In my original Wired article on Free, I described Freemium as the opposite of the traditional free sample: instead of giving away 1% of your product to sell 99%, you give away 99% of your product to sell `1%. The reason this makes sense is that for digital products, where the marginal cost is close to zero, the 99% cost you little and allow you to reach a huge market. So the 1% you convert, is 1% of a big number.
But that was just a hypothetical percentage split, to make a point. In the real world, what's the right balance? The answer varies from market to market, but some of the best data is in the games world.
In online free-to-play games, companies aim to structure their costs so they can break even if as little as 5-10% of the users pay. Anything above that is profit. Which is why these numbers from Nabeel Hyatt are so impressive:
- Club Penguin: 25% monthly uniques pay, $5/mo per paying user
- Habbo: 10% monthly players pay, $10.30/mo per paying user
- Runescape: 16.6% monthly uniques pay, $5/mo per paying user
- Puzzle Pirates: 22% monthly players pay, $7.95/mo per paying user
As the blog notes, that compares very well to the 2% of the casual downloadable game market that pays, or a 3-5% that a lot of "penny gap" free trial web startups get. Estimates for the number of free Flickr users that convert to paid Flickr Pro range from 5-10%. Ning says 3% of its 500,000 social network creators pay for the premium version. And shareware software programs often see less than 0.5% of users paying up.
But others companies are able to do much better. Intuit, for instance, offers basic TurboTax Online free for federal taxes, but charges you for the state version. Company officials tell me 70% of users opt to pay for that version. That's a special case--practically everyone has to pay both federal and state taxes--but it's evidence that some very high conversion rates are possible in the Freemium model.
For the typical Web 2.0 company planning to use Freemium as its revenue model, my advice would be to set 5% as break-even, but balance the mix of free vs. paid features with the hopes of actually converting 10%. More than that, and you may be offering too little in your free version and thus not maximizing the reach that's possible with free. Less than that, and the costs of the freeloaders start to get significant, making it difficult to make money.