Economics of Freemium talk at Stanford

1. The Economics of Freemium
Peter Fishman
Director of Analytics, Yammer
4/8/14

2. My Background

4. Relevant Experience

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

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

7. Gaming Pricing

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

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

10. Two Part Tariffs

12. Low “tariff” with multiple types

13. Evolved Pricing Model

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

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

16. 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

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

18. 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

19. Perfectly Evolved

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

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

22. Get the levers right

23. 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
Percentage

24. Williams Sonoma
$275 $429

25. 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

26. 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

27. Free Can Be Helpful

28. Free Can Be Harmful

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

32. Are there more or less
countries in Africa than
that number?How many countries are there in
Africa?

36. Thaler (1980), Kahneman (1984)

37. 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?

39. Thank You, Any Questions

40. Aim, Fire, Adjust

41. “That which is measured improves”
- Pearson’s Law

42. Why are weather forecasters so accurate?
HT: Murphy &
Winkler (1974)