Reality Check in a Candy Land™ Game – Freemium Meetup Nov 2012
The November Freemium Meetup set a new record with over 85 participants, and was held at Osborn McDerby LLP, Knobbe Martens Law Offices in San Francisco. As always, three experts on the Freemium Business Model shared experience and advice. Lawyer Stephen Osborn spoke from a legal perspective; David Weekly shared his personal startup experiences, and Lincoln Murphy expounded on the current state of Freemium.
Crowdfunding is like one big Candy Land™ game. Two steps forward and one step back. — Stephen Osborn, Partner, Osborn McDerby LLP
Stephen Osborn, Partner, Osborn McDerby LLP shared insights about the current state of private Crowdfunding. Surprisingly, Crowdfunding is not new. It started in Ireland in the 18th century where Jonathan Swift inspired Irish Loan Funding. Based on this idea, Arthur Guinness established the Arthur Guinness Fund that gives Microcredits to individuals with skills and opportunities, enabling and empowering them to deliver a measured benefit to their communities.
The SEC wants no transaction at all. — Stephen Osborn, Partner, Osborn McDerby LLP
Today Crowdfunding is very trendy and happens via technology and distribution. The methods are Rewards, Donation, Debt and Equity. Every Angel Network and Investment Club is doing nothing more than crowdfunding projects. They are allowed to invest more liberally, but in the US private investments are strictly regulated. Private investments have been legal in the UK since 2010, but are not legal in the USA yet. Therefore, some feel that the SEC (U.S. Securities and Exchange Commission) needs to update their regulations (set in 1933), to conform more with modern standards.
One chance that this will happen is the regulation of JOBS ACT of 2012 . This will make changes to Rule 506 to eliminate the prohibition against general solicitation and advertising in Rule 506 offerings. While some claim the new law is burdensome and has caps that are too limiting, it proposes to legalize the equity Crowdfunding. Since the definition of Crowdfunding is very well defined in the JOBS ACT of 2012 the SEC has very little to do. Congress laid out a lot of detailed rules, e.g. that the levels of funding have to be equal to the levels of disclosure. There are also limitations on how much a private investor can invest, based on his income. Sadly, the SEC has no idea what Crowdfunding is; yet, there’s still a chance it may become legal during our lifetime, according to Mr. Osborn. Because of this uncertainty a startup should try to get funded by Crowdfunding and traditional financing. The best chance to achieve this is to pre-sell your product: take orders to be paid on delivery, and show this revenue potential to prospective investors.
GoogleAds didn’t get much better than beer money each month. – David Weekly, CEO Oha.na
The CEO of Oha.na, David Weekly, created his first startup PBwiki (now known as PBworks) in his living room. In 2005, it was the first privately hosted wiki. He thought at first to finance this project with the help of GoogleAds, but that “didn’t get much better than beer money each month.” Based on this experience, he started to experiment with different revenue models. He charged the users $5US monthly to remove ads and was surprised by how many people were willing to pay.
B2C has more time than money, B2B has more money than time. — Lincoln Murphy, Managing Director, Sixteen Ventures, LincolnMurphy.com
This was the reality check for the state of B2B Freemium in 2013 perceived by Lincoln Murphy, Strategic Consultant of Sixteen Ventures. In a B2C (Business to Consumer) Freemium Business Model, the vendor sells to people with more time than money (e.g. time to play cheap games). In a B2B (Business to Business) Freemium Business Model the vendor sells to those who have more money than time (e.g. need a service for streamlining production).
Freemium requires cash; it’s not cheap for the vendor! — Lincoln Murphy, Managing Director, Sixteen Ventures, LincolnMurphy.com
In order to become successful Freemium Companies, those using this business model have had to raise lots of money. A few examples of Freemium fundraising are: Evernote ($166M), Dropbox ($257M), Box ($284M), and Yammer (147M). Furthermore, Freemium companies are cannibalizing each other for customers. They are stealing each others’ users — not just disturbing the SaaS vendors!
People want to support a brand based upon the value you bring to them. – David Weekly, CEO Oha.na
Another experiment is to ask for different prices for different levels of service. In order to know how to price your product, you have to understand how your customers are using your product. Mr. Weekly said that it is important to look at cash vs. learning when it comes to pricing if you have a 12 month discount. An annual fee is not as good as monthly payments. Sure, with an annual charge you have the cash, but it is impossible to get an honest read on churn. So David changed the price back to per user, per month. His key thresholds are:
- $5 Impulse buyers
- $50/yr Prosumers
- $500 Casual business tool
- $5000 Serious business tool (ends up requiring approval from various levels of company)
- $50k Higher level questions from higher level approval folks
- $500k Fly out to meet VPs, CEOs, CTOs
Consumers have different expectations of service and product. Depending upon how much you charge, people are more reasonable about expectations. At the level of $500K, customers want to know how the product is going to impact their revenue positively.
Never go for “Lifetime” with Freemium to Premium conversions. — David Weekly, CEO Oha.na
Another takeaway from David Weekly was that you have to be very clear about how long you will give away your product. For example, ‘unlimited’ should always have an asterisk with a limitation on it. Furthermore, never offer Lifetime use, and “Lifetime” value must be more than acquisition cost. Basically, no plan should be longer than 5 years. According to the Freemium Expert Lincoln Murphy, a conversion rate of 3-5% is a success. It’s quid pro quo. What value do your free users bring you? Do you get value from them? Are they just dead weight, or are they spreading the word?
Does Freemium work? It depends on what you’re trying to do. — Lincoln Murphy, Managing Director, Sixteen Ventures, LincolnMurphy.com
The key question if the Freemium Business Model can work depends always on what you are trying to do, according to Mr. Murphy. What is your product an alternative to? Are you displacing a paid product or another free product? Do you want to build a revenue-generating business? Sure, Freemium will work for this. But for a profitable business the jury’s still out. If you simply want to build a massive user base and sell out quickly, just go free and skip the Freemium Business Model.
Freemium is more accepted now, but no longer a guarantee to gain users.
Today, in general, “free” is more acceptable than it was three years ago. There is less of a stigma today as consumers are not thinking “how good can it be, when they are giving it away for free?” Funding builds trust with customers. People don’t want to commit to a company or product they’re not sure will be around long. On the other hand, free isn’t “that cool” anymore; nor is it a guaranteed user magnet. These days there is lots of competition and little advantage. So, user engagement is more important than ever.
Another common misconception is that the product will sell itself as soon it is Freemium or free. The product will not sell itself unless it’s been specifically designed to do that, according to Lincoln Murphy. Going viral is not the same as growing all on its own. To grow on its own it is crucial to have a massive audience and to work hard to make it happen. Basically, startups must focus their energy on engaging and retaining customers as well as on viral marketing and ensuring the functionality of their product. Freemium can help streamline selling a product, by helping to simplify complex sales where you’re dealing with multiple levels of people within a company. But don’t go Freemium just to avoid having to “do sales.”
Want to learn more about the Freemium Business Model for your business?
If you are in the Bay Area, join our monthly Freemium SF Bay Area Meetup for a chance to hear world-class speakers and make networking connections! If you can’t make it, you can always catch the summary, video and presentations.
- Osborn McDerby LLP , Knobbe Martens Law Offices in San Francisco