Fremium Will Squash Premium

The biggest threat to an established premium only software business is the arrival of a fremium player.  The best way I can think of to demonstrate this is through the following hypothetical scenario:

You’ve built a premium subscription software business model.  Your sales dwarf competitive premium offers because you have very efficient customer acquisition and a great product with strong customer retention.  Your marketing metrics are strong.  You have 1 million customers, for which you paid an average of $50 each to acquire.  The average projected lifetime value for each customer is $100 with a typical subscription length of three years.  So you paid $50 million and will eventually generate $100 million.  Your marginal cost of providing the software is minimal, so you are now focused on acquiring as many subscribers as you can for around $50 each.

Now imagine a fremium player enters the space.   At first you don’t notice much decay in your business.  You’ve got a marketing machine that’s generating enough cash flow to efficiently outspend the fremium competitor 10:1. And you have the benefit of a high lifetime value to justify the high customer acquisition spending.  The fremium competitor only has an average lifetime value of $10 per user (averaging their free and premium users).  Their average acquisition cost is a fraction of that because of high response rates to their “free” advertising messages and strong word-of-mouth.

Fast forward a year or two.   The premium only company starts to see retention rates plummet.  A few subscribers are going for the competitors ½ price premium version but most just choose the free version.  It’s only a matter of time until the entire Premium only installed base learns about free offer.

What should this premium only company do?  If they launch their own fremium version, they will sacrifice much of their paid base to their own free offering.  They paid a lot to acquire these users with the expectation that they would recover the cost through a high lifetime value.  A fremium offer at this point become pretty hard to swallow.

If you believe Chris Anderson’s recent Wired article – this scenario will play out in every software category.  If you are thinking about launching a premium  only software product, consider going fremium now.  It will be a little harder to get traction, but you will have a much more defensible business down the road.

Awareness Building is a Waste of Startup Resources


It’s surprising how many CEO/Founders of startups tell me that they want to hire a VP Marketing to “build awareness.”

Consider this: according to Inc Magazine , the average US consumer sees about 3,000 advertisements per day.  Can a startup really spend enough money to break through that clutter and build awareness?

For at least the first year or two, online consumer/prosumer/smb targeted startups should focus 100% of their non-PR media budget on acquiring customers.  Rather than buying a microsecond of awareness, you can actually use your limited funds to engage users in a real brand experience. Even for users that don’t convert to paying customers, you create a deeper impact by engaging people on your website.  And you can gain intelligence about such things as where and why potential customers are abandoning your acquisition funnel.

Focusing on customer acquisition over “awareness” takes discipline.  There is always some amazing advertising opportunity that could lead to explosive growth.  Your odds are probably better buying a lottery ticket.

Building a strong customer acquisition engine is the best chance you have of creating long-term awareness.  At a certain scale, awareness/brand building makes sense.  But for the first year or two it’s a total waste of money.

The Science Behind Viral Marketing

Many people don’t realize the advances in the science behind viral marketing.   Experts often known as “Viral Tuners” are applying a systematic data driven process to creating viral customer acquisition drivers.  By testing and optimizing the viral elements of a widget or websites they are often able to push the viral coefficient above 1.0.  This essentially means that each new user generates more than one additional user.  In other words, growth accelerates geometrically until saturation.

Even if you can’t get the viral coefficient above 1.0, you can still greatly benefit from virality.  The echo effect of a viral coefficient that falls below 1.0 is still important. For example, if a tracked user from a campaign costs $1 to acquire and you have a .75 viral coefficient, you actually acquire about 3.5 customers for that $1 and therefore your average customer acquisition cost goes down to less than 30 cents. If you can find a way to generate an ARPU (average revenue per user) of $.50 you have a strong business – even if you spend $1 to acquire that first user.  The higher your viral coefficient, the bigger the echo effect of every dollar spent.

Again, if you can get the viral coefficient above 1.0, the echo effect is infinite and your cost per acquired user approaches zero.  Any time you can acquire users for free, a viable business model becomes almost inevitable.  As long as you don’t have a significant marginal cost per user outside the acquisition cost, you simply need to micro-monetize these people and you’ll easily be able to grow a profitable business.

