In September 2009 a little known email service decided to try an experiment.
They would try a “freemium” pricing model.
12 months later the company was earning over $12 million annually.
In 2015 the company is estimated to be making at least $250 million with very healthy profits..
What was that company and what can we learn from their freemium marketing success story (as well as the risks involved)?
It is said that “free” is the most powerful word in marketing.
Free samples, free accounts, free audio books.
You love it, I love it, everyone loves free stuff.
When there’s no cost to receiving something that will hopefully improve your life, you have little reason not to take advantage of it.
But free isn’t always a cure for low or slow growth. In fact, it could poison your business and hurt profits. Even worse, it could be a symptom a bigger problem in your business …
The other week I was shopping for a Mother’s Day gift at the mall. I found a little gift store that sold high quality French hand crèmes. At checkout the lady behind the counter said they were running a giveaway for a free extra gift bag, all I need to do was fill out a ticket.
I declined, but she pressed:
“It’s free, wouldn’t you want to win this nice gift bag to give?” she pointed to the colorful prize on display.
“You’re going to email or text me and I don’t want to receive any more offers, I’m happy with my purchase for now.”
She seemed a little offended, but continued: “It’s free and we will not give out your information or send you any messages. Just put your name and phone number down here. And if you win, we’ll call you. If not, we won’t call you,” she smiled.
I was skeptical, but I decided to do it anyway. After all, it was free and it would be great to give my Mom an extra gift from this same store since her birthday was coming up (I rationalized).
In this case, for this little French beauty shop, free makes sense. The cost to the business to run the giveaway was only the cost of the one product set.
I found it hard to believe they weren’t going to build a contact database for marketing purposes with the entry data. Regardless, to me as a customer it was worth it. There wasn’t even a survey question to answer in order to enter.
The end result: The inertia of desire for the potential prize exceeded the weight of my skepticism and desire to not give out my contact information.
Free offers like this are one of the easiest ways to engagement anonymous website visitors and build a contact database so that you can follow-up later on.
What if you’re selling digital products, like an ebook or a SaaS product?
The incremental cost of giving away digital content (like an ebook) is quite low, practically non-existant.
Visitor enters his or her email, visitor gets digital download.
With software, as is the case of SaaS businesses who sell access to their online tools at a monthly rate—the incremental cost of offering their service for free is higher.
This is because all those free accounts take up space and often require customer support time until they (hopefully) convert to paid accounts.
For example, a famous case study comes from Mailchimp. In 2009, Mailchimp opened its doors offering anyone who wanted it a free account with up to 2,000 email contacts and a send limit of 10,000 emails per month.
As a result, Mailchimp’s userbase grew exponentially, as did their revenues and the number of people receiving their emails.
Today, although Mailchimp is a private company, it’s estimated to be generating over $250 million annually.
The reason why their freemium marketing campaign was so successful is because they had a strong foundation in terms of team and technology to support the growth; plus, their product was simple and laser focused on solving one problem for customers.
But the most relevant principle in action here is …
The Power Curve (And How to Relates to Freemium Marketing)
This is a concept I first learned about in Perry Marshall’s book, 80/20 Sales & Marketing. This is like a rule of business physics.
The graphed image below shows a logarithmic curve (ah, logs – remember 10th grade math?)
The curve shows that in any given market—assuming you have efficient distribution for your products or services—as the price of something increases exponentially there will always be at least one customer willing to buy at that price point.
On the other side of the graph, as the price of something moves towards zero, there’s nearly an infinite number of people in the market willing to buy at that price point.
Therefore, assuming you can get efficient distribution (traffic, impressions, conversion, market fit) for your offer, the purchase rate will approach 100%.
So the key benefits to giving away your service for free to start are:
- Wider market adoption
- Significantly lower barrier purchase
- Higher overall conversion rate from non-paying customer to paying
Of course, any reasonable business owner would say:
“But Matt, I can’t sell my service for $0, I’ll go bankrupt!”
I hear you, and I’m speaking as a marketer who runs a service company.
