The Freemium business model is normal for consumer applications, but can it work for enterprise software? Freemium usually means a free service with an "up sell" to paid premium subscriptions. Examples include Skype, LinkedIn, Flickr, Ancestry.com, Typepad, Dropbox, and many others. Freemium differs from Free Trial in that a free trial is the fully functional product but only for a limited time. Freemium is always free, but you can purchase additional features or service for a premium price.
Freemium business models usually involve a Free service, sometimes time limited or feature limited, supported by advertising. The ads rarely cover costs. The goal is to convert these free users to paid subscriptions. Most consumer services start with a $10 per user per month subscription and scale up to $20 or $50 per month based on a small, medium, large usage scale.
Enterprise software is also using the Freemium model, sometimes with higher prices commensurate with the power and functionality of the product. They all have slightly different measurements and cut-off points, but most have some notion of small, medium, large.
Most companies see a 1.5% to 5% conversion rates, with most of them averaging around 3%. That doesn't sound like much but they are reaching tens of thousands to hundreds of thousands of users...sometimes millions.
Here is some math. 100,000 free users convert to 3,000 paid users. If they pay $50 per user per month, that is $150K a month or $1.8M per year. That is an excellent revenue stream for small startups that typically have 3 to 5 employees. And, it is an annuity stream that continues to grow every year. By the 3rd or 4th year these small companies can be generating $5M to $10M a year, still with less than 10 employees. Most of these small companies don't take Venture Capital so they own the whole company. It is a pretty good cash flow business.
Recently at Google IO I moderated an all-star panel of VCs on the subject of Freemium in the enterprise.Making Freemium work - converting free users to paying customers - Venture Capitalists, Brad Feld (Foundry Group), Dave McClure (500 Startups), Jeff Clavier (SoftTech VC), Matt Holleran (Emergence Capital) and Joe Kraus (Google Ventures) discussed strategies for building free products that can be upgraded to paid versions.
Some key points from the panel;
Watch the video for more details and insight. This group of VCs has built lots of companies based on the Freemium business model. They have some great insights.
