Can “Freemium” Be Profitable? MailChimp Data Says It Can

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Have you ever wondered whether the “freemium” business model, nearly ubiquitous among the web apps that we review and use here at WebWorkerDaily, is workable? New data published by email marketing service provider MailChimp in a blog post suggests that it can be. MailChimp made┬áthe decision to offer its service for free to users with lists of up to 500 subscribers some 12 months ago. In that time, it has grown from 85,000 to 450,000 users, while also expanding its number of paying customers and profits.

The idea behind “freemium” is simple: Offer a basic free version of an app to entice new users, and then get them to pay as they need more features or capacity. Dropbox, Freshbooks, Evernote — nearly all of our favorite web apps use the freemium model; its ubiquity would suggest that it is successful.

But is that really the case, or is it just that because there are free apps that it make it very difficult for startups to do anything differently? Setting the base price for a product at zero can make turning a profit difficult; converting free users to paying customers is a tricky task, and as user numbers grow, so do costs. Indeed, many people have questioned whether so many free apps are good for the web app industry, and even whether the freemium model is bad for business in general.

However, MailChimp’s figures suggest that freemium does work, at least for that company. Not only has making the app a freemium product grown its user base, as you might expect, but other figures show positive gains, too. In the 12 months since going freemium:

  • The company has added over 30,000 new users and 4,000 new paying customers each month.
  • The total number of paying customers has increased over 150 percent, and profit has increased by a whopping 650 percent. Profit has increased primarily because cost of acquisition has dropped.
  • Contrary to what you might expect, the result of making the product free for users with a small number of subscribers actually increased the number of customers managing large email lists through MailChimp. In April of this year, 12 percent of MailChimp’s users had lists of greater than 10,000 subscribers. By September, that had increased to 20 percent.

Of course, MailChimp’s experiences won’t automatically extend to other web app vendors; indeed, there are many people who don’t think that the freemium model works. MailChimp is a slightly unusual example because it’s an established app that only recently made the decision to make some of its services free; it’s not a startup trying to break into the market with a brand-new product.

So what’s the secret to making a freemium business successful? MailChimp’s co-founder Ben Chestnut explains in his post that for most freemium services, the ratio of non-paying to paying customers is 10:1. For a freemium business to work, the revenue from that small number of paying customers has to support the large number of non-paying customers. As Chestnut notes, many startups make the mistake of solely focusing on growing their user base, assuming that they’ll be able to monetize the product later. MailChimp had already developed a solid product that was demonstrably generating decent profits. Adding a free component helped the company to get that product out to a much larger audience. Freemium doesn’t automatically mean success, but when coupled with a solid product with a proven ability to generate revenue, it can be a very useful marketing tool.

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