18. Attraction Offer. Freemium. | $100M Lost Chapters Audiobook

Attraction Offer/Freemium. Lost chapter. Author note: I ended up cutting this section because I didn't think it applied to enough businesses, but if you have a software or media business, any business that has close to 100% incremental margins, this is a dangerous but effective model used by billion-dollar-plus companies. I learned this by studying how freemium software companies upsold me. That being said, almost every one of these companies listed in the example section has funding. If you do not have investors or large amounts of capital, I would not recommend this structure. That being said, I'm including it as a way of presenting a complete picture of possible approaches. If you have something incredibly valuable, so valuable that lots of people come towards you without marketing, then you have something that qualifies for this structure. Otherwise, steer clear. Description. Freemium is one of the most dangerous acquisition strategies, but it also can be one of the most powerful. This is definitely an advanced move. To be honest, I've seen it done incorrectly by smart people more times than I've seen it done correctly. One of the key points to understand about freemium is that it is not a business model, it is an acquisition strategy. It's a very important distinction. The idea is you give something away that is so valuable that people come to get it and continually use it for free. They must come from word of mouth because the product is so good. It must cost $0 for them to use it or just enough advertising to get it going so that it spreads virally. That is where this gets tricky. Examples: Dropbox, online storage, free storage up to a point. Then after that you pay. Spotify, free music app, free music forever with ads, remove ads for a fee. Wistia, free video hosting. After a certain amount, you need to pay more. Gmail, free email. After a certain period, upgrade for more inbox space or start having your emails deleted. Fear of loss makes you upgrade. Details. Here's what it looks like when it's done right. You give away a core piece of software that provides value to someone's life or business. They don't value it enough to pay for it, but if it's free, they'll use it continually. This means you get hundreds or thousands or hundreds of thousands of people coming to you for free. Ad spend equals $0. The idea is then to use your marketing and sales teams to make offers to these quote customers to upsell them into higher levels of service. This gives your sales team a pool of quote free leads to upsell. It's always easier to upsell someone than to sell them. Designing this can be incredibly challenging. You must give something away that number 1, costs you almost nothing to fulfill. Number 2, provides continuous value, not one time. And number 3, doesn't give away so much of the farm that they'll never want to buy something else. A very difficult balance. In businesses selling to businesses, one of the key ways of doing this is giving something away that exposes a hole in their business, something that your next paid product solves. In a business selling to consumers, this typically comes in the form of giving away something people use. At the same time, it limits their use in some way that anyone who would regularly use it would need more of, either through advertising or limits that once they start using it, they would want to increase. You'll notice this play works well with software because software is number one, virtually free for each additional user, Number 2, intended to provide continuous value. So the quote, only part that you have to nail is how much and exactly what to give away, which is still very hard. Your true cost of acquisition when using this model is understanding what percentage of free customers upgrade and determining your cost of servicing a free customer. So if, for example, it costs you 5 cents a month to service a free customer and you upsell 1% of customers, then your cost of acquisition is 5 cents per month divided by 1%, which equals $5 a month. As long as your average revenue per paid user is above $15 per month, so that's 3 times that, then you'll have a profitable business that could grow. Because again, remember, you still have the cost of doing business before you start to actually turn a profit. Here's what it looks like when done wrong. You give away your core thing, people use it for free, then they don't want to buy your next thing. Now you're just running a business that loses money servicing customers for free. No bueno. Roadblocks. Here are just a handful of the problems you can encounter with this model. Number 1: Conversion problem. Conversion percentage from free to paid is too low. Number 2: Value problem. You give away something that people don't find valuable enough to tell other people about. You spend money marketing your free thing and still people don't want to tell enough people about it for it to be profitable. Number 3: Cost problem. People want it, they tell their friends about it, but your costs of filling them for free are too high relative to what you make from paid customers, so you're not profitable. Summary points. Overall, freemium is a very hard strategy to get right. It's also something that can be very powerful. If it's your first rodeo and you don't know everything there is to know about a freemium acquisition strategy, I would definitely not recommend it. This is a billion-dollar strategy that I mostly included for completeness. I think you need to be a seasoned pro and know your numbers like your child's names. If you can nail it, though, you can have unlimited free leads and viral growth as a result. It's important to remember that this isn't a business model, it's an acquisition strategy. It has to be free and valuable enough to spread, but not so valuable that customers use it without upgrading. If you use this strategy, good luck, you're a smarter man or woman than I am.