three years ago. The
company recently passed the 100,000 paid subscriber mark but that first
customer was where it all started: the transition from free to freemium. As startup pundits we expect business models to iterate but this particular switch was a thrill-a-minute ride.
So if you’re ready to take the plunge or are still on the fence between free vs. freemium then read on. I’ll highlight five key lessons learned over the last three years as we went from a 100% free model to freemium:
Lesson 1: It’s all about DNA
Lesson 2: Funnels come in all shapes and sizes
Lesson 3: Compound growth is a double-edged sword
Lesson 4: Don’t let pricing psyche you out
Lesson 5: “Boring” things can give you lots of conversion lift
It’s all about DNA
It doesn’t matter how smart your team is or how hard you work, everyone has to want to make the switch from free to freemium. The thesis of our first venture round of investment was to test both models to see how they scaled. But
the reality was we already had a significant free business (advertising
revenue helped my co-founders and I keep the lights on, sound
familiar?) so the lion’s share of the first six months were spent
building a team that could keep the viral, ad-impression-generating
parts of the business growing. When the subscription
service launched and showed great promise (we collected our first
payment within 4 minutes of pushing the code live), the business model
was changed but many of the team’s mindsets were not. Reconciling these differences was exhausting but we got there.
Do yourself a favor and pull the band-aid off quickly. If
you re-channel all effort into improving conversion and building your
brand your subscription business will get out of the blocks much faster. A change in DNA is the hardest thing a company can endure and some don’t; get through it early.
Funnels come in all shapes and sizes
Once you’ve made the switch a number of things will happen:
- People who don’t believe in paying for web-based services will call you a sell-out. Unsurprisingly, these folks aren’t in your target market. If
you provide a valuable service the majority of your users will stay
with you (most for free and some percentage will subscribe right away). YouSendIt.com’s traffic took a 30% haircut in traffic during this process. If we didn’t have anything further down the funnel this would have been devastating.
- Expect to see a drastic change in the mix of users you serve going forward. YouSendIt’s
business is international (everyone sends files), including geographies
that any startup will struggle to effectively monetize showing ads; in
general the same geographies also yield weaker subscriber numbers. This
pruning of who you serve and how much (by, say, asking for payment) is
very, very, common and often more deliberate; it’s a cost-to-serve
discussion every web business that thinks beyond customer acquisition
will eventually have. Over time we found that the users who were willing to pay for our services attracted similar users to the site.
- Plan to change the metrics by which you measure your business. Our dashboard went from plotting CPMs, impressions and make-goods to conversion rates, churn, and ARPU. Acquisition cost, cost-to-serve, and lifetime value start to rear their ugly heads. If you want to fully understand your freemium business, learn to love them.
Compound growth is a double-edged sword
Once the freemium engine has run for
a while you’ll see that, unlike fluctuations in ad-impressions and
CPMs, subscription revenue is very predictable; your shareholders will
appreciate this. Step functions in revenue are seen when
new products are launched (including up-selling to the current base and
convincing more users to subscribe) and new channels into the top of
the funnel are created (making our way onto the desktop was a big one). Compounded subscriber growth is very powerful: convert
more users in January and you’ll have a chunk of the year’s revenue in
the bag, provided you’ve got churn under control; fall behind and
revenue shortfall amplifies just as quickly over time.
Don’t let pricing psyche you out
Balancing market penetration and the
fear of leaving money on the table is no fun and more than one startup
has failed to even launch a paid product because of the pricing hurdle. Here’s a quick and dirty way to put a stake in the ground:
- Make a list of your competitors or find adjacent markets / potential substitutes with similar users and use cases. You should already have this list.
- Plot the spectrum of all the price-points of their offerings.
- Plan to release at least two paid tiers: one at the bottom end of
the spectrum that is driven by volume and one at the top that is
clearly differentiated by value.
By doing this you can accomplish the following:
fill in any market share vs. revenue maximization discussion rat-holes
(now you can test both); give customers a way to compare between three
offerings (free, a little more, and lot more; being able to compare is
an important part of any purchase decision); feel good that you’ve done
some diligence on pricing without prematurely shelling out a lot of
cash on market research.
If the above exercise seems unscientific that’s
because it is. Your pricing work has just begun: constantly observe the
rates at which users move through the funnel at different price-points,
use promotions to get buyers off the fence, and re-price as you get
more price elasticity data. At YouSendIt we raised prices
(yes, it can be done) successfully several times in the early days as
we learned more and more about buying behavior.
“Boring” things can give you lots of conversion lift
Conversion lift doesn’t always come from groundbreaking changes in product, offers, or funnel analysis. These
days I will look for ten 1% lifts in conversion before one 10% magic
bullet; in reality there probably aren’t a lot of 10% lifts left after
the first handful. Get into the groove of turning knobs
a little at a time, learning, and iterating; you never did this further
down the funnel when you were selling ads and you are likely out of
practice. Other mundane things that you haven’t invested
in start to get a lot of play: customer service SLAs, quality of
service, and even the right terms of service are all areas which can
drive conversion. Look for a 1% lift in conversion right now, it’s in there somewhere; then do it again a million times.
Conclusion
With any luck there are enough
examples above to convince you that switching from free to a freemium
business model can be done with a little perseverance and a lot of
belief. I’ve experienced the rush of going from 0 loyal
users, to thousands, hundreds of thousands, and millions a few times in
my career. But there is a different kind of satisfaction
you and your team will get when your business starts to amass paid
subscribers: users who believe the things your company has worked so
hard to create are good enough to pay for. This is the ultimate validation of your efforts.
>src <
|
