15/10/17

Annoy your users and waste their time: the secret to a successful freemium model

How can anyone succeed using the freemium model?

In this article, we will cover the basics of the freemium model in software. The freemium model has emerged as a popular pricing model in a wide range of software categories: from games, to business software, music players, productivity apps, and more. We will explain and understand the recent surge of the freemium model and why it is so popular.

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We will suggest that the most successful freemium offerings today rely on two basic premises:

  1. Waste the user's time
  2. Annoy the user

These are the two pillars that allow the most successful freemium services to convert their users at a high rate, and make them pay. The most important process that this method causes takes place in the users' mind: the price to pay is no longer the price of the software, service, or game. Since the software is provided for free, the price is usually valued against the user's own time and how the software can save it. Since everybody values their time the most, they are usually willing to spend a few dollars to save more of their own time, and not have it wasted by the (free) software, in one way or another. By making the user experience annoying, the user again considers his own valuable time and how he/she spends it, and sometimes decides that it's better to pay than be annoyed. This is the point where the user becomes a customer. Obviously, the price is never measured against the actual value of the freemium service, as it is already free.

We will illustrate these 2 basic concepts with real-world examples from popular freemium services encompassing widely different categories: Spotify, Candy Crush, Slack and Crowdfire. We only consider examples for which there are millions of paying customers.

But first, some background.

What is the freemium model and why is it used?

Basically, the freemium model for software is defined as providing the core component of your software or app for free, and charging for additional features, the premium freatures. It is a very popular model as it allows for high virality of the product (who doesn't want free?). It encourages users to share the product with their friends, since a great product for free is a great bargain. Getting free stuff is very enticing, especially when it involves something useful or fun. Virality can also stem from other features of the product such as collaboration features, data-sharing features, and so on.

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Freemium has grown to become a popular way to monetize (that is, make money from) a product, with many popular products employing the model. Among them: Spotify, Crowdfire, Evernote, Slack and many more apps and SaaS (software-as-a-service) products. It has also become very popular with games in the various Appstores. As of today, nearly all games (millions of them) in Apple's and Google's appstore are offered for free using the freemium model. Take freemium as a means of creating traffic flow. One important advantage of freemium is that by giving your product for free, your free users become your marketing force, which in turn bring you more users.

Conversion from free to paying takes time

Those who have already been using your service/app for a while and enjoying all the benefits are more likely to upgrade (pay you) to a full version than those who are just visiting and trying for the first time. The more users take advantage of your free offer, the more chances you have to monetize them.

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The idea of getting your users to better know your offering and even get addicted to it is inherent to the concept of the freemium model. Give them a taste of your product and don't take it away. Let them get used to it, and charge them when they need something more.

Don't forget the basics to succeed

First, let's review the basics of any freemium product:

The product must be frequently used

If you make a calculation or give a piece information that is useful only once in a year, the user won't have enough time to learn of all the benefits you offer and get addicted to your product. It must be a product with a potential to be used on a daily basis. Most companies who employ the freemium business model learn to integrate the free product or service into the user’s routine to the extent that they get accustomed to it and will simply pay up when an upgrade is needed.

Don't offer too much for free

Successful freemium models get the right balance on what to offer for free to the public. It is tricky and somewhat difficult to concoct the exact features to give away for free but with the right balance and strategizing, this can be achieved. There’s a thin line between the free and the paid plans and it is quite difficult to find that perfect line. In order to make it successful, the free plan must be good enough to attract users. The paid plan on the other hand, must be that extra icing on the cake that persuades users to upgrade because it has become an integral part of their lives. That could be extra filter, effects, extra cloud storage, you name it.

The secrets to actually succeed in freemium

As discussed in the beginning, all of the above is not enough. The conversion rate from freemium to paying users is usually in the low single digits. That is, around 2%-3%. And that is for a "successful" freemium. For some products it can even be less than 1%, and rates of around 0.5% are common for many (even successful) products. And of course, some products don't convert at all and need to rethink their business model. We've identified several popular online services and identified two key elements required for success in freemium:

1. be annoying.

2. waste the user's time.

We will now analyze several successful freemium models that are used in popular online tools and/or games and see how they adhere to both of the above ingredients.

Examples

Candy Crush

We will start with a classic example.

