Six facts about free increment you have to know

Intermediary transaction SEO diagnosis Taobao guest Cloud host technology Hall

Editor's note: Over the past few months, there has been no interruption in the discussion of free value-added in the end. IVP Partners and researchers got the following six after spending months interviewing several free value-added leaders such as 37signals,dropbox,evernote. It transmits more signals than the four words "free increment". And you will find that any of the following facts are based on the previous one, the front one is interlocking. Now that I have the patience to turn it over, I ask the reader to read it patiently and you will reap it.

The debate over the past few months about the business model of free value-added is pretty intense. For some, free value-added is like a trap to burn money, sacrificing a company's income and forcing a company to feed a hitchhiker who will never be a paying user. In other people's eyes, the free value-added has become the future of business, become the bandwidth, storage, information processing costs gradually trend after 0 of the reasonable trend. But both parties admit that free value-added can be very lethal (both to the user and to himself). A Wall Street Journal article says that free value-added is like a samurai sword: "Unless you are a master of it, you may cut your arm." ”

In our view, free value added in the entire industry has a large subversive significance, and this model needs to be read correctly. So, in the last few months, we've been on 37signals, Dropbox, Evernote,github,hootsuite, New relic,surveymonkey,weebly, Zendesk, the leader of the number of free value-added models, interviewed the following six facts/lessons. Please make good use of these six articles!

1. Start with the product

In our interview process, a little by the companies repeatedly mentioned: Please be sure to put the product first! Although designing a quality product is important for every start-up, it is particularly important for a company that pursues a free value-added model.

The so-called wine is not afraid of Deep alley, a perfect free value-added products do not require human intervention and a lot of overhead, will be able to market themselves, successfully acquire new users (whether free or paid users), and automatically handle customer service--and one of the premise is that customers really like your products.

For free value-added mode companies, conversion rates for users from free to paid mode are usually between 1% and 10%. The products they launch must have two key attributes:

1. Marginal cost is very low

2. Sales and marketing costs are also very low

Because most users don't pay, the company is in danger if a company spends a lot of money on marketing or offering products. Your product must be able to sell itself on its own product strengths and attract loyal users, rather than relying on a high marketing budget. For users, the product must be simple and easy to use-not that it should technically be complex, or that it can't look heavy behind it-but that you shouldn't let your customers feel that.

Moreover, the simplicity and quality of the product must be consistent between free and paid products. Many companies fail because they offer free products that tend to be "compromised" and then have the hope that users will buy their paid products. In fact, if your free product is the quality of Seoul, then the probability of a user paying is lower--and that's exactly what you're really motivated to do when you start throwing free value-added bait. The best free value-added companies, whether for free users or for paid users, provide real value. And they spend most of their energy on optimizing free products.

So if you can't make a good product, you're not attracted to either a free user or a paid user. And once you've designed a world-class product, the next thing to do is to know your customers and try to understand that free value added doesn't work for them.

2. Know your customer: Does the free value increase work for "them"?

In fact, free value added is just like a subscription, authorization, service based pricing model, and it's a tool for your customers to buy products. And your first step is to first understand the customer pain point, and then make a product to solve this pain point. If you have finished this step, then you need to ask, what is their willingness to buy products, free value-added is not a right model? At this point, you can ask yourself the following questions:

1. How complex is your product? If your customer needs a series of products that are related to pilots, RFPs, RFIs, then it is likely that your product is too complex and free value added does not apply. To use the free value added, you need to ensure that your customers understand your product and that you can get started quickly. If customers need hands-on training or support, then free value-added may not be the right business model.

2. Will your "free" product attract them? Think about it, if a stranger wants to bring you kids for free, or if you see a dirty couch on a street corner, would you accept it? Chances are, you'll say no to a lot of free stuff in your life--because you're mentally aware that there's no cost to using them. Some things are because of their high importance (such as with children), so you would rather spend money. There are times when people think that the cost of time and energy for free products is too high, and they would rather use a paid product.

And once you've decided that the free value added is really working for the customer, the next thing to do is to understand the value of the free user and determine if the free value added is meaningful to your business:

3. Understand the value of free users: does it make sense to add free value to your business?

It is only when free users can provide value to your business that they are worth fighting for. Getting free users is relatively easy, and many companies are tempted to do so. Think about it, who do not want their own users over million, million, tens of millions? However, if this part of the user can not be directed to the paid user (whether direct or indirect), then this group of people may become a company's expensive burden. For free value-added to work, your free users must meet one of the following two points:

1. Become a paid user from a free user

Although these people are not paying half a dime today, based on your observations of the same group of data (cohort data, the 5th meeting below), you can predict that a sizeable portion of them will be turned into paid subscribers.

