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The Economics of Freemium

The Economics of Freemium. Peter Fishman Director of Analytics, Yammer 1/8/14. My background. Gaming Pricing. How do you maximize revenue?. P (Value Per Game). D. Q. How do you maximize revenue?. P (Value Per Game). D. Q. Two Part Tariffs. Low “tariff” with multiple types.

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The Economics of Freemium

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  1. The Economics of Freemium

    Peter Fishman Director of Analytics, Yammer 1/8/14
  2. My background
  3. Gaming Pricing
  4. How do you maximize revenue? P (Value Per Game) D Q
  5. How do you maximize revenue? P (Value Per Game) D Q
  6. Two Part Tariffs
  7. Low “tariff” with multiple types
  8. Evolved Pricing Model
  9. How do you maximize revenue? P DH DL Q
  10. A tale of two travelers Adam Pete
  11. 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
  12. Can you walk down a demand curve? P DH DL Q
  13. Perfectly Evolved
  14. Freemium Model Premium Features, Advertising, Lead Generation 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
  15. Who is a data scientist? Statistics Programming Product& Communication
  16. Components of “lifetime value” = Revenue/User Revenue = Users Install/ User Payer/ DAU Revenue/Payer DAU/ Install x x x x Virality User Acquisition Retention Monetization DAUs Marketing / CRM User Mechanics Tech Investments
  17. The “virtuous cycle” New user Acquisition
  18. Get the levers right
  19. The Economist Online-only – $59.00 Print + Online – $125.00 Print-only –$125.00
  20. Williams Sonoma $275 $429
  21. 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
  22. 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
  23. Free Can Be Helpful
  24. What are the last 2 digits of your telephone number?
  25. Are there more or less countries in Africa than that number? How many countries are there in Africa?
  26. 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?
  27. HT: Dan Ariely
  28. Thank You, Any Questions
  29. Even this event…
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