I was playing around with financial models over the weekend and this week to answer the question: can you make money out of freemium model?
The answer so far is: it depends. It depends on the business, objective, value the product provides, infrastructure and how you are planning to monetize your product. The biggest mistake one can make is to take one of the outliers like Dropbox, etc. as a norm – if Dropbox made money this way, why cannot we? Businesses are incompatible.
With free accounts and usage, service will get lot of users. Free users will provide good feedback, testimonials and general buzz around the product. However, free users also means load on the infrastructure. They will also increase support cost and might not be the segment you are targeting.
How do one makes money? By converting the free users. Free users will not convert by themselves - product will have to make them convert by architecting a solution to convert.
First step is finding the triggers for this conversion and it totally depends on the product. You would want the users to use the product for feedback but also make some features pay-only.
Dropbox conversion rate is 4%. That is for every 100 users, only four of them are paying for the service. These four paid users are paying for the usage of other 96 users. Dropbox did not get to 4% conversion right away – they went through lot of trial and error to get there. Forbe’s profile here would shed more light on their monetization.
If you adapt a freemium business model your marketing cost is the free users
Products will always have to target the potential paid users, I think. One of the biggest distractions is that free users can skew the user segment and let marketing walk in a different direction in terms of targeting marketing efforts go. No matter where free customers come from, product would need to target the known potential paying customers.
Interestingly, Dropbox stopped SEO marketing because it was bringing in lot of free users who were searching for ‘free storage’. If users are not thinking about paid storage and most definitely not pay for storage.
Next, products should architect a way to get the users to sign up for paid accounts if possible. Basecamp acknowledged that lot of paid users sign up for paid accounts upfront. They even made getting the free account little harder – deprecated getting free account link to finer point in the sign up forms.
“… The majority of the revenues for our products come from people who sign up for the paid versions upfront. So we definitely have people upgrading from free to paid, but the majority of people who are on pay started on pay… of course, more people are going to pick the free version and stay on the free version, but if you’re looking to get paying customers, ask for money upfront and you’ll have a lot better shot of getting them.” 
MailChimp let users use their product for a campaign but they will have to pay for the subsequent use. They showed you how easy it is for you to use their product and once you realize the ease of use, you have to pay for use. I am planning to make the product irreplaceable after few use by providing great features but also incentives to upgrade. Maybe users could use extra something when they upgrade.
…there are thousands of instances where the freemium model works for companies, but the reason it works for these companies is that they have architected the freemium plans very very well to essentially be the equivalent of getting a cheap buffet at a nice restaurant while all the other patrons are eating their awesome steaks behind glass a few feet above your head.
Other option worth exploring is to think of ways to monetize through the free users without affecting their users. Think of filters you will have to pay for in mobile apps – it is free and you can use the app without paying a cent but you could also pay for a filter or theme. That should take care of some cost.
Most importantly, take care of the free users if products could keep them around long term. Evernote notes that 2% of their free users convert after a year. It is higher than 0.5% conversion they are getting during initial sign up. Moreover, free users influence the buzz around the product.
On the flip side, I started getting creative on ways to minimize the cost to build and host the service. Almongst other things, I emphasized heavily was on saving infrastructure costs. Figure out the cost and make sure that the service is not costly to run per person. Even if you get 4% conversion, you might not survive the infrastructure costs if it is done incorrectly. Freemium model and usage should be architected into the solution and should propagate to infrastructure.
Am I going freemium way? Don’t know but I know I will be architecting the solution to get more paid users.