Freemium: New Software Business Model

Freemium: Implementing the
New Software Business Model

November 16, 2007

About Rubicon
• Help high tech organizations win markets
through business and market strategy
g gy
– Since 1999
– Practices: define, deliver, defend, optimize

Project Title Goes Here ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 2

About this presentation

• quot;Freemiumquot;
– Giving away software products or services in order to
software, products,
make money in some other way
– Many names: Freeware, shareware, etc.
y
• Understand the freemium business model
– Decide when to use it (and when not to)
– Anticipate what it does to you competitively
– Identify some best practices

Freemium ©2007 Rubicon Consulting, Inc. | Proprietary & Confidential Page 3

Freemium model: Top three FAQ's

• 1. quot;Should I enter the freemium market?quot;
– quot;What is the market like?
What like?quot;
• A. Giving away software for free is a business
model, not a market
– Every strategy is unique, so every usage of free is unique
– Decide your strategy first, then we can tell y how free
y gy , you
fits
– Key points to consider: Current business, product line,
market structure, customers, competition
ktt t t titi



• 2. quot;What's a good conversion rate?quot;
• A Conversion rates vary enormously
A.
– From 0.1% to 50%
– What is a quot;goodquot; conversion rate depends on your
good
strategy and goals



• 3. quot;Are the freemium software vendors a threat
to my business?quot;
business?
• A. Yes.
– Because they're creating very different (and efficient)
they re
business practices.
– It's the new business model that will challenge you, not
free itself.


The fundamental difference between
traditional software and freemium
• In traditional software, usage of your product
is an after-effect of the sale.
– It's the end of the process
• In freemium, getting the customer to use your
product is the front end of the sales process
– Thi changes almost every aspect of th b i
This h l t t f the business --
product design, engineering, marketing, sales, support,
etc.


Agenda

• Best practices: What's a good conversion rate?
• Toolkit: What you can do with free
• Next steps


The freemium conversion funnel

• You lose customers
at every step
• The most
successful free
software is
designed to drive
conversion
comprehensively


There is no standard conversion rate
• Depends on many variables
– Features of paid version
– Effectiveness of reminders
– Prequalification of downloaders, etc.

Range What's bad?
Consumer quot;2% to 50%quot; Below 1% is not good
Depends. The higher
your price, the lower
Enterprise ~0.1% common
the conversion rate can
be
b


The less focused your distribution, the
lower your conversion
• Magazine cover CDs
– Typical conversion rate from installation to sales is 0.5%
• Download through CNET, other major sites
– Conversion rate of ~5% for a significant consumer
application is considered good


Typical consumer conversion flowchart
At expiration, give
Conversion
option to buy or Purchase complete
downgrade to free
Trial of
paid
app
Downgrade

Give option to
Show animation of
Download install trial of paid
Visit website features being
g
software.
software Promote
software
ft removed
its extra features.

Free
application
pp

Upgrade free app
regularly

Upgrade requires
installation


Consumer conversion best practices
Practice
Get on Download.com and other key sites and make sure your traffic is high enough to keep you highly
Download ranked. Do not ask for registration information prior to download; it chases people away.
Give ad for features of paid version and offer opportunity to upgrade now or to install trial of paid app.
Install
sta Collect registration information after install has stated.
stated
This is key. Gently remind user of what the program is doing, and what they could get by upgrading. Do not
Usage become invisible.
Frequently offer free upgrades of free app, with bug fixes and selected new features. Each time user
Upgrades upgrades, run them through install process again to educate about paid benefits.
If user downgrades from paid trail to free, show them the extra features being removed.
Trial conversion

Enable users to also download other apps with which you've made alliances. (This gets you referral fees.)
Affiliates
Dedicate people to designing the install and conversion process, and k
Dd l d h ll d d keep them on it permanently. It's never
h l '
Staff done.
Change offers and upgrade messages frequently; explore around to find out what works.
Experiment
Measure uptake and conversion rates every step of the way, and report results frequently (weekly is good).
Track


Strike the right balance

• Reminding and incenting people to upgrade
drives conversion
• Crippleware and nagging lowers conversion

• Small, subtle changes can make a substantial
change in conversion rate
– quot;30% increase.quot; quot;50% delta.quot;


Agenda

• Best practices: what's a good conversion rate?
• Next steps


Three basic free business models

• The details vary incredibly
– How is the software used, ,
what's the competition,
what's the segment, what's
the delivery model, etc, etc.
– Most companies mix models
• Because they experiment
– Every company is unique
y py q

– Learn the possibilities and
tailor a model to your needs
y


The most innovative freemium
companies are on the web
• They assume free and build up from there
• Lines between packaged apps and web apps
a eb u
are blurring rapidly
g ap d y
– It's really just a different channel
• Already, in our customer surveys, most users don't differentiate
– Web app insights apply to all software companies
– Over the next several years, packaged software merges
with web apps


