Lesson: Sales Funnel Optimization with Hiten Shah

Step #9 Freemium: How "freemium" and "trial" services can support your product or idea

The general idea of free in freemium businesses is that there are millions of people that could use it for free and just converting single digit percentage of them can be to substantial revenue for you. That's an easy way to think about freemium. That being said, if you have only a million possible customers but you believe or can prove or there's reason to believe that more than 20-30% will pay if you gave them a free product, that's another argument to do your free product even if your user base isn’t hundreds of million of people.

Freemium, I can boil it down really simply, which is it's a way to think about your business, more importantly your business model, so that you can acquire customers as cheap as possible by providing something for free and you believe that they will convert at a rate that will allow you to offset the cost of free and actually make money.

I think there's two types of free trials. There are free trials that are time based, which are obviously free trials. You only get it for a certain amount of time. After that, no more.

There's other types of free that's more free, limited, basically what I would call “usage based free”. So a lot of companies like Dropbox or Evernote give you limits on the amount of storage you can have and you could argue that those are free freemium businesses and the reason I would argue that those are freemium businesses and not free trial is because you can delete stuff and still use the product for free.

So in my opinion, the way I think about it, the framework I use is freemium businesses are businesses where somebody can find a way to use it forever and get a lot of value from it. That's freemium. Free trials whether they are time based or usage based are limited usage that end up being a limited time.

We first had a free 30-day trial. What we learned is that people who are in the 30-day trial, it took them at least 14 days just to implement KISSmetrics, like integrate it, start passing us data. Once we went to 14-day trials, most of them did it within three days.

So it created a different kind of pressure for them. Obviously, for us it's better if they integrate faster. We have more opportunity to work with them with data in our product. But we wouldn't really have been able to make an informed decision on that unless we were really trying to solve a problem that we noticed by changing the trial.

So I think it's really important to just do what you think is best at first and then learn, and then use that learning to figure out what you should do next. I mean, if we learned something different, we might have made it a 45-day trial, right, if we felt like that was going to optimize the business better and that people needed more time.

In this case, we knew that they didn't need more time. They were just dragging their feet because they felt like they had a lot of time.

The revenue model is one thing, but it's really like what's going to actually cause your business to be successful. So here are a few examples.

So if you are a social product, which means people are interacting with each other on the product, if people are not coming back on a regular basis, you are not actually going to be able to monetize because the way you monetize is by having eye balls. And it's not just having a million users, because if a million users only come back once a month you are not going to be able to create enough impressions of that. So you actually need a highly engaged product in that case the most important thing is retention of those users, how many are coming back on a daily basis out of your whole user base.

If you have a e-commerce business you don't make money unless people are purchasing and your most important purchase is usually the first purchase and repeat purchases are purchases that are usually gravy in most e-commerce businesses. So you're really optimizing for can I get people to buy once, and that's how you want to think to everything you do in business, which means you are creating products that people want to buy once and things like that.

If you are a subscription business and people are basically voting every month or every year on a regular basis on whether they should pay you or not, the thing that's most important to you is your lifetime value. Lifetime value's essentially how on average how long do people pay us and what's the average price they pay and that length of time makes it so that you actually are really worried about and really concerned about making sure you are providing continuous value and the way to measure that is what the lifetime value of the customer is.

Then you have sort of more publishers and media businesses that are, again, kind of like social except they just care about page-views. As long as there's enough page-views happening and there's enough add impressions, they'll make money. So it's really more about the number of page-views and is not growing.