Freemium: Is it Right for Your Subscription Business?

By Aarthi Rayapura May 27, 2014

FremiumJosh Gold
Director, Simon-Kucher & Partners

May 27, 2014

 

 

 

Would freemium be an effective lead generation, conversion, and revenue driving strategy for your subscription business? Or, would it be a high risk, dead-end approach likely to burden you with runaway costs and few paying customers?  The answer depends on two things:

 

  • How well your subscription business aligns with 10 freemium success criteria, and
  • The confidence you have in the data/assumptions driving your freemium business case

 

If the right business conditions are met, a freemium model can help drive faster revenue and profit growth than a paid only model.  The first step in the decision process is to evaluate whether a freemium model makes sense for your business from a qualitative perspective.  Below is a list of 10 freemium success criteria we use to help our clients evaluate the potential effectiveness of a freemium strategy:

 

Freemium-evaluation-criteria

A top score across all criteria is not necessary, but the more criteria you can check off, the more confidence you can have in building the business case for a freemium model.

 

Once your business passes the qualitative evaluation, step 2 is to do the math and pressure test your assumptions with a freemium business case.  At a minimum, the estimated customer lifetime value from a freemium user should at least cover their likely acquisition cost.  To increase confidence in your modeling, it helps to run best to worst case scenarios (or Monte Carlo simulations) on key performance drivers (e.g. free-to-paid conversion, ARPU, churn, etc.) to evaluate the range of potential financial risks and rewards.

 

If your business passes the above qualitative and quantitative tests, you likely have a viable case for a freemium strategy. To maximize your chance for freemium success, make sure you:

 

  • Maximize marketing spend efficiency to generate excitement and virality
  • Minimize the cost to serve free subscribers
  • Fence your paid offers from you free offers in a way that minimizes cannibalization and creates a compelling free-to-paid migration path
  • Establish a clear, effective call to action to drive conversion

 

Want to learn more? Come join us at Subscribed next week on June 3-4. Simon-Kucher & Partners is a Silver sponsor and will be speaking on innovative pricing and packaging strategies for the Subscription Economy.

 

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