Say you want to increase customers (those who pay for the service as opposed to freeloaders) by 10% in your freemium business. You have two options:
- Blue Pill: Increase user base by 10% – if the proportion remains the same, % customers goes up by 10%
- Red Pill: Convert your freeloaders into customers
Which one would you pick? You pick the option that delivers higher incremental profit, that is new revenue less the marketing costs and operational costs.
Let us use some numbers – because of the ubiquity let us use numbers published by EverNote (otherwise there is no connection to EverNote).
Current number of users: 2.7 Million
% customers: 2%
Fixed Cost/year: .09*2.7M =$243,000
Incremental revenue from 10% more customers = $243,000 (just coincidence)
Incremental profit is $243,000 less cost to acquire and support 270,000 more customers.
Incremental Operational Costs: Let us assume you are at capacity and need to add new capacity to support 10% more customers. A moment’s reflection will convince you that this is not an unreasonable assumption. So adding 10% more customers would incur $24,300 incremental cost for capacity enhancements.
Incremental Customer Acquisition Costs: These are the marketing costs. Despite the claims that “free is free marketing”, there is a cost to acquire 270,000 new users especially after already acquiring 2.7 million users. This is going to take time and will cost $5,000- $10,000. But to keep with the freemium model assumptions, let us treat the marketing costs as $0.
For option two, both these costs are zero and you only need to convert .22% of the freeloaders compared to acquiring 270,000 new users.
So converting even a tiny fraction of your freeloaders delivers you higher incremental profit than growing your total user base by 10%.
Is your choice the blue pill or the red pill?
Now my selling point – any solution that enables this conversion will add $24,300 in value to you. The value scales as more of your freeloaders are progressively converted to customers.
The value can grow further, if a solution can find 10% of freeloaders who will never pay and hence enables you to fire them – that is another $24,300 in value for a total of at least $48,600.
Would you be interested in sharing a fraction of incremental value-add for that solution?