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November 13, 2008

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Hashim

At Ning only 3 percent pay for premium services:

http://playersearch.wordpress.com/2008/10/07/ning-provides-data-point-for-free-mium-pricing-model/

But the other 97 percent are monetized through advertising.

Bertil Hatt

One can consider a classic economic model, with a rational decision to go freemium, based on the structure of social ties around the objects considered. By offering a free option, the producer shifts:

* from a sub-set of rather heavy user, a k-core — with k being the number of friends using the service to justify the price, proportional to k; a k-core is a set of people with k friends in the set, and it is, smaller with k large;
* to a wider network, k'-core, with k' justifiying only the curiosity to fill the form and try; only certain users would contribute (say, with honnest users, those in relation with more then k'' users — k'' justifying the premium bill: because those k'' do not have to be in the small k''-core, but in the larger k'-core, it's larger group, especially on a complex network; costs increase (slowly) with success but so should revenue (fast). Therefore, a stable ratio of paying members depends on how much users with many potential friend users are connected to users with not-so-many friend users (homophily). The same reasonning can be applied to more or less intensive users.

Strong homophily drives to higher payment ratio (freemium doesn't change much of the model); weak homophily or strong network externality (e.g. having families using the personal version of my anti-virus really improves my professional security solution) makes freemium a very blod move, and lead to more skewed payment ratio.

Photo-sharing can be well segregated between professionals or hollyday pictures: those two a rather segregated, so Flickr gets a rather high ratio — and more generally, the photo services are segregated by how serious you are about sharing: just storing (Yahoo! Photos), sharing with friends party pictures (Facebook), sales-oriented pro (SnugMug), all with high payment ratio, or no free option at all.

For Club Penguin et al., it's about having something your four friends don't have: high ratio, for the same reason; for shareware, there is no network effect, so freemium won't drive massive turnouts, etc.

Osma Ahvenlampi

Chris, the long tail model in fact applies very closely to the free-to-play, pay-for-stuff games model. Based on our experience with Habbo, I wrote about this two months ago in a bit more detail at my blog, link below

Dan Scherlis

Nice posting, but I'm sure you'll want to correct your sourcing, Chris. The posting you saw on MMPOW was republished, entirely, from Nabeel Hyatt:

http://nabeel.typepad.com/brinking/2008/09/theres-been-som.html

Nabeel's the CEO of Conduit Labs in Cambridge MA, and an excellent analyst of free-to-play (F2P) games.

Chris Anderson

@Dan: Thanks for the catch. Corrected.

Jim Ciallella

Dries of Drupal fame wrote a very related post about his recent freemium experience with Acquia and Mollom and the quest for more answers. - http://acquia.com/blog/freemium-business-model-giving-away-pays

I wondered if you have worked with Dries. If not, it seems his ventures could benefit from your freemium research, and vice versa.

Francesco

Interesting since it gives some harder numbers to your talk in Belgium last thursday, which I was happy to attend.
And it comes exactly when I am working on a new venture to get launched and first time I will use freemium as a business model.

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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.

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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.

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Chris, the long tail model in fact applies very closely to the free-to-play, pay-for-stuff games model. Based on our experience with Habbo, I wrote about this two months ago in a bit more detail at my blog, link below

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This is great to read this article.It is free or freemium models are more complicated, however. Generally, you have a free offering that comes with restrictions and limitations, and a premium, paid offering that you sell as an upgrade. On one side, you spend money to get free users to sign up to a basic level of service (SEO and PR aren't free!), and then you spend more money to provide that free service.On the other hand, you usually get to convert some percentage of those users to premium users with minimal additional costs in sales and marketing.


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Tidbits

The Long Tail by Chris Anderson

Notes and sources for the book

FREE was available in all digital forms--ebook, web book, and audiobook--for free shortly after the hardcover was published on July 7th. The ebook and web book were free for a limited time and limited to certain geographic regions as determined by each national publisher; the unabridged MP3 audiobook (get zip file here) will remain free forever, available in all regions.

Order the hardcover now!