• Upgrade features
• Ongoing services
• Premium services
• Add-ons
Add
• Support
• Pay for
commercial use


User pays for upgrade

• Most commonly used in downloadable apps
• quot;More featuresquot; are the main reason to upgrade
pg
consumer
– In enterprise, usually support + more features
– To consumers support is not as big a benefit unless product is a
consumers,
specialized tool
• Means you expect problems
• Security might qualify
• Key: Balancing satisfaction with free product vs.
inducement to upgrade
– Products seen as intentionally crippled are hated


Example: Google SketchUp

• Base product is free
– Can be used to create buildings for Google Earth
• Paid version: SketchUp Pro,
$495
– CAD export
– Presentation software
– E-mail tech support
– Free trial: Eight hours of usage


User pays for ongoing services

• Like trialware, but not tied to time
– Get them hooked and then start charging them
– Usually a web application tied to volume
• quot;Stealth lock-insquot; --Joel Spolsky
p y
– User's data is stored in the product and hard to get out
– User's identity is tied to the product (e-mail address)
• Very common in web services for bloggers and
websites


Lock-in software
• Gmail
– Free until you hit a storage limit
– Emerging as a
common approach
for Google
• ClustrMaps
– Website traffic counter
– Pay when you hit a certain
traffic level
ff l l
• The old AOL
– Get you to t y it free, t e you e stuc because your e a address
try t ee, then you're stuck you e-mail add ess
is there


User pays for premium services

• Base product is free and fully functional, but user can
py
pay for extra benefits
• Very common in enterprise, where web software can
be on user's server or hosted
– Pay f hosting
for h
– A variant of Software as a Service
– Usually combined with open source development model
• Also used sometimes for consumer web apps


SugarCRM

• Base product open
source
• 30-day free trial on
paid version
– Support, additional
dd l
modules
• Deployment options:
On-demand, appliance, on-site
– Different financial models for each
• 1m downloads 1k paying customers (.1% conversion)
downloads, ( 1%


MySQL
• Database
• Paid version includes
support, maintenance,
deployment help
– Annual fee
– Must also pay if
embedding in commercial product
• 6m users 5k customers ( 083%) $34m revenue
users, (.083%). revenue.


User pays for add-ons

• Base usage is free, but add-on features or
modules cost extra


SecondLife

• Residency is free
• Paid account gets a
currency stipend,
ability to own land,
and ability to display
products (clothing,
etc)


User pays for support

• Heavily used in enterprise and development
tools
– Anything where users expect to ask questions, where
they are customizing or developing
– Assumes a very dedicated user
• Often used in combination with extra features


Red Hat Linux

• quot;Monetizesquot; 10% of its
Linux base
• Why it works: efficient
distribution
– Spends 30 cents to get a
dollar of maintenance
revenue
– Even though maintenance revenue isn't that huge,
costs are so much lower that the model works


User pays for commercial use

• Used very often with open source
– Source code is given away free for noncommercial use use,
but if you use it in a for-profit product you have to pay
– Often paired with support and a few extra features


JasperSoft

• Business intelligence
software
• Base product open
source; commercial
use (
(resale) requires a
l) i
license
– Paid license also gets
support, additional
features
• 2m downloads, 20k deployments, 5,000 p y g (
, py ,, paying (.25%)
)


• Advertising and
promotions the
user views
• Advertising
attached to
something user
builds
• Brand image


Advertising the user views

• The most common for content, communities, and some
services
– Google, Yahoo, AOL
• Works best when there's context on what the user is
looking f
l ki for
– Web search
– Communities (best tied to promotions)
– Does not work as well when there's no context
• Does your application generate context on user intent/interest? If
not, maybe it's not right for ad-supported.


Dogster


Advertising attached to something
the user builds
• Very common in publishing tools online
• Usual model: Use of tool is free if you let site
place ads
– Pay if you want ads removed
– Ads can be tied to content; increases effectiveness
• Example: FeedBlitz
– Lets you distribute weblog posts by email -- but inserts
ads after them


Ning

• Free social network, they run the ads
• Or you can pay


Vox

• Free blogging
• Banner ads and
Amazon affiliate
placements
• Company retains
100% of revenue


SixApart blogging

• Three communities, three products, three models
• Vox
– Easy blogging, self-expression; affiliate and ad-supported
• LiveJournal
– Intense community, open source, volunteer support
– Paid premium features: more photos, surveys, themes, etc.
• TypePad
– Mainstream blogging
– Open source base (Movable Type), paid hosted service (TypePad)
and paid support
d id t


Brand image

• Sponsor
placement
• Often aimed
at a
particular
demographic


•Critical mass
•Kill a competitor
•Set a standard
•Brand
B d awareness
•Shared revenue
•Get help from a
community
•C tft
Create future b
buyers

