Freemium Is Not a Business Model, Trust Me

Last Updated Jan 11, 2011 12:28 PM EST

By Lars Helgeson, CEO, Teamr, San Diego, Calif.
I own a group of websites that help people organize group events and activities. My tools send email reminders and set up calendar notifications without the hassle of emailing group members individually. We also have a built-in website builder, project manager, and a few other useful features to save time and money for group and event organizers.

Initially, I thought offering the tools for free, with a premium upgrade package, would help us become profitable quickly. But almost no one was willing to upgrade, and my business wasn't even breaking even.

So I decided to make the leap to a paid subscription model -- and lost most of my user base. But I don't regret my decision.

Freeloaders don't pay the bills
I launched my online organizing tools a decade ago, and in the years since, I've created different websites to appeal to different types of organizers: one for scouting troops, one for sports teams, one for alumni networks, et cetera. I offered the basic tools for free, with premium features like an e-commerce store, a survey manager and a social media tools manager for a low monthly fee.

Even so, virtually no one was willing to upgrade to the paid package. Our conversion rate was as little as two percent. Meanwhile, our free users hammered our servers and constantly asked questions of our support staff, creating huge expenses for the company.

Between paid memberships and the money we brought in through affiliate sales on the sites, our revenue averaged $100,000 a year, which didn't cover the bills for development, support staff, or server costs. I knew I needed to get rid of the freeloading system and switch to an entirely paid membership model.

We knew there was a risk that this switch could lead to our company's demise, but we weren't making enough to cover our overhead as it was. We were willing to take that chance.

A huge drop-off
When I rolled out the paid system, I integrated all of the previously free and premium tools, and offered our existing members a low introductory monthly rate. Based on the number of people who actively engaged with the service by making requests and suggestions, I had predicted that at least half of our existing users would stay on under the paid model.

To my surprise and disappointment, our member base dropped by 80 percent the first day.

Even though our rates start at just $5 a month, most of our users decided they would rather spend hours sending individual emails and doing everything manually than pay a modest fee. When we received angry emails from people who'd used our free service, I was honest: The freemium model didn't make us enough to keep the lights on. If they wanted to use our service, they'd need to pay for it from now on.

Less noise
About 20 percent of our user base -- the ones who saw the real value in the service we provided -- decided to pay. Now that the premium tools are included, they take full advantage of our entire spectrum of services. The average time spent on the site has tripled.

Losing such a large portion of our audience was tough from a psychological perspective, but there are some bright spots. Our revenue has more than tripled, for a start. And because the hits to our server and requests to our support staff have gone down dramatically, we've been able to cut back on many of our expenses.

The next stage
As I saw from our switch, it's difficult to get everyday consumers to part with their money for a service that they could conceivably do on their own. So the next stage for my company is a focus on the business market, which is far less sensitive about paying a subscription fee for the sake of convenience.

Our new venture, GreenRope, launched in July. It offers the same set of organizing tools as our consumer-focused brands, but on a much broader scale -- they're designed for company-wide groups, which can consist of thousands of people. Our price point is somewhat higher, because we know the sector has more price flexibility than the consumer marketplace.

GreenRope is a small segment of the entire company so far -- it accounts for about 30 of our 1,000 paying clients to date -- but we believe that's where our greatest potential lies. So we're focusing on developing our services to meet business executives' needs, and investing in advertising to reach the business market.

Our experience has taught us that the number of users you have isn't the key to your success -- it's the quality of the users you have. We're aiming to make our company more successful by establishing more valuable relationships with fewer customers.

Lars Helgeson's roster of tools sites includes MyTeamCaptain.com and MyAlumniConnection.com.
-- As told to Kathryn Hawkins

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