The 2.5% Freemium

Here is one number to keep in your mind: 2.5%

That is going to be the ceiling on your freemium conversion rate. That is the percentage of users who will ever pay anything.  The rest will remain free users for ever.  This number should sound familiar to you. That is the number most start with as we have seen in early examples, Evernote, Dropbox, LogMeIn and countless other apps.  And it appears that is the number most freemium businesses end up with as well.

There is no data to support the claim that, “just wait for users to fall in love and start paying for it”. Or to the claim, “more will pay up to buy goodies and add-ons”.

Lifecycle

Where is the data for my claim you ask? Well we do not have extensive data on every freemium startup that started five years ago. Most die out or do not make significant enough cash to join unicorn clubs on valuation. We are going to look at the data on two of the biggest winners – one who had an exit and other with known private valuation.

King Digital, the maker of Candy Crush genre of games with freemium model went public and last week was acquired by Activision for $5.9 billion. That is a valuation number that is tad lower than its IPO day an year ago. And a key metric reported is most users are not paying a dime and the percentage who spend remains 2.5%.

Dropbox has a private valuation of $10 billion. It reportedly has 400 million users but only 150,000 paying customers. Considering these are businesses, if we give a generous number of 50 paying users per business and add a few more for personal users, we still hit a number of just 2.5% paying customers. All of Dropbox future revenue growth is not going to be from covering free users but from a focused enterprise product and GTM strategy (which Box did 3 years ago).

If the percentage of paying customers top out at 2.5, what options do freemium businesses have?

They do the only  thing they know is revered in the startup space – they grow. They  spend more on customer acquisition. They hire growth hackers. All in the hope of keep finding 2.5% in every million users they add.

You would think after the first 10 million users they will understand segments, value and pivot to a better product and pricing strategy.

Unfortunately that sounds boring and defeatist compared to the sexiness of growth hacking. Hack all you want, as King Digital acquisition says there is only so much value market assigns to user growth that hardly pays anything.

Wouldn’t you rather start here?