1.
The Economics of Freemium
Peter Fishman
Director of Analytics, Yammer
7/23/14

2.
My Background

3.
Who is a data scientist?
Product &
Communication
Programming
Statistics

4.
Relevant Experience

5.
Agenda
• Gaming Pricing
– Evolution of Freemium
– Lifetime Value Model
• Pricing Psychology
– How do prices affect utility?
• Should they?

6.
Gaming Pricing

7.
How do you maximize revenue?
P
(Value Per Game)
D
Q

8.
How do you maximize revenue?
P
(Value Per Game)
D
Q

9.
Two Part Tariffs

10.
Low “tariff” with multiple types

11.
Evolved Pricing Model

12.
How do you maximize revenue?
P
DH
Q
DL

13.
A tale of two travelers
Adam Pete
1st Class $2000 $420
Coach $1000 $400

14.
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

15.
Can you walk down a demand curve?
P
DH
Q
DL

16.
Freemium
• Advertising
– Product placement
• Branded content
• Video ads
• Lead generation and
offers
• Premium Features
– Virtual Goods
– Additional Controls

17.
Freemium Model
 Premium Features, Advertising, Cross Subsidy
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

18.
Perfectly Evolved

19.
The “virtuous cycle”
Invite Friends
Virality
Buy Things
Monetization
Use the product
Retention
New user
Acquisition

20.
Revenue =
Users
Components of “lifetime value” = Revenue/User
Install/
User
DAU/
Install
Payer/
DAU
Revenue/Pay
x x x x er
Virality
Monetization
User Acquisition Retention
Marketing / CRM
User Mechanics
Tech Investments
DAUs

21.
Get the levers right

22.
The Economist
• Online-only – $59.00
• Print + Online – $125.00
• Print-only – $125.00
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Online Online + Print Print Only
Percentage

23.
Williams Sonoma
$275 $429

24.
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

25.
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

26.
Free Can Be Helpful

27.
Free Can Be Harmful

28.
50 cceennttss 150 c ceennttss
HT: Dan Ariely

29.
Thaler (1980), Kahneman (1984)

30.
What are the last 2 digits of your
telephone number?

31.
Are there more or less
countries in Africa than
tHhoawt nmuamnbye cro?untries are there in
Africa?

32.
Transistors: HT Martin Westhead

33.
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?

34.
Thank You, Any Questions