Today at Y Combinator’s Startup School, Chris Anderson from Wired gave a fascinating presentation on leveraging Business Models (a great Techcrunch summary is available here). With economic times being as challenging as they are, the allure of leveraging “a free service” to build users makes sense. “Freemium” gets people using a service while at the same time, giving them an easy path to pay for a premium features.

One point Chris highlighted was the barrier to entry for recommending a free service is low (it’s a free service after all). If your friend was looking for a better way to manager their money online, its a lot easier to recommend using a free service like Mint.com vs Intuit’s costlier Quicken software. This feeds directly into a concept Chris described as “free users aren’t freeloaders”. These free users actually offer free marketing by spreading the word about a product. The more users recommend the product’s free services to friends, the more users the product has. The more free users a product has, the more paid users they’ll develop. It’s a simple formula. According to Chris, customers who upgrade from a free service to a paid service are a “higher quality customer” vs. those that sign up without a trial.

Another good point Chris mentioned is that if you have a freemium service with a low conversion rate, it may be because your free version has too many features (no need to upgrade), or too few features (too crippled to really try it).

The most intriguing point Chris mentioned is that the churn (or turnover rate) of paying customer using a Freemium model is far less than other business models. Why? They already know what they’re getting when they pay for the service. Any marketing book will tell you its far cheaper to keep paying customers, than to bring on new ones.

For more background on developing a freemium model for your product, see our earlier post on the topic.

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