The Economics of Freemium

Peter FishmanDirector of Analytics, Yammer

7/23/14

My Background

Who is a data scientist?

Product &Communication

Programming

Statistics

Relevant Experience

Agenda

• Gaming Pricing– Evolution of Freemium– Lifetime Value Model

• Pricing Psychology– How do prices affect utility?• Should they?

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

• Advertising– Product placement

• Branded content• Video ads

• Lead generation and offers

• Premium Features– Virtual Goods– Additional Controls

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

HT: Dan Ariely

5 cents 10 cents5 cents0 cents

Thaler (1980), Kahneman (1984)

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?

Transistors: HT Martin Westhead

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