SaaS Startups

Why You Need 50 Million Active Users for Freemium to Actually Work

echojason@gmail.com'

Jason Lemkin

Having spent 6+ years building what is, if nothing else, the web’s leading freemium e-signature service, I’ve learned one thing: almost everyone gets the math wrong in Freemium.  9 times out of 10 — just don’t bother with a Freemium model, at least as your sole/primary business model, if you really want to go big.  The problem?  There simply aren’t enough businesses in the entire country + Europe to get most products to a $100m freemium business in almost any business/SaaS/work segment.

Let’s do the math:

  • Assume you can get $10/mo per paid user (many times, you can’t).
  • To build a $100m business (i.e., go IPO), you’d need almost 1,000,000 paid seats to hit that.
  • Assume a 2% conversion rate, for simplicity’s sake.  You’d need 50,000,000 active users. Not pretend users.  Not users who registered and never came back.   Not even users than use you once a year.  50,000,000 active, passionate, engaged users using your business app, on their own, electively, with some regularity.

That is extremely tough in consumer internet, but it can happen.  Facebook is at 1,000,000,000.  Twitter is past it, Pinterest may be, etc.   But in SOHO or SMB business apps, one million paying customers — it almost never happens.  Intuit, Microsoft, Adobe, PayPal.  But not too many with 1,000,000 paid business customers, or 50m truly active users.

So is freemium hopeless to build a $100,000,000 business?  Absolutely not.  In fact, what it can do is create it, build it, and seed it.

For example, at EchoSign, never did purest Freemium (i.e., no human involvement ever) exceed 40% of our revenue, and as we passed the first $10,000,000 in ARR revenue, it declined a bit and never exceed a third of our direct revenue, measured all on its own.

Another great example is Box.  Box has grown past $100m in revenue, but it “tilted” from a mostly freemium product to an enterprise focus, with freemium today being a minority of their revenue — although a key source of leads (see below).  A big piece, but not enough to get them to $100m.

DropBox is past $100m on Freemium.  But that proves just how many millions of folks you need to be truly actively using your utility to make freemium scale to the nine figure level.  An exception that makes the rules.  And most importantly, DropBox’s growth would be on the back of consumers, not businesses.

So freemium alone has a ceiling.  But – it builds your brand. It exposes you to millions.  Which creates leads.  Highly qualified leads, many of whom need to go to a salesperson, but have already used the product, love it, and are almost ready to buy.  Combine that with unassisted Freemium, and that accounted for the majority of all of our revenue.

This can end up being a free trial disguised as freemium.  It’s hard to pull off, and can sometimes confuse customers, but get it right, and it works.

But pure, automated freemium — you put up a website, and the money automatically rolls in, once people hit the choke point — it’s wonderful.  It works.  But to get to an IPO, alone?  It can happen — but it’s highly improbable.  You’ll need to build on top of it, and add more.

[Note: post is an update from an answer I gave on Quora.]

Published on September 2, 2012
  • Jason, I’m wondering what the assumption that 2% of *active* users will pay is based on? My guess would have been that you can expect 3-4% of *all* users to pay. So looking at the signup base it would look something like this:

    – 100 people sign up
    – Out of the 100, around 15-20 become active non-paying users
    – Out of the 100, around 3-4 become paying customers

    This would mean around 20% of active users become paying customers, i.e. an order of magnitude higher than what you estimated, which would lead to different conclusions.

    My guess is based on a bit of anecdotal data but I don’t have a lot of data and would love to learn more.

  • It’s just a pretty standard freemium assumption. I also think almost everyone “lies” and overstates conversion and also assume it’s some magical thing in an absolute sense — which it isn’t. The truth is on some level, it’s just a function of how easy you make it to sign up (increases denominator), and then the quality of those in the funnel. I think the 3-4% number is too high for most freemium apps. If you are seeing that, you are experiencing something more akin to free trial disguised as freemium.

    We experienced conversion on the 1-2% rate from paid when the funnel was open wide. When doing a true time-limited “free trial” (we offer/offered both), the conversion rate is geometrically higher … because the lower quality or at least much-less-likely-to-convert folks don’t sign up …

    Anyhow if you look at public comps of companies like J2 Global and others that really publish info, you’ll see 1-2% conversion in public comps is doing just fine.

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  • Good post, and I agree with the points you make within the context of a SaaS business. For consumer tech, I think the point of freemium is to gather lots of data and focus product iterations on the needs of the most engaged users. The conversion rates are similar (2-5%), but generally pricing isn’t oriented around a MRR model: rather, the product offers a broad portfolio of purchasable items that can lead to a distribution of LTVs with a long tail.

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