Create a critical mass of users

• Lack of critical mass often hinders adoption of new
apps, especially when they benefit from lots of users
pp , p y y
• Use free distribution to build up an installed base
quickly
• Frequently used by Microsoft
– Example: Sharepoint free add-on for Windows 2003 Server
• Key:
– How do you monetize it?
• Sharepoint helps Microsoft server sales


Kill a competitor

• Give away equivalent to competitor's cash cow and
wait for them to go broke
g
– Can get you sued, but very effective if you're a larger competitor
– Often combined with open source today
• Cl i
Classic:
– Microsoft Internet Explorer vs. Netscape
• Today
y
– Google apps, Google Android, Sun + Open Office, IBM + Linux


Set a standard

• Frequently used with quot;runtimequot; players
– Flash PDF, QuickTime, Microsoft Silverlight
Flash, PDF QuickTime
• Company usually makes money from tools, or
is pushing a standard that protects its other
businesses
• Sub-example: Set a standard and then charge
Sub example:
– Flash is free for PCs
– Flash costs money on mobile devices


Set a standard before Microsoft
arrives (1)
• VMware: Virtualization software
– Mi
Microsoft is working on virtualization features to be bundled i
ft i ki i t li ti f t t b b dl d in
Windows for free
• Answer: give away the base product
– Get embedded in IT and in the minds of computing students
• If they're used to VMware, they'll continue to use it
– Paid versions have support, administrative tools
pp ,
• Key: Move through adoption curve fast, monetize later


Set a standard before Microsoft
arrives (2)
• AOL: Consumer online services
• Before the Internet killed private online
services, AOL beat Microsoft
– Was the leading dial in service
dial-in
– Knew Microsoft was coming
– Flooded the country with CDs offering free trials
y g
– Extremely successful: MSN never met its goals


Brand awareness

• Free software is a substitute for advertising
• quot;We have an installed base of 6 million out
there. This is our marketing department.quot;
– Marten Mickos CEO MySQL
Mickos, CEO,


Build brand awareness

• Distribute a free version with OEM hardware in order
to create brand presence
p
– quot;OEM upgrades are just a bonus; the main goal is building brand
awareness so they'll buy from us later.quot;
– 1% conversion rate on an OCR program bundled with scanners
• 80% of OEM customers who used the app did so only once a year
• Key: Potentially useful for an unknown brand with
enough resources t wait
h to it
– More targeted than most advertising


Shared revenue

• User and developer collaborate to produce
value,
value and share revenue
– eBay
• Also often used with art, crafts
– iStockPhoto (stock photography), deviantArt (artwork),
Threadless (t-shirt designs)


Threadless


Get help from a community

• In exchange for a free core product, community adds
value to it
– Documentation, software drivers, support, evangelism, localization
– Enables a small company to scale faster, a large company to hit
niches
• Core with value add is leveraged to make money in
other ways
– Often used with hosted services


WordPress

• WordPress.org
– Free weblog creation
g
software, well documented
and supported with help of
community
– Lots of third party plug-ins
• WordPress.com
– Commercial paid service to host a weblog for you
– Uses WordPress code base, documentation, plug-ins, and support
– Free software community cuts expenses of paid service


Create future buyers

• Get young people locked in for free, so you can
charge their schools and employers later
• Can be used in schools
• A long-time tactic by Microsoft and Apple
long time


students.autodesk.com

• Free apps for
individuals
and teachers,
not the labs
• Very popular
among
students


Agenda

• Metrics: what's a good conversion rate?
• Next steps


Three tasks

• Understand how freemium could be used to
attack your business
• Understand how you could apply freemium
• Learn to think like a web app company


How could freemium be used to attack
you?
• Are freemium companies targeting parts of
your market already?
• Are there online communities of your users
that you don't control/participate in?
don t
• Are overhead and development costs
preventing you from serving some
segments/regions?


How could you apply freemium?

• Do you have employees who understand the
model?
• What parts of your company have to change,
and how?
• Can you organize a small/low cost team to
experiment?
• Which freemium model(s) fit best with your
p
product and market?


Think like a web app company

• Drive traffic first, then monetize
• What are your user communities?
• How can you get them to hang out with you?
• What problems do they share?
p y
• Can you solve those problems -- even if they're not
related to your software?
• What can you monetize once you h
h i have the traffic?
h ffi
– Example: Who else would like to market to your users? Can you
charge them for access?


For more information

• How to apply the lessons to your situation
• What skills and practices you need to change
• Vulnerabilities to free competitors

• Visit us at www.rubiconconsulting.com
• Or call 408 395 3910


Win Markets
Trusted Advisors to high-tech fi
T d Ad i hi h h firms seeking
ki
to transform their visions into strategies,
strategies into plans, and plans into results.

Practices:

Define / Design / Defend / Optimize


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