Freemium 101: Customer Conversion

At Get Satisfaction we have had a freemium model from day 1, when it was just free, no premium offerings existed so we’ve lived through a couple of key transition points and now are optimizing a model we know works.

We have 2 primary channels to market, an enterprise business that mimics what every other enterprise business sells, which is a contract sale with a named customer built around high value product offerings and bound by legal agreement which stipulates a heavy support model and SLA for non-performance. The other half of the business is web-direct, we call them Standard Plans, that are marketed and purchased directly through the site and have a month-to-month model where customers can discontinue at any time without financial penalty. The latter part of the business is what I am responsible for.

The basic challenge with a freemium business is twofold, first providing enough incentive for free customers to convert to paying and for paying customers to not downgrade to free, and secondly to deliver effective product marketing on the site and through an inside sales capability to keep the sales funnel flowing.

The product marketing is a real challenge because if you assume your product is reliable and is without major deficiency, and that you provide good customer support for all stages of the customer lifecycle (in other words, your customers aren’t leaving you because you are pissing them off whenever they interact with you), then the only other reason you will lose customers is because you are misrepresenting the utility and value of the product which when discovered causes mass customer defection.

Churn (aka turnover) will kill you in this business and it’s not as simple how many customers you lose in one period compared to the previous but rather the relationship between attrition and customer acquisition over time. This is why it is so important to target the “right” kind of customer in your marketing because in order to recover the cost of customer acquisition you need to keep them long enough to go positive on revenue relative to customer acquisition and ongoing operation.

If you do a cohort analysis which maps out the survivability of customer groups according to what month they were acquired you will see the effect of churn on your customer base and get a foundation for determining what the lifetime value is of a single customer at any plan level, assuming you have multiple pricing plans. This is critical because it gives you a basis for determining the efficiency of your sales and marketing expenditures for achieving revenue and more important, profitability.

I have written about pricing issues before and while I do want to cover that again in more detail I will defer to a later post because pricing is a topic which deserves a much deeper dive than is possible here.

The last thing I want to cover is trial processes and customer conversion. There is no process more critical to your success than optimizing the free-to-paid conversion and the web-to-trial process. We have done a lot of work to address improvements in how we move web visitors into a trial process and then convert them to paying customers.

About 22% of the communities that are created on the Get Satisfaction network are accomplished through a trial-to-pay process and this is a phenomenal result that any business would be proud to disclose… which is exactly why I am disclosing this. We understand how to do this well but it’s only half of the equation because once you get them to opt-in to a trial process you have to do everything possible to make them successful with the trial and move through to regular monthly billing.

Accomplishing successful trial conversions is a process that incorporates a strong dose of online trial enablement combined with effective inside sales capabilities. At $19 a month I can’t afford to have high touch inside sales people working the trial customers but at $289 a month I cannot afford to not have them working on those prospects.

Our trial process is 15 days and that is not arbitrary. Basically it comes down to a simple dynamic which is that if a trial customer does not start using the product in the first hour after creating the trial account we know the probability of converting them goes down exponentially with each passing day, therefore a 30 day trial process is not going to contribute to a higher conversion percentage.

A 7 day trial process is far too short for us because we have a product that requires several discrete steps to be taken in order for the value to be realized. We have recently instituted a series of emails backed up with landing pages that go out to a trial customer when they sign up, this is commonly called “onboarding”. Over a 15 day period we can, depending on when the trial was initiated, have 5 weekend days in that time period so getting 5 emails out when the trial customer is most likely to respond to them requires more than 7 days but they can’t be sent out too closely together and risk over-communicating to a trial customer which causes them to opt-out and you have lost your ability to communicate at all with them.

I hope this is useful information, it’s actually quite a fascinating departure for a guy like me to be involved with when compared to the world of traditional enterprise software that I grew up in. I would like to make this a series of posts that cover conversion, retention, free community migration, and operational metrics but I will resist creating the impression that I will knock these posts out in the next week. Stay tuned.