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The Economics of Freemium
Peter FishmanDirector of Analytics, Yammer
7/23/14
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My Background
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Who is a data scientist?
Product &Communication
Programming
Statistics
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Relevant Experience
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Agenda
• Gaming Pricing– Evolution of Freemium– Lifetime Value Model
• Pricing Psychology– How do prices affect utility?• Should they?
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Gaming Pricing
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How do you maximize revenue?P
(Value Per Game)
D
Q
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How do you maximize revenue?P
(Value Per Game)
D
Q
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Two Part Tariffs
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Low “tariff” with multiple types
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Evolved Pricing Model
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How do you maximize revenue?P
DH
Q
DL
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A tale of two travelers
1st Class $2000 $420
Coach $1000 $400
Adam Pete
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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
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Can you walk down a demand curve?
P
DH
Q
DL
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Freemium
• Advertising– Product placement
• Branded content• Video ads
• Lead generation and offers
• Premium Features– Virtual Goods– Additional Controls
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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
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Perfectly Evolved
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Invite Friends Virality
Buy Things Monetization
Use the product Retention
The “virtuous cycle”
New userAcquisition
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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
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Get the levers right
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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
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Williams Sonoma
$275 $429
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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
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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
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Free Can Be Helpful
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Free Can Be Harmful
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HT: Dan Ariely
5 cents 10 cents5 cents0 cents
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Thaler (1980), Kahneman (1984)
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What are the last 2 digits of your telephone number?
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Are there more or less countries in Africa thanthat number?How many countries are there in
Africa?
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Transistors: HT Martin Westhead
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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?
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Thank You, Any Questions