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While Candy Crush is not exactly a SaaS product, this once highly popular mobile game from King has found its own way towards success in the freemium model. Once grossing $850k PER DAY (and an insane $1.5 BILLION in 2013), it is certainly annoying and time-wasting. How did it do it?

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Candy Crush is match-three puzzle video game. In the game, players complete levels by swapping coloured pieces of candy from a game board and try to make a match of three or more candies of the same color. These candies are then eliminated from the board and replaced with new ones, which could potentially create more matches. Matches comprising of four or more candies product special effects and act as power-ups that can clear more pieces from the board, faster. Each level has various goals that must be completed within a given timeframe or a fixed number of moves.

In Candy Crush, after you've used 5 lives and failed to pass a level, it puts you in "time out mode". This time out mode means that you cannot keep playing for the specified amount of time (e.g. 30 minutes).

Whenever you're out of lives, you have two options -

  1. Wait for the time out to complete (e.g. wait 30 minutes) and continue playing
  2. Pay a small amount and continue playing immediately

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This is a sure-fire way to make at least some people pay the small amount ($1 or so) and continue playing immediately. And these micropayments add up! Some people have paid more than $100 in these micropayments.

How does the above obey the two basic secrets of premium as outlined above? Well, waiting is certainly annoying. And waiting is, well, a waste of time. So Candy Crush is indeed annoying and time-wasting.

Spotify

This digital music service boasts over 140 million active users, of which 50 million are paying users. This super-high conversion rate does not come easily. Besides having a great and addictive product, the usual ingredients of a successful freemium model apply here as well.

Spotify is a music, podcast and video streaming service that was launched in October 2008. Spotify pays royalties to the rights holders of the artists, based on how much of their creations are streamed using the services. They rights holders then pay the artists based on individual agreements.

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So how did Spotify convert so many users into pay customers? By becoming annoying.

The free plan allows you to create your own playlist and listen to it in Shuffle Mode. This means that you can't control the order in which the songs are played, as they're played in random order. This is only bearable at the beginning. When you have only few songs in your list, it doesn't matter that you have to wait a bit to get your favorite song. But once you have 100 songs in your list and want that one song, what can you do? Click Next, Next, Next and hope that your song will come on in the randomized list. And that is both annoying and time-consuming - the winning formula. Besides that, the free version also includes some ads, to further annoy your already aggravated experience.

Crowdfire

Crowdfire is a highly popular tool to build your following on social media networks. While being a great tool to manage and grow your following on various social media outlets (Twitter, Facebook Instagram, Pinterest, Youtube, etc.), its creators also knew how to make for an addictive experience that will convert their users to paying customers (a great product isn't enough!).

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It started originally as tool to automate tasks like friending and unfriending on Twitter, and has evolved over the years to support many more social networks. It also allows you to automatically schedule posts on social media and even recommends interesting content to share on your channels. Crowdfire boasts millions of paying users.

It starts with their homepage. You start looking around looking for the pricing, and don't find it anywhere. That's annoying. So you have to sign-up for the service to see what's it's all about and keep looking for the pricing page. Even after signing up, there's no way to check for the pricing, but you just have to start using the software. That is super-annoying and is built to make you experiment with the software and get addicted to it.

And Crowdfire has some addiction built-in. You just need to tap the plus button to follow new friends, tap plus to unfollow others, and tap a button to publish new posts. Super-easy and fun, takes just 5 minutes a day. Yet after getting addicted, you start to get blocked. Suddenly it tells you you've passed the free account limits, you can't follow anymore today. Come tomorrow. Or upgrade.

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So where do we see the formula here? While Crowdfire is annoying, it does not explicitly waste the user's time. The user will invest 5 minutes a day using the tool, regardless of whether he/she's paying. However, if the user does pay, then his/her time becomes more effective: he/she can achieve more on the platform, at roughly the same amount of time. Then the choice of buying the product boils down to whether the user will invest $5/month to make his (already used) time more effective. And it boils down to a simple decision. It's not about buying the product, the user is already using the product for free. It's about a better use of your time.

Slack

Slack is the super-popular, super-fast-growing team chat app. It allows the users for a great way to communicate with their team in real-time. Users organize themselves in teams and groups and chat with each other across the organization. All that is said in Slack is saved forever. All files attached in the chat rooms are saved. And all data is searchable. Such that Slack actually becomes a knowledge base for the organization. And all that is free.

Slack has found an ingenious way to make you pay. It limits the search capacity to only the last 10,000 messages in the chat rooms.

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That way, if you don't pay, you can still keep using Slack throughout your organization. However, you lose the ability to find old data quickly. And a knowledge base must be searchable, or else you'd have to manually go over all the messages to find what you're looking for. And that is annoying and time-wasting. Bingo! We have a winning formula for freemium.

The new paradigm of SaaS (software-as-a-service) allows the freemium model to exist

Why has freemium become more and more popular in recent years? Nowadays, the SaaS (Software as a Service) model is transforming the way software is provided to users. In the past, users had to download the software into their computer and run it locally. Today, everything is web-based. SaaS applications can be accessed over the internet. In fact, the SaaS revolution is what enabled the freemium model and actually allowed it to exist. Since the vendor can monitor all actions of the user that are done on his service in real-time, it is easy to limit and add features at will and in real-time. This is what allows the user to upgrade in 1 minute and gain all the advanced features. This is also what allows the service provider to provide the software for free without any chance that the user will somehow gain the advanced features without the provider knowing that (no hacking is usually possible when the user must connect to the remote server to use the software). SaaS started with the development of hosted software space in 1998. These first-gen SaaS apps allowed web-based access to software via a subscription from the SaaS provider instead of conventional application licensing for a software purchased and downloaded. It started by using the pay-per-use model, without any free plans, and only in the recent decade we've seen a surge of freemium web apps.

The vendor maintains the data, servers, and other related hardware at the vendor’s data center. To gain access to the remotely located application, a subscription that allows users to utilize the software is required.

The revenue flow from SaaS is quite different than from on-premise (downloaded) software. Indeed, it is rare for even the most successful SaaS companies to see massive revenue during the first year of inception. As in any subscription business (e.g. magazines, cable TV, cellular phone), it compounds. The revenue of a user signed up today will build up over many years. All upfront initial sales in subscription business are smaller compared to on-premise software, where everything must be paid upfront. This requires SaaS organizations to structure their finances in a new way, since it can take a while to amass enough profit from new users. It is also easier for users in SaaS to switch to competitors, as they're usually not bound by any multi-year contracts. It takes patience, time and initial funding for new SaaS companies to grow, or they could run out of operating cash before the software can have an opportunity to take hold on the market.

Conclusions

To recap, we have demonstrated the paradigm shift that the freemium model enables.The price paid is no longer the price for the service. The service is for free anyway. This price is quantified as the value to pay to save the user's time and annoy him less. Everybody values his time as his most precious resource. And he's already using that service or app and it's great. So the payment is to save that person's time. And that is a worthy investment, since everybody considers his time to be of a very high value.

The future

As always, the economical models of today are likely to be disrupted in the future.

Today's highly successful annoy-and-waste-time model may be a remnant of the past within a few years. As more and more vendors exploit this model to their benefit, we may reach a tipping point in which to remain competitive in the market, you must actually give the product for free without being annoying and time-wasting. And users will recommend to their friends only the products that refrain from doing that.

All of the above examples are likely to be disrupted by new software companies that will provide similar (or better) services, yet will provide the same experience without the less-friendly elements. And in that case, users will no longer have to endure these monetization models, and go for the alternatives. That will happen if the alternatives find a different way to monetize, without providing a negative experience to the user.

Last words of warning

These secret tips will not be applicable if you don’t consider the following possible drawbacks:

  1. When your freemium version doesn’t live up to expectations, consumers may not consider upgrading at all. At first, aim for product-market-fit. Aim for happy users. Aim for paying, happy users. If you don't have a great product, no technique will make users pay you.
  2. If your users decide not to upgrade, your company may not be able to recover the cost involved in offering your free products/services. So you must make sure that there's a value in upgrading beyond eliminating the pesky elements.
  3. If the product or service is not good enough, or too annoying, it may result in negative consumer reviews and comments which can tarnish the image of your company, thus affecting the overall outcome of your company.
  4. Your users may find similar premium features at a lower cost or even for free somewhere else. That is why we mentioned above that this monetization model is likely to be disrupted as new entrants provide the same level of service, without the peskiness.

Alright, that's it, now get back to shipping your product!

Tags: freemium

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