Three characteristics of a successful freemium business

I’ve been thinking about Evernote and Dropbox, and the characteristics that make them successful freemium businesses.  Of course, a lot has been said about freemium, and Ning’s recent decision to drop that business model has placed it under renewed scrutiny.  But I don’t think it’s time to bury freemium just yet.  I wanted to write down some quick thoughts on what I believe are three essential characteristics of a successful freemium business:

  1. Be patient with usersEvernote’s cohort analysis shows that initial conversion rates are at about 1%, but once users have been with the service for 18+ months, that jumps to 4% — more than enough to be profitable.  And it’s not actually a bad thing to have free users for that long — at that point they are so invested that they’re not going to take their data elsewhere.  They know and love the product, so when they hit the storage limit, they’re comfortable with paying.
  2. Have a natural (and inevitable) path to upgrading.  With both Dropbox and Evernote, if you use the product long enough, you’re going to have to upgrade — at some point you’re going to run out of storage.  If you don’t have a natural path to upgrading you need to create one, or you’ll find yourself in trouble.  Users will use your free product for forever and be happy with it.  You need to make it inevitable that a certain % users will hit one of your limits.
  3. Have a great free product.  It might sound contradictory, but if your free product sucks, the switching cost will be very low.  Dropbox and Evernote are successful because users love the free product, so when they run up against the limits, the decision to pay is an easy one.

To put it another way, I think that to be successful as a freemium company you need to (1) have a free product that users love, (2) be ok if those users don’t convert to paying customers for months, but (3) make it inevitable that at some point, they will have to upgrade if they want to keep using your service.

If you haven’t seen these great talks on freemium, I highly recommend you invest the time to watch it – very informative: