5Degrees and the Quest for Freemium

Software as a Servicesand the Quest for FreemiumWhat it takes to beSticky, Viral and TouchlessWhat makes Freemium workFree:Lower friction = faster tractionSticky: Grows more valuable the more its used.Viral: Ecstatic customers + Incentives to share with friends.Touchless:Guide users to become customersFor Freemium to workLow CAC High LTV

Source: David Skok, Matrix PartnersWhy Free?It Optimizes spread, Creates large footprint, Fast decisions Examples:Started with free = Freshbooks, Dropbox, Evernote.Added Free = MailChimpSource: David Skok, Matrix PartnersWhen is Freemium a good fit?

Source Matt Brezina, XobniFree- CaveatsProduct is the salespersonSo you have Absolutes:Ease of set upEase of useClear instructionFast proof product works

Source: David Skok, Matrix PartnersStickyCreate a product that has a great long-term retention rate; Make something whose value increases over time; (Evernote)Hang on to older users by introducing new features (Evernote, Xobni, GIST)Source: Phil Libin, EverNoteSticky- Example by Cohort : EvernoteOldest cohort now 20% paidSource: Phil Libin, EverNoteViralGive users better tools to spread the loveReferral program w/ 2-sided incentive (paypal, dropbox)Surveys, split tests, landing page/signup flow optimizations, encouragesharing big winsBig investment in analyticsTest, measure, repeat

Source: Drew Houston, DropboxViral- Example DropBoxoo4,000,000100,000Dropbox grew from 100,000 to 4,000,000 users in 15 month.Roughly 25% CAGR, Sustaining 17% CAGR over the last 9 Mo.Source: Drew Houston, DropboxTouchlessMove customers from trial to purchase without needing a sales force.Customers like to sell themselvesUse a simpler sub-set of your product/service, then upsellEasier to upsell an existing customer(Evernote, 37signals, Dropbox, Xobni, Freshbooks, ProOnGo, ConstantContact, etc)Higher LTV - MonitizationRecurring RevenueScalable pricingUpsellProduct line extensionsLead gen for 3rd parties (API-platform)A Working Freemium Business Model

Source: David Skok, Matrix PartnersEarly Success MetricsVisitor-to-trial conversion rate. it indicates if target audience is interested in the product and the ability to communicate the value of the product.

Trial-to-paying-account conversion rate. If people pay for product, that's the best sign that we're delivering real value to them. Higher conversion = lower CAC.

Engagement and retention of early users. look at usage metrics such as daily or weekly logins and various application- specific metrics to see if product is really used by customer.

Enthusiasm of your early users. These early VIP users are a strong signal that product is solving a real pain and hence a strong indicator of product/market fit (which is the basis for low CAC and high CLTV).

