I’ve been doing a bunch of research on Evernote and their implementation of the freemium business model. In the early days, Evernote CEO Phil Libin was a treasure trove of useful information and perspective on their business, including enough data to make some reasonable revenue projections for a similar kind of product. A few things in particular really jumped out at me.
In an interview with Xconomy, Phil said:
Where a lot of people stumble when they’re thinking through this model is that they get stuck on the percentage of people who pay. If 98 percent of your customers are using it for free, it seems like there’s no way that could be a good business model. But the percentage does not matter at all. What matters is the total number of people who are paying, and the total expenses you are incurring to get those who pay.
So let’s say our goal is to have a million people paying for Evernote. There are two ways of doing it. If we were a traditional product, and we wanted to get a million people to pay us $45 a year, we’d have to spend some very large amount of money on advertising and marketing. Or, we can get 50 million people to fall in love with the product and use it for free, and have 2 percent of them pay us. It’s actually a lot easier and cheaper to get 50 million people to use your software and have them fall in love with it and tell their friends.
I had never thought about freemium this way. Phil’s basic comment is: focus on the free and the paid will take care of itself. At one point in another article, he goes even further:
Right now, roughly 2% of all [registered] Evernoters are premium customers, which is good for business. As the service adds more users, both free and paid, Libin wants to maintain that rate at 5% or less. If people start converting en masse, “that means our free product isn’t good enough,” he says. “And if our free product isn’t good enough, what’s the point of being freemium?”
Frankly, this set of comments really blew my mind. Almost every Lean Startup book and website is chalk full of A/B Test examples and talk of optimizing price and landing pages. Phil says, in essence, forget it all. Focus on the free and the paid will follow. At the Founder’s Showcase, Phil gave his three bullets for a successful freemium product:
- Long term retention rate
- Product increases in value over time
- Low variable costs
I have a little harder time with this list, but only because of my own experience and the people I know who use Evernote. I am still skeptical that giving people a free product without any reason to convert will just get people to pay. Especially in today’s world of consumer’s pay nothing for apps and services, I think it is actually far fetched. So there has to be some stake in the ground, something that gets a customer to pay. Maybe that is fear that if you don’t pay then all your stuff will go away. That’s what Phil implies. For me with Evernote, that line was sharing. I needed to be able to share and have other’s edit my documents and at the time that was a paid feature. A business associate paid because he wanted indexing of pdf documents. But something got each of us to pay.
That doesn’t change, to me, the profound nature of what Phil says here. Focus on the free customer and the Emium ones will follow.