How Freemium Can Work for Your Startup

Earlier this year, I asked the readers of this blog and those who follow me on Twitter what the one app was that they couldn’t live without. Among the most common names offered up were Evernote, Remember The Milk and Dropbox.

Since then, those three apps have become indispensable to me as well. And they all happen to be benefiting from the business model championed by venture capitalist Fred Wilson known as “freemium.” They’re not alone — numerous companies have walked down the freemium path since he first wrote about it in 2006, among them Freshbooks, Jott.com, Box.net and of course, the granddaddy of them all, Flickr.com. More recently, San Francisco-based startup Xobni eschewed the ad-supported model to go the freemium route.

One of my old editors, Damon Darlin, now at The New York Times, over the weekend wrote about the success being enjoyed by Evernote. And it in reading Damon’s article, the qualities of a successful freemium product finally became clear to me.

As Darlin notes, Evernote is making about $79,000 a month from its paid services –- not enough to turn a profit. And while just 0.5 percent of its customers convert to paying the company $5 a month (or $45 a year) within 30 days of signing up for its free service, that figure rises to roughly 4 percent if users have used the free version for closer to a year. Why? Because Evernote is a digital drawer of sorts. The more you use it, the more you cram into it until — sure enough! — you have to get a bigger drawer, and that costs money. Given how in harmony the usefulness of this app and its level of engagement are with one another, Evernore more than any other app seems poised to see its customers switch to the paid model. Now all the company needs to do is figure out how to make it even easier to digitally clip and cram content.

Remember The Milk, on the other hand, is a simple to-do list, albeit one on steroids. In other words, it has a narrow but deep focus on one single domain. Not only have the folks at RTM made it dead simple to add tasks and delete complete ones, they have seamlessly integrated the most important part of any to-do list: reminders. Remember The Milk will send you reminders of your tasks in the form that works best for you: via SMS on your mobile phone, IM or email. It even mashes up the location of your tasks with a map.

However when you use the app while on the go (such as when you’re actually out running errands), its utility grows exponentially. And that is precisely what RTM charges for: its pro version includes support for mobile phones such as iPhone, BlackBerry and the Windows Mobile devices. With it, you never have to wait to be in front of your computer in order to start making a to-do list. The difference between the free and premium offerings is very clear, which as a buyer makes your decision to pay up an easy one.

Finally there’s online storage-syncing service Dropbox. While it disobeys the most basic rule of freemium — “no downloadable apps” — Dropbox more than makes up for it by being easy to install and even easier to sign up for. You start out with 2 Gb of storage space for free, which doesn’t take very long to use up. At that point you have two options: switch to another offering or buy a premium package. But while the thought of paying $120 a year to upgrade to the 50 GB package may make you balk, chances are the $9.99-a-month subscription service looks pretty affordable.

That’s why the premium versions of some of the more popular freemium apps are really subscription services. Which speaks to point No. 6, that if you encourage your customers to use your application often, the easier it will be for you to sell them something else in the future.

A few weeks ago I decided to move all my data from Dropbox to another online service, Jungledisk. The reason: I wanted to archive all my folders and information from 2008, for which I needed more storage than my current Dropbox account could offer. It was about 45 GB of data, which meant I’d have to upload it to Jungledisk, and even with a really fast connection, it would take forever. Suddenly it dawned on me that the more stuff I put on Dropbox, the more difficult it would become for me to switch to another service. Instead, I upgraded to 100 Gb a year.

Same goes from Evernote, which is becoming more valuable to me by the minute. Again, even if I wanted to go elsewhere, it wouldn’t be that easy to switch.

I’m sure there are many more ways to build great freemium applications, but one has stood out for me above all the others. It comes from Phil Libin, CEO of Evernote, who tells The New York Times, “Our product is our marketing.” Indeed — that’s where it all starts — and ends.

Recommended reading: Check out Andrew Chen’s piece on how to create a profitable freemium startups.

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