Team. Smart, dedicated, talented and results-driven. Excel at product. Get" modern SaaS consumerized business applications that are powerful yet easy-to-use and can be sold online using a low-touch sales model. Its in the DNA of the founder team. Source: Christoph Janz, Point 9 VenturesThe Process: 5-Step Model - AARRRWebsite.comRevenue $$$Biz DevAds, Lead Gen, Subscriptions, ECommerceActivationHomepage / Landing PageProduct FeaturesACQUISITIONSEOSEMApps & WidgetsAffiliatesEmailPRBiz DevCampaigns, ContestsDirect, Tel, TVSocial NetworksBlogsDomainsRetentionEmails & AlertsSystem Events & Time-based FeaturesBlogs, RSS, News FeedsREFERRALEmails & widgetsAffiliates, ContestsViral LoopsSource: David McClure, 500Hats15Sample Conversion MetricsStageConversion StatusConv. %Est. Value(*not* cost)AcquisitionVisitors -> Site/Widget/Landing Page(2+ pages, 10+ sec, 1+ clicks = dont abandon)60%$.05ActivationHappy 1st Visit; Usage/Signup(clicks/time/pages, email/profile reg, feature usage)15%$.25RetentionUsers Come Back; Multiple Visits(1-3x visits/mo; email/feed open rate / CTR)5%$1ReferralUsers Refer Others(cust sat >=8; viral K factor > 1; )1%$5RevenueUsers Pay / Generate $$$(first txn, break-even, target profitability)2%$50Source: David McClure, 500HatsStep 1: AcquisitionUsers come to the site/app from various channels:Affiliate Develop affiliate program, create rewards schemeIdentify target affiliatesApps & WidgetsCreate widget to embed in other websites, facebook, outlook, emailBuild API for others to build on top of, encourage open development, create revenue sharing modelBiz DevIdentify and calling/networking with target industries e.g. Jones LangChannel partnershipsBlogCreate original blog contentShare useful content relevant to target users e.g. HubspotCreate video sand podcastsShare features e.g. wibiya, facebook like, twitter tweet, google +1, linkedin share, stumble upon,Campaigns & ContestsRunning online contests, giving away giftsHackathons and local eventsGoing to tech eventsAdvertisingTV, Radio, PrintOnline paid adverting e.g. Google Adwords, Facebook Ads, industry, online publicationsStep 1: Acquisition ContdUsers come to the site/app from various channels:DomainsRegisters multiple domains focused on specific elementsEmail Obtain targeted email lists, send out emailsPay email marketing firms e.g. constantcontactPRPress releasesPlacement on sites like Yahoo News, Google NewsMentions on tech websites e.g. techcrunch, mashable, gigaomCommunication and relationship with journalistsCommunication and relationships with tech bloggers, magazine writers,Develop a PR package to downloadPaid PRSEM & SEOFind most relevant and popular terms and embed in websiteGet linked/mentioned on other websitesCreate backend tools e.g. web analytics, log file analyzingSocial NetworksFacebook, twitter, google plus pagesYoutubeStartup blogs and networks e.g. builtinchicago.orgTapping into MBA networkMetrics to Track by source:Quantity(#)Cost ($)Conversion (%)Step 2: ActivationUsers enjoy 1st visit i.e. happy experienceHomepage/Landing PageConduct A/B testing of UI, impact of various of colors, placements and UITrack page views, clicks, time spent on siteKeep page clean and simpleSet activation goal e.g. get emailsProduct FeaturesTest success of different product featuresIterate fastProvide incentives and encourage call to action

Metrics to Track by source:Pages per visitTime on siteConversion (%)Step 3: RetentionUsers comeback to visit site multiple times:Emails & AlertsLifecycle emails e.g. 3 day, 1 week, 1 monthStatus emails e.g. best of week/monthEvent based emails something happenedEasy to unsubscribeEasy to read emails (Important info in subject, small body)Blogs, News Feeds, Twitter FeedsTrack ImpressionsTrack commentarySystem Events & Time-based FeaturesRelease features with maturity /demand of customersRelease features around eventsCohort AnalysisConduct cohort analysis (dist. of visits over time, rate of delay, customer lifecycle)

Metrics to Track:SourceQuantityConversionsVisitor LoyaltySession LengthStep 4: ReferralUsers like product enough to refer others:Viral LoopsCreate incentive for sharing e.g. rewardsCreate same-side networking effect so users benefit from inviting othersMake sharing easyTrack viral growth(Growth factor = X*Y*Z where X = % of users who invite others, y = avg number of people invited, Z = % users who accepted invitation). Track growth of different channelsEmails, Widgets & SocialMake it easy for users to invite others from app/webPenetrate a specific customer segment with widgetsBuild API for others to build on top of, encourage open developmentAffiliates, ContestsAds, Affiliates, Cross-promote app with other developersStep 5: RevenuesUsers conduct some monetization behavior:RevenueFreemium Model figure out optimal model, priceSubscription/Recurring TransactionsCreate API for other developments, profit sharingTrack profitability: Lifetime value > Cost per acquisition + Cost of service (paying & free)Build profitability model

Biz DevCreate channel partnershipsForm alliances versus competingTarget tech savvy users/early adopters initiallyTarget industries and functionsThanks Want more info? Kelly Schwedland219-405-5723kellys@abdus.com

Sections of slidedeck taken from: Dave Mcclures http://slideshare.net/dmc500hats 500.co (@DaveMcClure)David Skok http://www.slideshare.net/DavidSkok http://www.forentrepreneurs.com/ (@BostonVC)