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GUEST MENTOR Kyle Westaway, co-founder of Biographe: With the advent of Web 2.0, freemium has emerged as a viable business model for successful companies like Flickr, Dropbox and Spotify. Apparently, they are not the only ones.According to Velti PLC< VELT -6.47%/a>, a mobile advertising and marketing company, about 77% of the top-100 grossing mobile apps in the Apple App Store use a freemium pricing plan.

What are these companies doing right? Here are three keys to a successful freemium business model.

Go Big. Freemium business models typically give away more than 90% of their product to free users and make all of their revenue off of 1% to 10% of their users, so if you want to build a successful company on that small fraction of your user base, you’d better be tapping into a huge market. Freemium will fail if you are targeting a niche audience. As Phil Libin, CEO of Evernote says, “The easiest way to get 1 million people paying is to get 1 billion people using.”

Add Value. The value proposition must be absolutely clear for both free and paid users throughout the entire lifecycle of their interaction.

According to a recent report on freemium by IVP Ventures, “Many freemium companies fail because they provide a free “gimmicky” product that provides little value with the hope that users will convert to the paid version. The best freemium companies provide real value to both free users and paid customers and spend the majority of their time making their free product even better.”

Once the free version of a product that has a large user base, converting free users to premium users is dependent upon features that provide a net value add for the user. The most relevant premium features save time and help the users make money. Some examples are features that organize, provide access to monetizable data and increase productivity or output.

If you’ve built a great free version of the product the users are converting to premium users for the right reasons, they already know the value of the product and understand how to use it, so the premium customer has a lower attrition rate resulting in a higher lifetime value for the company.

Make it Stick. It’s not enough just to just build useful product. It has to be sticky over the long-term. The best freemium products become more and more valuable as the user uses them over time.

Evernote has done a fantastic job with this. They have an incredibly high user-retention rate and the longer a user stays with Evernote, the more likely they are to become a premium user. The conversion rate from free user to premium user in the first month is 0.5%, by 6 months, that number is 1% and after 24 months 6% of users are premium users.

Freemium is a great business model for the right type of app or digital product, and may prove to be a more prevalent model of Web 2.0. The dominant business model in Web 1.0 involved companies using the ad-supported business model, which can often force developers to focus on gaming the system to increase page views, rather than creating a better product.

The freemium business model can actually yield a better product or experience for the user because it forces developers to focus on building the best-possible product in order to convert free users to paid users.

So when freemium is done well, it’s a win-win for the user and the company.


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