But your product needs to have such a core attribute: Over time, users can derive increasing value from your product.

Case: Evernote. On the first day, a new Evernote user could not see what was stored, and the only thing he could do was create new content. But as the user builds up the number of notes, the more likely he is to go back and use the product, and try different ways to interact with such historical data. Three years later, a Evernote user's value from the product grew from the first day they used the product, so they were more likely to come back with the product. Although most of the product users over time on the use of a product is declining, but Evernote situation is exactly the opposite (Evernote loss rate is negative, look at the following smiley face you know). And as users gain more and more value through their free products, some users end up being converted into paid users, bringing revenue to Evernote.

2. Without paying, it attracts paid subscribers.

These people may not pay for your product for a lifetime, but their loyalty and dynamism to the product may attract a group of paid subscribers. In many cases, this type of user can be viewed as another marketing channel in which you spend a sum of money and then you can quantify your ROI.

But your product needs to have such a core attribute: virus-like transmission

Case: SurveyMonkey. Online surveys can be said to be a typical type of viral transmission. A free user who spreads dozens of of surveys is actually selling SurveyMonkey to hundreds of potential customers. If the conversion rate is not problematic, then such a marketing project could become a very effective channel for paying users (even if the initial part of the free user does not become a paying user).

So if you're using free value-added and you want to be successful, your product either has to be able to bring more value to the user over time (from free to paid direct conversion), or to have viral transmission (to attract new customers). There are some lucky companies with these two attributes. For example, Dropbox and GitHub, a free user through the sharing of file sharing/Public information base to the behavior of the company to pull new users, and then, as their demand for content storage/private sharing of the growth of demand, this part of the free user also many people become paid users.

And once you've made sure that your free users are bringing value to your business, then make sure that your account is not wrong:

4. Make sure your account is correct.

The free value-added model will fundamentally subvert your business economy, which has both advantages and disadvantages. Even if you think the time you spend on free users is "value for money", you need to understand the entire business economy and make sure that they can be used for you so that your business can truly prosper. The two major analyses you need to do are:

1. Market Size: The free value-added model works only when your market is large enough-which is why companies such as Dropbox and Evernote are looking at large vertical areas. Because, once you set the initial price of the product to 0, then the price of your paid version of the product is very difficult to go up. Plus, because you've already provided a free version, you've killed a lot of potential paying users. Because a large part of the users are free users, only if your user base reaches millions, your paid users are not too little.

Most free value-added companies have a 1% to 10% per cent conversion rate (on average between 2% and 4%), while a typical paying user does not spend more than hundreds of dollars a year. So if you want your company's annual revenue to reach 100 million dollars, that means you need to get tens of millions of users (see the chart below). If your market is not that big, then you should not apply the free value-added model in the beginning.

Note: This chart does not consider user churn. If you consider the loss of users, then the number of free users will be larger, or conversion rate is higher.

2. ROI for free mode (return on investment). In addition to targeting the big market, one thing you need to ensure is that you attract paid users (directly or indirectly) through free users, and they bring more value than you incur for the service you use. As we mentioned at the beginning of the article, free increment is only applicable when marginal costs are low, that is, you don't need a lot of extra overhead for each new user (which is why software is more suitable for free value-added mode than hardware).

By comparing the costs you spend on serving this part of the free user, and the benefits you get from paying users who are bringing them, you can calculate the ROI for free value-added (see the hypothetical case below):

As we mentioned in the 3rd, only when free users turn themselves into paid users or attract other users can you expect to earn revenue from free users. If the free value-added model is applicable to you, then your one-year ROI should be significant-ideally, most startups should be over 50% (in some cases you might want to increase market share while assuming that ROI should be positive for years). Let the first year's ROI turn into a negative number. However, the strategy may be very cost-rich, and it is best to allow more mature business to be implemented in more stable and predictable algorithms.

The optimization of these core economic drivers is also one of the biggest challenges many companies face in exercising the free value-added model. All of these decisions will have the greatest impact on conversion rates, viral communication capabilities, revenue, and eventual ROI for pricing goods and determining the watershed between free and paid products. At the outset, your decisions will not be able to contain guesswork, extensive testing and mistakes. But if you have a deep understanding of this account of free value-added (4th), and a detailed assessment of your concurrent group data (cohort data) (5th), you may be able to reach an optimal price point, or find the best tipping point for free products and paid product features, Achieve maximum ROI and maximum benefit.

