Asking for a credit card number is a significant hurdle for most people. High fall off rates are to be expected. But once someone gives you a card number and starts a trial, they are more likely to convert to a paid subscriber at the end of the trial. So, if you are optimizing for your conversion numbers from trial to paid, then collect the credit card at the beginning of the trial.

If you offer a trial period and require your users to upgrade before the end of the trial, you will get more people in the door and trying your service. However, it’s very difficult to get someone to come back before the end of the trial to enter their card number. At least the number of total users will be much higher; use this as an opportunity to collect more feedback from your free users, especially the ones that declined to upgrade.

If you are able to offer your users an indefinite, free version, then you can wait to collect the credit card number when the user is ready to upgrade and convert to a paid subscriber. You benefit from getting the most people in the door and will have the most opportunities to ask the user to consider upgrading.

At the end of the day, you need to factor in the costs associated with the free trial, the viral-ity of your product, and the likeliness of a conversion when deciding when to collect their credit card number. You’ll get the highest retention rate when you can reach the customer the most (while providing value, not annoyance).

Recurly was invited to Supernova as one of the spotlight innovating startups, which enabled us to present our service to attendees. More importantly, it let us attend the various sessions. These ranged from panels focusing on the evolving “real-time web” to the changing landscape of venture funding to the future of global internet policy. The common thread through all of these areas was rapid, real-time change. Rapidly changing times, rapidly changing customer needs and rapidly evolving business models.

How Subscription Billing Fit in

We were really curious to see how the movement towards subscription billing and Freemium models would be discussed. Over the past few months, we’ve spoken to companies ranging from SaaS companies to small newspapers and nonprofits- all of whom are looking at new ways to gain revenue and donations. It was encouraging to hear that the trends we’ve seen over the past year- a movement from traditional ad based revenue models to subscription models- highlighted several times by the panel speakers. One particular presentation stood out in this area- the panel on building startups today in the aftermath of the recent recession. Rashimi Sinha (Slideshare) , Christine Heron (First Round Capital) and Dave McClure (Founders Fund) discussed their thoughts on building a company now, how to fund it and guide it to success.

What was mentioned time and again was that now is the time is right for creating a new company. More can be accomplished with less capital- thus the reasoning for the drop in the size of funding rounds and the increase in the quantity of smaller fuding rounds. For many startups, pure bootstrapping is a very viable and real option. With the drop in dollars put in by VCs to startups,  Dave felt VC’s now offer an even greater level of support for startups in non-tangible resources (assistance with marketing, partnerships, advice on social media). Most interestingly, Dave and Christine suggested if you’re building a startup today, you should be looking at a subscription-based revenue model for success.

What does this mean?
As time goes on, there is going to be a larger shift towards service paid for in smaller- but recurring- increments. Multiple attendees I spoke to from several larger enterprise software executive to the manager of a nonprofit agreed that this shift towards subscription billing/donations is a direct factor of the economy. By lowering the bar to trying a new service (or donating to a charity)- it makes it much easier for an end user to sign up for. Even if the cost of the service over the user’s lifetime is higher, the value of being able to amortize the cost over time is a great incentivizer to using a product. With the explosion in the area of subscription billing and the growing amount of businesses interested in subscription billing, we see this number only growing, And we look forward to assisting make it easy.

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.

]]> http://blog.recurly.com/2009/10/chris-anderson-on-why-freemium-models-work/feed/ 0 http://blog.recurly.com/2009/10/planning-a-freemium-revenue-model/ http://blog.recurly.com/2009/10/planning-a-freemium-revenue-model/#comments Fri, 09 Oct 2009 18:56:37 +0000 Tim http://blog.recurly.com/?p=24 When entrepreneurs come up with an idea- revenue plans are rarely the first thing that come to mind. After all, asking  “how do we solve this incredibly painful business issue” can be a lot more exciting then “how are we going to monetize this”.

Since the first dot-com-boom, several models for revenue have come, some gone, and most have evolved- from the straightforward ad-revenue based model to the more open-ended-funding model (similar to Twitter).  A trend that’s been getting a lot of attention lately is the “freemium” model. This typically offers users a stripped down version of a web service for free, while enabling users to “upgrade” to a fuller-featured version for a fee.

Clearly this works best for feature rich products and services that can be subdivided in some way- deciding how to price these features is the next step.

What to sell? What to give away?

A good first step is deciding what features users are willing to pay for vs. getting for free. Is there a pivot point in your product or service that can easily separate the paying customers from the free customers? If you’re an online storage backup site, a paid account might give you more storage, or automated backups. A customer relations management site might enable you to track on 10 accounts for a free version, but unlimited accounts in the paid version. In any of these situations, customers should not only be able to smoothly upgrade from a free account to a paid account, they must be incented to do so. Finding that hook in your product will be key to your success.

What’s in a price

Now that you have an idea of what you’d like to charge for- what do you charge your customers? Is there a direct, measurable cost to you for user activities on your site? An example would be Dropbox which offers users online storage syncing. New users get 2gb of storage for free- but to use more than those 2gb costs the users a fee. The cost of those initial 2gb of storage is a loss leader for the Dropbox team, but one that clearly is offset by users upgrading to a more premium level of support. The hook for offering the initial 2gb of storage it build buzz or “virality”- which drives new customer signups. With a free to paid conversion rate remaining constant, more free users means more paid users.  To help decide how to best price your product, construct cost models that can demonstrate where your break even point occurs. This will help guide you in putting together pricing plans that can easily fit into a freemium model.

Looking at competitors solutions can give you some guidance, but don’t let the pricing models set by others limit you. Now why would someone upgrade if they’ve already gotten something useful for free? See Om Malik’s post on this topic to get a great illustration of why a user might make the jump to a premium pricing tier.

Freemium models aren’t the magic answer to all revenue model challenges, but with the right product and the right mix of free, you could turn a handy profit.