6 Ways for Online Business Directories to Convert More Freemium to Premium

Source: Chris AndersonDuring the past four years, some of the hottest Web 2.0 companies have been experimental labs for the Freemium business  model. A portmanteau of the words “free” and “premium”, freemium refers to giving a baseline version of your product or service away for free, while charging for upgraded features. Originally championed by NYC VC Fred Wilson in 2006, some VCs have found the business case for Freemium so compelling their portfolio investments aim primarily for freemium-based digital product startups. Why? The appeal of freemium is tremendous, promising  huge brand awareness, shorter sales cycles and, most prominently, a marked reduction in the cost of customer acquisition. The efficiencies are captured well by Wired's Chris Anderson, author of Free: The Future of a Radical Price in a blog post on freemium math,

“...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% costs you little and allows you to reach a huge market. So the 1% you convert, is 1% of a big number.”

The  success stories of freemium-based companies are now legendary: From Skype, Flickr, Evernote, EBay to even Intuit’s TurboTax.  Although less ballyhooed by the techno media, freemium has even worked for B2B companies such as Hoover’s and The Financial Times.

Recently I was approached by a successful online business advertising service provider, offering a listing service and additional lead-generating marketing features to law firms. While the provider adopted a "vintage freemium" model in 1998 common to business directories, it's competition is now on the rise. Under this duress, there is considerable disagreement within the company  as to whether  the entry-level  free listing service (and leads provided)  is helping or hindering their customer acquisition and revenue growth.

Challenges

For this B2B marketing services provider as with others of its kind, executing  successfully on a freemium model  has its challenges: 

Incomplete Profiles. First and foremost, when a business appears in a listing directory, it's well-known that the probability of gaining a lead, getting a click-through, is very dependent on the “richness” of the business profile in wooing the web visitor: Has the business completely filled in its profile? Included photos and videos? Do recommendations exist? Are white papers or demonstrations of expertise provided? Social media links? 

An industry-wide problem is that  freemium business directory listers, often busy professionals with little marketing training themselves, many times do not take the time to fully develop their profiles. 

Potemkin Village A second and related problem, a freemium model can lead to pockets of poorly documented listings, reducing the overall credibility of the directory service.  

Delayed Gratification. A third  challenge is posed by the inherent time delay of “reward” associated with directories offering business leads. These are  not at all like freemium-based social games  or application software where the freemium customer gets immediate gratification upon installing the application. Rather the leads benefit show up days, weeks or months later, making it difficult for the lister to establish a  “positive reinforcement bond" with the service provider. 

Total Population of Directory Users. A fourth and formidable challenge for business advertising directories is that the service is only as good as the total number (and quality) of leads the freemium service provider can provide  customer companies. Hence, as web visitor bait, we see the auto-populating of directories with company names. But as we see only too often (MerchantCircle, anyone?) - this can back-fire, enhancing the Potemkin Village effect.

In the case of the law firm directory provider, the frustration is that while less than 1% of  their Freemium legal firm customers go on to upgrade, among those that do there is an 80% renewal rate. Their core question was: How could the company increase conversions to paid premium services?

In a freemium model, there are two obvious paths to increase paid-for customer revenue: (1) increase the total freemium customer base size which you will know will convert at X% into paid customers or (2) proactively focus on increasing the conversion rate of your existing customer base.

Here I’m principally going to discuss the second method, increasing the conversion rate as I’m assuming the business directory provider already has a fairly good installed base of freemium customers-- therefore the risks are less. Here are at least six questions that the service provider using a freemium model can ask itself to optimise conversion.

 1. Are you flaunting the success of your paid-for customer plans to increase the urgency of upgrading?

Source: FashionFame.com

In the case of the law firm listing service, the 80% renewal rate, while a huge marketing asset, was not mentioned on their website. (!) And yet- if a no-fee customer would see that wonderful statistic, they could not help but think, "Gee- my company may be a newbie to this service, but, clearly, the full sets of services is  benefiting the majority of firms using it -- some of which may be my competitors."

2. Are you promiscuously offering  "Upgrade Everyware" with every customer marketing interaction? 

Source: Adapted from Adam GreenfieldSuccessful users of freemium seed “Upgrade Now” messages on their web sites, within customer account areas, in email newsletters, in customer service and support calls and emails at every opportunity – Everywhere Everyware.  The classic case of a successful promiscuous upgrade strategy is GoDaddy.

 3. Are you “Edu-Marketing” to Freemium users, cluing them into the successful mechanisms used by your best practice premium customers?

click to sourceWhile the law firm directory has great recommendations on their web site from pay-for customers, what is missing from the testimonials is direct reference to the specific paid-for services contributing to the customer’s lead success.  So if a specific feature, eg.   the addition of a video or use of a social media sharing feature, contributed to a  subscriber’s success –  the inclusion of these details bridges the gap in the freemium user’s mind, allowing them to see beyond their current tunnel-vision view.

Obviously, this approach has the additional benefit of educating premium customers as well.

4. Do you maintain a fast (relentless) pace in introducing new “Pay For” features? 

Source: Gizmodo via Arstechnica.comPerhaps nothing creates a feeling of increased trust in a marketing partner as well as a sense of  “missing out” among non-pay partners than introducing new, highly desirable  features.  Evernote, a freemium-based supplier of  online memory aid tools, ascribes much of its success to the steady introduction of new features .

I particularly like their approach as it’s a triple-edged sword: New pay-for features not only serve as marketing morsels to entice Freemium users to the pay-for service but can contribute to customer retention among paid users. Further,  by  introducing new features into the premium service, a company has the potential to “raise the bar” on freemium competitors, commoditizing competitor freemium services by recycling "last version" premium services into "now version" freemium offerings.

5. Is a  Customer Reward Referral Program appropriate for your market? 

Source: David Chin OnlineWhile the data isn't completely in on this approach for revenue growth, only customer growth, I believe it will prove relevant so describe it here.  

One company that has effectively used an “increase the freemium base size” strategy is DropBox, the online storage and file-sharing company.  As reported in GigaOm, DropBox dramatically iincreased their customer growth (now up to 4 Mn as of this writing) by dropping their search marketing strategy for customer acquisition and instead focusing on incentivizing  customer referrals,  giving away additional storage to users who provide referrals which install the product.

This tactic has legs especially in our shiny new social sharing world: Now customers have the choice of directly paying for premium services or “paying” with referrals.

As I started off here, one major caveat here is that I do not know that this tact has contributed to growth in for-pay customers of DropBox.  On the one hand, one would expect some cannibalising of "for pay" customer conversions as a result of offering more freemium.  On the other hand, even with some dimunition in conversion percentage, one would expect an increase in the revenue-side as some customers need for increased storage space outdistances their willingness to rely on iffy  "referral" storage space.

6. Have you considered a mid-tier priced “jumpstart” service? 

Source: Australian ParkourAssoc.The problem for many freemium-based companies is getting their business customers to jump the gap from “free” to often a much higher priced product.  In the case of our law firm advertising directory, users have a choice of “free” vs. $200/month, a substantial price gap.  One obvious solution is to introduce a lower priced service, peeling off a set of the premium service features.  However, this by itself may not address one of the B2B Freemium challenges, namely, that busy professionals do not have the time to set up their accounts properly to receive the benefits.

Some potential is suggested by  Google's new Local Merchant program.  Aimed at former small business customers of Google Adwords. Google identified that many small businesses, despite paying thousands of dollars per month, were not reaping the benefits, principally due to lack of knowledge of SEO and keyword marketing.  Observing the rapid drop-off rates of these small business customers (and really wanting to hold onto the local search market), Google has recently offered a fixed and lower-priced product where  first-tier support staff “fill the knowledge gap” by setting up both the small business’s keywords for them. This holds a lesson for the freemium-to-premium business directory gap as well:  By introducing a sub-set of premium services of high benefit but relatively low company cost, a  directory supplier can bring a "mini-premium"  experience to a larger group of its freemium business users.  Collect some revenue today and win more trust for the higher-priced tier service tomorrow.

Unfortunately, I know of no magic parkour-like freemium to premium gap jumps  that avoid the sweat work of market testing and scaling the rows and columns of an excel spreadsheet, looking at marketing and development costs of new marketing and product offerings-- all tracked against free customers base growth and  conversion rate data. What's a good conversion rate? As Chris Anderson pointed out in Freemium Math: What's the Right Conversion Percentage? the answer varies from market to market.

In the End...

click to sourceHave I taken the coward's way out by mostly avoiding the  "Increase the freemium base size" approach to increase revenue even while conversions stay fixed? Yes. But I've got my reasons.

The chicken-vs-egg choice of  enlarging the freemium base vs. increasing paid conversions is not unlike the final scene in the movie, "The Big Lebowski." [Spoiler Alert]  Standing on a cliff, face to the wind, John Goodman starts to cast the cremated  ashes of his friend Donny (Steve Buscemi) into the ocean. But a big gust of wind foils his intent, blowing the ashes to coat the onlooking Jeff Bridges standing behind him.  Had Goodman been facing back to the sea and cast some test ashes over his shoulder, he would have foreseen the outcome. (Although it would have been less hilarious.) 

As in this scene (and offering me a great deal of artistic license here ;-))   for companies already invested in Freemium and with an established base,  facing your existent base, not the new wide sea of to-be-acquired customers, offers you the best view of what’s most likely to happen next. Not only do you have a ready set of customers to upsell to, but by focusing on pay-for conversions you’ll attain a great deal of knowledge about the exact premium features that your customers are willing to pay for. (Hopefully, without sacrificing your big toe. ;-))

Related Articles

Case Studies in Freemium: Pandora, DropBox, Evernote, Automattic and MailChimp (GigaOm)

Financial Times Goes After Younguns with Foursquare Deal  (Silicon Valley Insider, 4/09/2010)

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Comments

[amit]

Online directories allow customers to surf through categories to provide an easy location to your company. They help in sighting your location and directing targeted patrons to your website.
Thanks for sharing a important article with us.