The "freemium" business model - best practices

It's so rare that a CEO talks in detail about how their company generates revenue that I want to take a moment and share this TechCrunch link, which covers Evernote CEO Phil Libin's presentation at a meeting named Founder Showcase. Mr. Libin discussed some of the elements of making the "freemium" business model work.

If you haven't heard of the term freemium or "freemium business model" before, it's a term used for this software sales model we have these days of offering one level of software for free, and then charging a premium for additional features. (This is close to some shareware models, but I'll skip that analysis for today.)

The Evernote freemium business model

These are some of the most important points I'm taking away from Mr. Libin's freemium discussion about their Evernote product:

• A year ago Evernote was making most of its money from licensing its technology, but it focused on its premium plans ($5/month or $45/year) because that was more scalable. Now, premium subscriptions bring in around $300-400k a month, and licensing represents around $45k.
• Evernote has 3.1 million cumulative users, and adds around 10k a day. Around 68k paying customers.
• Users have grown more valuable over time. New users convert to premium at a rate of .5%. But of the users that signed up two years ago and are still active, 20% have become paid customers.
• This trend is important — most users quit quickly. But the ones that stay become much more likely to pay over time.
• Evernote’s cost per user is around 9 cents per active user per month. It makes around 25 cents per user per month. The site reached break even a year and a half ago.
• Entrepreneurs should aim to be making money on each new active user as soon as possible. Otherwise scaling just means you’re losing money faster, rather than earning it

He also mentions that in the Internet Age, a good product can get marketing for free, so he suggests focusing on the quality of your product. An an engineer, I tend to think that way too much myself, and as a former successful business owner, I think you have to be strong across the board: great business plan, great technical skills, marketing, sales, accounting, whatever.

Other freemium business models (Pandora, Dropbox)

In his case, Mr. Libin is actually getting great PR from this talk, along with another freemium article that was published on GigaOm in March. That's a great article also, in part because the owners of Pandora and Dropbox talk about their revenue streams as well.

Here's one great quote from the CEO of Dropbox.com:

"... the big lesson there is if you adopt a freemium business model your marketing cost is the free users"

As I type this, I just realized that other than saving some clips from Jonathan Ive design articles and the Dieter Rams 10 design principles (commandments), I don't save too many articles that I read these days, but I will save these digitally in my "Reference" folder so I can look back at them from time to time.