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Value of "free" customers in a freemium pricing model

18 points by ashleyreddy ↗ HN
In what way are nonpaying customers valuable in a freemium pricing model. Let’s get the obvious out of the way: Yes a certain percentage of them will convert to paying customers and they will tell their friends etc I get that. Say someone like Dropbox has x million customers and only a 2% of them are paying. There is a cost associated with the other 98%. How do you adjust the pricing to cover the cost of those free customers? Does anyone have any stories they wish to share about how they approached this problem? Also do big numbers strike an emotional chord when raising successive rounds?

14 comments

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mgkimsal
"In what way are nonpaying customers valuable in a freemium pricing model"

They keep your user from using a competing service (whether pay or free).

carbocation
Free customers may add value by virtue of the data that they contribute during normal use of your product.

In my case, our free users contribute data which, in aggregate, allows us to peer deeply into the college admissions process and ask questions such as, "To what extent does applying early to Yale help my chances of admission?"

michael_dorfman
It depends on the product. In some products, there may be "network effects" where each user benefits by the number of other users in the system-- for example, if Facebook were to adopt a Freemium model, the paying customers would benefit from having the free users in the system.

This, of course, is not the case for most apps-- like Dropbox, in the example you chose. For Dropbox, the free customers have costs associated, but largely serve as a funnel. In other words, the costs of the free users are just considered part of the customer acquistion costs, the same as if they were Adwords costs with a given conversion rate.

I don't think big numbers strike an emotional chord with VCs when it comes to financing rounds, if by "big numbers" you mean "big numbers of non-paying users", unless there are plans to improve the conversion rate on these prospects.

If I were you I'd frame the question another way: given the product/app that you are planning, what advantages would a Freemium model offer over, say, a free limited-time trial of a paid-only product?

maguay
Actually, I think Dropbox has a network effect as well. I'm a paying user, but my account is more valuable to me because can share folders and collaborate with free users. Many of them would not use it if it wasn't free (hey, I started with the free service and later upgraded myself), but since its free they have seen how awesome it is and are 1000% more likely to upgrade to a pro plan than if they'd never started using it in the first place. In the mean time, they make my Dropbox account more valuable to me.
faust1
I have extensively researched on the software products relating to the PC maintenance category. What I have found is that you can cover the cost associated with non-paying customers through advertising,etc. For instance, Trial Pay is used by many software vendors to let customers pay for essential things and get software for 'free'. There are other advertising models which can be adopted. Yet for our product, RegInOut, http://www.reginout.com , we have not yet tries these freemium model yet.
Paymo
We use the freemium model (Paymo time tracking & invoicing http://www.paymo.biz) it can have the following benefits for your potential business (in no particular order):

1. helps spread the word (lower customer acquistion costs) 2. "free" users are more likely to give you feedback, which will make your app better over time 3. you and your team feel good that you're able to share with the world something for free (just think of how many free apps help you during the day) 4. you can convert free users to paying customers. (in our case the app actually helps the users grow their business) 5. people seem to be willing to try out free apps vs trial apps more often

ramanujam
Ning is one prefect example. They gained lot of popularity with the freemium model but weren't able to cope up ultimately.

Ning did get into the bad books of many when they pulled the plug and asked all existing customers to either pay or leave.

Adding to what someone pointed out, the value depends on cost involved per free user and also if it is worth it in the long run.

robryan
I think for Dropbox free customers are recruiters, when I recommend it to someone I usually find that it fits their need perfectly and they love it, they just didn't know it existed before. Without the freemium model thy would struggle to reach some of these people and as long as a small percentage want to pay for more space they keep growing.
MalcUK
From an non-financial perspective, presumably they are useful for testing the service? Adding experimental features, seeing how they react, not having to worry about up time on their servers. Understanding how the service scales, in case you get any enterprise-style customers. Learning what sort of features are missing etc. Essentially a loss leader to improve the service.
jeffepp
They are valuable for several reasons:

1) They may give you feedback 2) You can track + analyze their usage 3) They may refer peers 4) They may become 'paid customers'

In a vacuum, non-paying customers may not be super-valuable. However, if these non-paying users have good experiences with your product/service, it is possible they are adding more value to than they cost.

Remember, the marginal cost (per user) for many web apps is minimal.

dangrossman
You need to figure out what it costs you to support each user, make a ballpark of how many free users will upgrade (it's less than 2% for most sites that share their numbers, including my own W3Counter.com), and do the math to see if freemium will work for you. You might find that you won't be profitable if your cost to support the free user base is more than the paying users can cover at prices they're willing to pay. You can't just make the price arbitrarily high, sometimes freemium really doesn't work for a business.

W3Counter barely gets by as a freemium service. The paying users cover the servers it takes to run the site, but not enough more to pay even a single person's salary. I'm always waiting until service degrades to the point someone starts complaining before I add more hardware, otherwise enough new users wouldn't have started subscriptions to pay for the expansion.

The next service I built, W3ROI, does not offer a free plan. It's harder to build traffic to the site, and there are less people talking about it on blogs and social networks, but each new user it adds pays for themselves. There is never a risk of not being able to afford the hardware to provide a good quality of service.

schammy
There are three reasons. You mentioned two of them - word of mouth, and potential conversion to paying in the future. But there's another one too, and that's just the total size of your userbase. Either for bragging rights (we're bigger than competitor X) or for future sale value (the more users you have, the more money you will likely make from a sale/acquisition of your service, even if a lot of them aren't paying for your service) - both are good reasons to offer a free, dumbed down version of your pay service.
jlogic77
Aside from the items you've mentioned you should also consider these items:

Proving your market - Attracting and registering large numbers of people prove it's something people want. If you can't give it away for free, there's a problem. (Good for funding)

User feedback and "The up sell" - With the right features that non-paying customer may be a paying customer waiting to happen. You'll also have collection of emails of people interested enough to try your product, where you can up sell them to paid later. (Good for your product)

Scalability - Testing your product in the real world with real traffic patterns, live servers, and people depending on your service is very valuable. (Good for funding AND your product)

I'm a huge believer in the freemium model. Just don't give the cow away and try to position your premium product where users feel like they are getting real value when they have to take out their wallets.