5. Assessment: Please make good use of your concurrent group data

As an investor, we like companies that provide us with the same group of users data. Why? Because the data show both the company's current operations and its future. By dividing a user into a specific group (based on the user being registered on a certain week or month), a free value-added company can assess trends in access to users, user participation, conversion rates, and retention rates.

For companies with free value-added mode, the analysis of group data is particularly important. Because it may be a long time span from user registration to a user who eventually becomes a paid user. In the traditional software licensing model, customers need to pay directly to use the software-and then the transaction is basically over. But in the free value-added model, a free user may become a paid user after several years. The only way these companies can assess whether a user's conversion will happen is by tracking the data. Just as a brewer would try wine from a barrel to make sure that every year is fine, the top of a company needs to keep track of the data to make sure his business is maturing.

And a company that can closely monitor and understand the user's group data over the same period can gain two benefits:

1. Better judge conversion rate and retention rate: User-Group data provides a very good basis for the company's products and pricing decisions. One of the most common data analyses in this area is to calculate the cumulative conversion rate over time (see chart below). In an ideal state, this cumulative conversion rate should be increased over time (the latter period is less than in the previous period, where the data line in the latter phase is higher on the chart than in the previous period). Furthermore, in the group data for each of the two consecutive periods, their conversion data should be getting better (each line is in a downward-concave rise).

In addition, the time based cohort data can also be used to track some other important indicators:

What is the typical performance of a user during the three months of registration? What about after a year? What about three years from now?

What is the lifetime value of a free/paid user?

Are the conversion rates of users who get through different channels not the same?

What effect does the product modification have on the above data?

What are the effects of product price changes on product usage and user conversion rates?

2. Predictability is stronger. If you can get robust concurrent group data, the predictability will be stronger as the free value-added business matures (and this is something that CEOs, VCs, and open market investors will love). Within a specific time period, a free value-added business can receive revenue from the following three sources:

1. Customers who have been converted to paid subscribers in the previous period, and they are still paying

2. Those who have been free users in the previous time period, have just become the customers of paying customers in this time period

3. New users just acquired in this time period, and they started out as paid users

With the history of the same group of data, a company entering a new quarter, you can more clearly know how many first class users and the second category of users, only the third category of users are unknown. This makes the predictability of the free value-added model more predictable than the SaaS (software-service) model. For this topic, you can also click to see more technical details ("If you like SaaS, try freemium!").

6. Beyond the free value-added model

While the free value-added model is highly expansionary and can generate significant revenue, the business model of individual companies should not be static. There are a number of successful software companies that have successfully surpassed the free value-added and adjusted their business to meet customer needs, and such companies typically adopt one or more of the following strategies, as follows:

1. Sell well. Although many free value-added companies are good at making easy-to-use products, they automatically convert their users into customers, but many companies do not sell well. For example, as companies such as Dropbox, New Relic and HootSuite infiltrate into major companies, they also find that their customers want to talk about corporate-level lists and see their salespeople. But don't worry, it's a good thing.

Although most of the free value-added companies have smaller sales teams, the smart team remembers the second one: Understanding your customers. If your client wants to buy your product in a different way, it's understandable to adjust the sales model. Therefore, the free value-added model companies rely on "always focus on the product" of this culture, can also form a strong sales team. In addition, because these teams have accumulated a large number of users through the free value-added model, they also have some advantages in selling products that are not free value-added models. For example, Dropbox's personal products are very popular, which makes them more likely to have business products that are not free value-added.

The free experience also has a "free". Although companies such as 37signals and Zendesk do not offer a lifetime of free products for users, they believe that users will eventually see the value of the product and should pay for it. However, these companies will provide users with a free experience, an intuitive product, a simple pricing, and then their products can sell themselves. Like the free value-added model companies, these companies also use the "High speed Sales" (high-velocity sales) model, but the model itself relies on a product-driven corporate culture. They may sacrifice market share (because they have less user coverage than competitors using the free value-added model), but this does not prevent them from creating profitable, fast-growing companies.

Conclusion：

While the free value-added model doesn't necessarily work for every company, it can be a pretty powerful tool if used properly. We've seen countless companies, including the 9 companies interviewed above, that have earned significant revenue and profits through free value-added or fast-selling models. We believe that, just as Salesforce has grown into a large company with tens of billions of of billions of dollars of revenue by first practicing the SaaS model, companies that have been successful in the free value-added model can also create ongoing, large-scale businesses.

However, before you do this, remember that you should start by creating a world-class, user-critical pain-point product.

Via TC