Economics of Freemium (Stanford 4/14)
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Transcript of Economics of Freemium (Stanford 4/14)
The Economics of Freemium
Peter FishmanDirector of Analytics, Yammer
4/8/14
My Background
Relevant Experience
Who is a data scientist?
Product &Communication
Programming
Statistics
Agenda
• Gaming Pricing– Evolution of Freemium– Lifetime Value Model
• Pricing Psychology– How do prices affect utility?• Should they?
• Bacon Hot Sauce
Gaming Pricing
How do you maximize revenue?P
(Value Per Game)
D
Q
How do you maximize revenue?P
(Value Per Game)
D
Q
Two Part Tariffs
Low “tariff” with multiple types
Evolved Pricing Model
How do you maximize revenue?P
DH
Q
DL
A tale of two travelers
1st Class $2000 $420
Coach $1000 $400
Adam Pete
What happens?
• Charge Adam $1999 and Pete $419 for 1st Class tickets.– Airline makes $2418
• Charge $1999 for 1st Class and $399 for coach.– Airline makes $2398
• Charge $998 for 1st Class and $399 for coach.– Airline makes $1397
• Charge $1999 for 1st Class and >$999 for coach.– Airline makes $1999
Can you walk down a demand curve?
P
DH
Q
DL
Freemium Model
Costs– No upfront revenue– Cannibalization– Risky revenue
streams– Difficult to segment
Benefits– Lower Barrier to Entry
• This drives down discovery costs and risks
– Lowers Customer Expectations
– Can get cheap feedback and iterate
Premium Features, Advertising, Cross Subsidy
Perfectly Evolved
Invite Friends Virality
Buy Things Monetization
Use the product Retention
The “virtuous cycle”
New userAcquisition
Revenue =
Users Install/User
DAU/Install
Payer/DAU
Revenue/Payerx x x x
ViralityMonetization
Components of “lifetime value” = Revenue/User
RetentionUser Acquisition
Marketing / CRM
User Mechanics
Tech Investments
DAUs
Get the levers right
The Economist
• Online-only – $59.00• Print + Online – $125.00• Print-only – $125.00
0%10%20%30%40%50%60%70%80%90%
Online Online + Print Print Only
Perc
enta
ge
Williams Sonoma
$275 $429
Choice Set Dependence
• Chicken, Fish, Steak– Unwanted items can affect the perception of
other goods
• Adjacent Offerings Can Impact Preferences– An overpriced option can make a nearby choice
seem like a bargain
Geek is the new cool
“If you ever go bar hopping, who do you want to take with you? You want a slightly uglier version of yourself. Similar… but slightly uglier.”
– Dan Ariely
Free Can Be Helpful
Free Can Be Harmful
What are the last 2 digits of your telephone number?
Are there more or less countries in Africa thanthat number?How many countries are there in
Africa?
Thaler (1980), Kahneman (1984)
Freemium• Which is more important, short-run profits or grabbing land?
– How much runway?
• Do you get network effects? Or externality benefits like analytics?
• Can you deliver a premium experience that is worthy of breaking out the credit card?– Your toughest competition may be yourself
• Does the consumer psychology of free enhance your monetization opportunities?
Thank You, Any Questions
Aim, Fire, Adjust
“That which is measured improves”
- Pearson’s Law
Why are weather forecasters so accurate?
HT: Murphy & Winkler (1974)