In what way are nonpaying customers valuable in a freemium pricing model. Let’s get the obvious out of the way: Yes a certain percentage of them will convert to paying customers and they will tell their friends etc I get that. Say someone like Dropbox has x million customers and only a 2% of them are paying. There is a cost associated with the other 98%. How do you adjust the pricing to cover the cost of those free customers? Does anyone have any stories they wish to share about how they approached this problem? Also do big numbers strike an emotional chord when raising successive rounds?
Value of "free" customers in a freemium pricing model
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Re: Value of "free" customers in a freemium pricing model
#2"In what way are nonpaying customers valuable in a freemium pricing model"
They keep your user from using a competing service (whether pay or free).
Re: Value of "free" customers in a freemium pricing model
#3Free customers may add value by virtue of the data that they contribute during normal use of your product.
In my case, our free users contribute data which, in aggregate, allows us to peer deeply into the college admissions process and ask questions such as, "To what extent does applying early to Yale help my chances of admission?"
Re: Value of "free" customers in a freemium pricing model
#4It depends on the product. In some products, there may be "network effects" where each user benefits by the number of other users in the system-- for example, if Facebook were to adopt a Freemium model, the paying customers would benefit from having the free users in the system.
This, of course, is not the case for most apps-- like Dropbox, in the example you chose. For Dropbox, the free customers have costs associated, but largely serve as a funnel. In other words, the costs of the free users are just considered part of the customer acquistion costs, the same as if they were Adwords costs with a given conversion rate.
I don't think big numbers strike an emotional chord with VCs when it comes to financing rounds, if by "big numbers" you mean "big numbers of non-paying users", unless there are plans to improve the conversion rate on these prospects.
If I were you I'd frame the question another way: given the product/app that you are planning, what advantages would a Freemium model offer over, say, a free limited-time trial of a paid-only product?
Re: Value of "free" customers in a freemium pricing model
#5I have extensively researched on the software products relating to the PC maintenance category. What I have found is that you can cover the cost associated with non-paying customers through advertising,etc. For instance, Trial Pay is used by many software vendors to let customers pay for essential things and get software for 'free'. There are other advertising models which can be adopted. Yet for our product, RegInOut, http://www.reginout.com , we have not yet tries these freemium model yet.
Re: Value of "free" customers in a freemium pricing model
#6"In what way are nonpaying customers valuable in a freemium pricing model" They keep your user from using a competing service (whether pay or free).
Yes! Good one.
Re: Value of "free" customers in a freemium pricing model
#7We use the freemium model (Paymo time tracking & invoicing http://www.paymo.biz)
it can have the following benefits for your potential business (in no particular order):
1. helps spread the word (lower customer acquistion costs) 2. "free" users are more likely to give you feedback, which will make your app better over time 3. you and your team feel good that you're able to share with the world something for free (just think of how many free apps help you during the day) 4. you can convert free users to paying customers. (in our case the app actually helps the users grow their business) 5. people seem to be willing to try out free apps vs trial apps more often
Re: Value of "free" customers in a freemium pricing model
#8Ning is one prefect example. They gained lot of popularity with the freemium model but weren't able to cope up ultimately.
Ning did get into the bad books of many when they pulled the plug and asked all existing customers to either pay or leave.
Adding to what someone pointed out, the value depends on cost involved per free user and also if it is worth it in the long run.
Re: Value of "free" customers in a freemium pricing model
#9I think for Dropbox free customers are recruiters, when I recommend it to someone I usually find that it fits their need perfectly and they love it, they just didn't know it existed before. Without the freemium model thy would struggle to reach some of these people and as long as a small percentage want to pay for more space they keep growing.
Re: Value of "free" customers in a freemium pricing model
#10From an non-financial perspective, presumably they are useful for testing the service? Adding experimental features, seeing how they react, not having to worry about up time on their servers. Understanding how the service scales, in case you get any enterprise-style customers. Learning what sort of features are missing etc. Essentially a loss leader to improve the service.