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Making Money From Free Konstantin Kalabin, Top Internet Consulting ICMA Conference, Nice, April 2011
Contents ! Media business model disruption ! Freemium model in classiﬁeds ! The Magic Formula ! Applying the Magic Formula ! Customer segmentation
Media Business Models Disruption Technology step-‐change Multi-‐ Pay for Multi-‐ Sided Access Sided Markets Markets Freemium Digital access costs -‐> 0 Digital production costs reduced, but ≠ 0 Proﬁts $$$ Proﬁts ?
What is a Multi-‐Sided Market? ! “Multi-‐Sided Market” is a business model in which several diﬀerent types of users exchange goods, services or information. ! Network eﬀects are an integral characteristic ! Cross-‐side (buyers/sellers) is most common, must be + ! Same side (users/users), can be + or -‐ ! Tend to be “winner takes all” markets ! Usually one side is subsidized by others to achieve wide adoption ! Multi-‐sided markets examples ! Telephone Networks, All Newspapers, Visa, Game Consoles, Google
Classiﬁeds as a Multi-‐Sided Market: Print Prod Sellers Fees Advertisers Sales Display & CS (Free | Paying ) Force (Display) Ads Strongly Negative Negative Very Strong Very Strong Legend: Revenues Circ Buyers (Readers) Copy Costs & Mark Sales Neutral Network Eﬀects
Classiﬁeds as a Multi-‐Sided Market: Online Freemium principles Prod Sellers Advertisers Fees & CS Online (Free | Paying ) (Display) Sales Ads Strongly Negative Negative Very Strong Very Strong Legend: Revenues Buyers (Visitors) Costs Mark Neutral Network Eﬀects
What is Freemium? ! “Freemium” is a business model in which one segment of users can receive service for free permanently, while other customer segments subsidize the cost of providing the service to free users ! Demand is maximum at the point of “Free”. The diﬀerence between 1p vs free is the diﬀerence between having to make a decision vs just do it ! Usually free and paying customers have same needs, but of diﬀerent importance and/or scale ! Subsidy happens within the same type of customers – key diﬀerence to multi-‐sided markets ! Free samples, shareware are not freemium models ! Freemium examples ! Skype, Evernote, LinkedIn, Google Apps, Zynga etc
Freemium in Classiﬁeds Business We need to get scale to improve proﬁts! Invest in marketing and drive traﬃc! Hmmm…, you make an interesting point…
Little Experiment Original situation Double revenue per paying user Negative Correlation Double conversion rate Halve costs per free user
The 3 Levers of Freemium Model ! Cost per free user (CFU) ! Revenue per paying user (RPU) ! Conversion rate (CR) CR RPU CFU
Cost / Free User: Minimize Most of freemium businesses fail because of prohibitively high costs of free users User User Total Cost / Acquisition Servicing Free User Costs Costs
Cost / Free User: Acquisition Will I use this Do I recommend • Can be cheaper than SEM it to my friends? TV • Good for very large scale service again? • Super fast • Expensive (CPA = $0.5-‐1.2) SEM • ROI constant • Fast • Ideally no cash involved Partnerships • Time & eﬀort to establish and manage • Very Cheap (CPA = $0.01) SEO • ROI grows over time • Slow • Free (CPA = 0) Repeat Visitors (Core) • Organic x WoM growth • Greatest asset
Cost / Free User: Servicing Will they enjoy Do they still using our recommend us to service again? their friends? • Outsource all non-‐critical functions Out-‐ • Leverage specialist technologies source • Sharp focus on 80/20 • Pass costs onto users Eliminate • Use open-‐source & free technology • Self-‐service everywhere • Digitize all processes Automate • Balance performance, complexity, reliability
Conversion Rate: Maximize Dominate niche Charge for really demand important features Page views go Ouch! up after paying Demonstrate Value Make It Easy Hmmm?… ! Analyze response from each upsell Be Reasonable Easy ! Communicate the eﬀects to user in their terms (“sell twice faster”) ! Never more than 3 options at a time ! Provide all popular payment methods 10 mins of time vs £5? ! Know which option you want the user to choose and make it clear why Conversion ! Charge for things that have obvious costs Typically 2 to 8% (print ads, private numbers, larger photos) ! Price proportionate to value to customer
Revenue / Paying User: Increase Sell beneﬁts not features Manage limited capacity – charge per time period Vary prices by category based on avg item price or category demand Increased reach Play on urgency
Cost / Paying User: Optimize ! CPU can be several times CFU, but usually 2x-‐3x ! Acquisition Costs ! SEM optimized based on lifetime value just like in eCommerce ! Servicing Costs ! Hosting costs much higher due to volumes ! Support includes higher human involvement ! Payment processing costs (incl. fraud) ! Refunds
User Segments & Strategies Max Likelihood of paying Delight: Convenience-‐ Trade & Harvest & Learn Win trust Analyze & Time-‐Savvy Professional Segment Support Beat expectations Sellers Sellers 80% of Optimize • 5% of customers • 10% of customers Revenue Service • 2% of ads • 40% of ads Volume or Frequency Min Max Cost-‐Sensitive Spammers Occasional • 10% of users Impress: Minimize impact: Fast Sellers • 40% of ads Delete at source Simple • 75% of customers No refunds It works! • 18% of ads Block access Min 80% of Costs
Making money from free is not rocket science! But it’s not far oﬀ…
Your Questions email@example.com www.linkedin.com/in/kalabin Skype: konstantin.kalabin