Tuesday, July 7, 2009

More on Freemium

Since writing about the "free" business model yesterday I have spend extra time reading other bloggers thoughts.

Phil Wainewright has a good set of thoughts going over at ZDnet in his post Free is not a business model - thanks to Dan London - Dan-london.com - for making me aware of this post.

Wainewright notes there are three alternative revenue sources to charging your users directly.
  1. Advertising
  2. Freemium - my favorite
  3. Syndication
He links to a post by Fred Wilson titled Freemium and Freeconomics - I have to be honest, it is nice to have a break from made up words based on Twitter, twisn't it.

Fred has some very interesting numbers on Facebooks revenues and sources of revenue. I quote his post...

"Earlier this week, we spoke to several sources who each have some insight into Facebook's financials (none of them know precisely). Taking the sources' input together, we'd estimate the company's expected 2009 revenue this way:
  • $125 million from brand ads
  • $150 million from Facebook's ad deal with Microsoft
  • $75 million from virtual goods
  • $200 million from self-service ads.

These numbers are similar enough to others that I have heard that I feel comfortable republishing them here. Facebook has 200mm+ monthly active users worldwide. Let's say they are doing $50mm per month in revenue. That's a revenue per monthly active user of $0.25. Low for sure, but enough to operate at breakeven."

This is an interesting look at revenue per user based on advertising.

To compare this to Freemium businesses of which I have a personal knowledge, they seem to have a monthly revenue per user of $1.00 to $5.00. This makes freemium much easier to run profitably at fewer than 200,000,000 users. It may be a better fit for the business that has a more niche focus and a limit of 100,000 to 1,000,000 total users.

Of course I feel the need to add a word of caution about start up times and cost. The source of high margins in online ventures is based on the relatively true statement that the marginal cost of each additional user is almost zero. The flip side of that is the cost of your first user is your total development and operating cost. It can take a significant period of time to attract an adequate number of even free users.

I have read the typical runway to this break even point should be planned as four years. My experience is your doing great if you get there in three years. It is possible with very strict attention to cost controls.

As a final comparison, in the pure software model where nothing is free - in a niche like property and casualty insurance, Applied Systems, an Insurnace Agency specific back office system - the average monthly revenue per user may be $100 to $250. This is a slower sales model, but each sale covers it's unique cost from day 1 - minus of course development and probably direct selling cost.

How is all this relevant if you make your money from selling things you can offer for free?Examples...
  • Amazon with books
  • An insurance agent with insurance policies
  • A lawyer with legal advice

These are all products that have proven to be profitable online for many companies. I guess you can make money online without giving everything away for free afterall.

Maybe I should spend some time getting me some of that knowledge and understanding.

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