Let’s address the inherent problem with freemium for a minute…
The problem with freemium marketing (especially for services)
Going back to the case study of Mailchimp, note what the founder, Ben Chustnut, said about
“For eight years, our company never thought about freemium. We didn’t even know the concept existed. For eight loooong years, we were focused on nothing but growing profits. If you had brought up the concept of “freemium” with us during those eight years, we probably would’ve looked at you like you were eff’ing insane, then went back to work.”
In other words, freemium worked well for Mailchimp because they already had a solid, focused product and company infrastructure in place to support the move to the free offer.
So if you’re a young service business with a process and a focus not so well defined—you need think about productizing your service(s) first (I’ll be interviewing Brian Casal about this exact topic in a future article). Adopting a freemium model is excessively risky for service offers because of the time and labor factor.
Ben also understood that with a freemium model, Mailchimp would see a ratio of about a 10 free users to every 1 paying customer (similar to YouTube’s ratio of 1 out of 100 users create content rather than only consuming it).
With numbers like that, this is a nearly impossible pricing model to sustain for a service business… right??
Yes, freemium is tough for service businesses to offer. BUT there’s a middle ground that will allow you to get closer to achieving a similar level of benefit that comes with the freemium model.
In the past I’ve written about the Product Splinter (AKA “Service Slice”) as a means to allow clients to test-drive your services with low time and labor risk on your end, and low financial risk to clients.
Three other important tactics that can get substantially closer the benefits of a pure freemium model
> Risk-reversals – This is where you guarantee the deliverable and/or that the client will be satisfied. For example, at AutoGrow we offer a 100% Quality Guarantee since the quality of each of our project for each of our web marketing projects is very core to our brand. And in the future, we’ll be offering a 100% money back guarantee when we start offering more “Service Slices” (i.e. website tweaks and small projects < $1000 each).
> Free, actionable content – Require an email opt-in in exchange for something of value that you’ll be giving away. For example, our 11 Point Perfect Sales Funnel Checklist.
> Free trial, with a credit card required – Not a pure freemium offer, but it limits risk on your end while still keeping the gates wide open enough for new clients to efficiently flow into to your sales funnel.
Examples of Freemium Marketing (done right)
SaaS Business – ActiveCampaign (AC)
You might call them a competitor to Mailchimp, though email newsletters just one component of their platform. AC is much more useful as email automation software, working to automatically follow-up with, educate, and make offers to leads.
Currently, they offer a 14-day free trial, whereas they used to offer a completely free and unlimited account up to 2,000 contacts.
As I learned from speaking with their support team, it was a move they had to make because their growth was outpacing their ability to adequately service customers.
Service Business – AutoGrow
This month I’m revamping our entire Fix Your Funnel webinar presentation. I’m not going to reveal too many details here (you should stop by to get lot of useful, actionable tips and strategy on how to create a high converting sales funnel), but here are the important points as it relates to this article:
> It’s going to include a special “service slice” offer at the end for people who are interested in creating or improving their online sales funnel.
> The offer will include a HUGE, free digital content bonus that will help clients get the results they want, regardless of whether or not then end up buying the full service package from us.
> The offer will include a 30-day money back guarantee to mitigate any perception of risk, and you get to keep the bonus as our gift in either case.
So while service businesses cannot completely offer a adopt a pure freemium marketing model (unless you mix in software somehow with the service as part of the tool to get the deliverable), you can still get close enough where you’ll get most of the benefits.
A pure freemium marketing offer like what Mailchimp does is difficult for any business to sustain for the long term. Part of the reason WHY Mailchimp is able to do it is because they get free advertising every time someone sends an email blast—so it makes perfect sense.
> As the price of anything approaches zero, a much larger portion of your target market will be willing to try it.
> Freemium works much better for focused software products and productized services. This is because there will be significantly more free users than paying clients at any given time, and those additional users will require support.
> Having a support infrastructure in place is also very important. After all, free users are always less likely to convert to paying clients if they can’t get the value they expect on the free level.
> A pure freemium model is extremely risky and not recommended for a service business, but it is possible to get the majority of the benefits you use risk reversals, free content, and/or a free trial as incentives.
How will you grow your business with freemium marketing?
What other “free” strategies have you seen success with?