All of the above is pretty abstract, so I’ll give you an example of the only viral growth driver I’ve ever created. Ten years ago I launched a YouTube sized game widget called Trivia Blitz that appeared on over 35,000 websites. Each widget carried an “add this game to your website” link, helping it to spread virally between sites.  We acquired several million users with this widget, paying the referring site 50 cents per user (a small fraction of the average lifetime value each user generated in advertising revenue).  To achieve a high average lifetime value, it was important to transition users from the referring site to the engaging multiplayer games on the website – which was already among the stickiest on the entire web.

During these irrational dotcom bubble years, our competitors were wasting millions on crazy marketing campaigns like expensive branding campaigns on TV or multimillion dollar AOL deals.  By focusing our resources on Trivia Blitz and tightly tracked direct response marketing drivers we were able to take leadership of the game category, surpassing Microsoft, Sony, Yahoo, and many gaming startups backed by leading Silicon Valley VCs.  Trivia Blitz was such an efficient customer acquisition tool that it eventually helped position for a NASDAQ IPO.  Among public companies, Uproar was able to achieve the lowest customer acquisition costs for a free registered user (about 1/6 of Yahoo’s cost which was considered pretty good at the time).

While we didn’t optimize the virality of Trivia Blitz, it is still illustrative of the results that are possible if you can create a viral coefficient above 1.0.  I’m now focused on learning the skills of viral optimization, so I can take something that is slightly viral and fine tune it into a major viral marketing driver.

If you are interested in reading more about viral marketing, I highly recommend Andrew Chen’s blog.  I’ll blog about any other great resources that I find.

Chris Anderson "Gets" Freemium Business Model

There has been a lot of attention this week on an article called Free! Why $0.00 Is the Future of Business published by Chris Anderson in Wired Magazine. It is an excellent overview of the drivers behind the important trend of companies offering free versions of their products. He plans to release a full book on the subject next year.  For those who aren’t familiar with Chris Anderson, he’s the author of The Long Tail, a book that kicked off a frenzy among internet entrepreneurs and VCs a couple of years ago. It highlighted the impact of unlimited online shelf space.

Every time I start reading this “Free…” article I interrupt myself to write down more thoughts on free business models.  It’s bringing back years of thinking about the best ways to execute these models.  In fact I’ve spent most of the last 13 years in the “free” space.  I plan over the next few weeks to make several “brain dump” blog posts on the subject.

A quick recap of my specific experiences with free business models.  In 1995 I made an angel investment in a “free” company call  When the service neared launch in mid 1996, I joined full time as VP Marketing.  Our business model was to require users to complete a detailed registration form to be able to win cash and prizes in “free” online game shows.  We used this detailed registration information to target advertising.  While “free games for cash and prizes” was the hook, we created a very sticky site through community and a great game playing experience.  Ultimately this free online experience combined with a systematic approach to customer acquisition propelled the site to the 8th biggest web property worldwide in terms of total usage time (a key metric for ad supported websites).  Uproar was acquired by Vivendi Universal in 2001 for $140 million but the bubble valuation peaked at about $1 billion.

From March 2003 until Dec 2007 I led marketing for a more classic “fremium” service called LogMeIn.  For confidentiality reasons I won’t go into details about the executing the model, but the LogMeIn home page states the service has “Over 30 million devices connected worldwide for remote support, access & backup”.

Through both opportunities I gained lots of insight in executing this model.  I especially learned that, in a competitive category, it’s much better to be the fremium player than the premium only player.

Huge Newsweek Article for Xobni

Newsweek published an article today that clearly positions Xobni as the leader among companies addressing the ubiquitous issue of “dissatisfaction with swelling inboxes.”

Xobni co-founder Matt Brezina has some great quotes throughout the article, but this one is the best “We’re at the front of the pack.  And we’ve got a target on our back.”

The article points out that Bill Gates called Xobni “the next generation of social networking.” Relationship based email management is going to be a huge space and this Newsweek article should help ensure that Xobni leads the conversation as the category picks up steam.

Demand Harvesting – The Easiest Driver for Startups

I always begin a new startup marketing assignment by looking for any untapped existing demand.  Demand harvesting is much easier than demand creation – and it has a faster sales cycle.  You don’t have to convince someone they need your category of product, you just need to be easier to find/buy and have a better value proposition than the other guys.

The first question to ask is “where would someone seek my product category?”  Twenty years ago the most obvious answer would have been the yellow pages, but today it is Google.   A lot of information has been published on getting the most out of SEO or SEM and there are also many experts you can tap in this area. Beyond Google, I’ve found it is helpful to survey existing users for other places they would potentially look.   It’s great news when discover healthy demand for your product category.

The next step is to analyze the solutions competing for that demand.  The best situation is to discover heavy unmet demand and no competition.  That is about as likely as winning the lottery, so don’t count on it.  More realistically, there will be a few companies with varying offers competing for that demand.  In this case, you should hope for weak execution from these existing competitors.  If you can be significantly more effective at extracting money from each prospect, you can afford a more prominent promotion at the initial point of connection and begin capturing market share.

If you discover that the existing competitors are executing well, you’ll have to differentiate your offer with a better value proposition for at least a segment of the existing prospects.  This was the situation in my last company.  We faced a well entrenched competitor who was harvesting the majority of existing demand and spending millions every month creating new demand.  Rather than simply trying to out-execute them (they were extremely efficient), we decided to counter with a free-to-premium offer.

This gave us a high response rate among existing main category searchers but also played into a new trend that had been developing over the last few years.   In discovering a new expensive software solution, many prospective customers now check for free alternatives.   For this new segment of demand, we quickly became the dominant market player.  Once we had these users engaged on the free product, we could patiently upsell various complementary premium services.

Whether competing for existing demand or creating a brand new product category, you’ll eventually have to begin creating demand.  This is a much more difficult and unpredictable art that I’ll cover in a future post.

Why I Love Silicon Valley

Silicon Valley has a contagious energy unique from any place I’ve previously worked. New York City was close, but it wasn’t focused on the tech industry.  Palo Alto is the epicenter of this energy, but it spreads all the way into San Francisco, where I’ve been living for the last three weeks.

While the energy hits you right away, it’s the network that is the real value.  After just a few weeks I’ve already developed more valuable relationships than I did in 3 years in Boston.  For me, the best part of these relationships is exchanging marketing experiences.  Every meeting with another entrepreneur or startup marketing leader yields new insights into powerful marketing drivers.  And it is always a two way exchange of information.  Meetings end with a genuine desire to get together again soon and enthusiasm about all the new tactics we’ll bring back to our ventures to test.

David Weiden from Khosla Ventures has made the most valuable introductions.  And these introductions spread well beyond Silicon Valley.  Yesterday I met with Jamie Siminoff, a serial entrepreneur based in LA with multiple successful ventures already under his belt.  Jamie is one of the sharpest marketers I’ve ever met, despite never carrying a marketing title (he’s been the founder and CEO of his ventures).

Michael Mullany has been another great introduction from David Weiden.  Michael was the early VP Marketing at VM Ware, which went public in 2007 and is currently valued at $23 billion.  His knowledge around product marketing blows me away.  Given my core-competency in customer acquisition, we always have a great exchange of information that inspires new tactics for each of us to try.   We plan to bring other successful startup marketing leaders into our conversations which will surely generate additional insights and relationships.

Finally, David Weiden made the introduction to Xobni, where I am currently engaged in the traction stage of marketing.  The Xobni team is extremely sharp and I’m sure will be part of my relationship network for years to come.  Once again, while no one else at Xobni carries a marketing title, they’ve already added new marketing tactics to my arsenal.

Amazing it took me so long to move to Silicon Valley; especially since I went to college only about an hour away at UC Davis.

Bill Gates Demos Xobni in this Morning’s Keynote

We’ve had an exciting morning at Xobni.  Bill Gates demoed Xobni at the Microsoft Office Developers Conference, calling it the next generation of social networking.  A more practical comment was that he credited Xobni as helping you understand the richness of different types of relationships so that you can manage those relationships.

Below is a link to the portion where he demos Xobni: