Freemium and OpenSource Funnels

July 22nd, 2010 by Roy Russo

In my last blogpost titled “Why Free? Why Now?” I provided some background on the impetus and the reasoning behind LoopFuse’s move to provide a free marketing automation offering. It has been only three weeks since our launch of FreeView, but the response has already been overwhelming. One of the most interesting changes that comes with a move into a freemium model is the shape of the funnel. Over the past several years I’ve studied the funnels of dozens of companies and I’ve noticed that those companies based on freemium models (including opensource) show some very distinctive and interesting patterns.

The Mouth of the Funnel

The first distinctive feature of a freemium-based funnel is obviously that the funnel’s mouth becomes extremely large. Providing anything of significant value for free will attract a large number of people. The number of people attracted is directly related to the amount of value provided for free and inversely related to the “friction” in obtaining that value. For example, when Ben and Jerry’s offers a free ice-cream cone a line will form. But as the line grows the “friction” to obtain the free ice-cream becomes a disincentive for people who realize that waiting an hour in line for a $3 cone may not be worth the effort. However, if the free item were an iPhone instead of an ice-cream cone then the length of the line would naturally extend much farther as people weighed the value of their time against the inconvenience.

Freemium companies must not only ensure that their free offering provides significant value, but also that the “friction” required to obtain that value is minimized. For example what information must the prospect divulge about him/herself and/or his/her organization to access the free offering? What setup and configuration tasks must be completed? How aggressive is the push to migrate from the free offering to the paid upgrade? The value of the free offering minus the total friction required to obtain that value will directly drive the relative size of the earliest stages of the funnel.   Of course, in order for people to consider a free offering they must be aware of it. While word-of-mouth is a key component of the freemium marketing strategy, there is still a very important role for traditional marketing to drive awareness.

Behavior-Driven Funnel Definition

The second distinctive feature of a freemium-based funnel is the segmentation of the funnel based on behavior. Traditionally the progression of a lead through the segments of the funnel has been based on external indicators such as registration, download of collateral, participation in webinars, product trial download, contacting sales for assistance, etc.  However, due to the volume of leads being managed inside the funnel, a freemium model must provide a hyper-efficient means of measuring the progression of a lead towards purchase and must maintain a level of accuracy in that measurement to ensure that we are not overwhelming the sales team with unqualified leads. Therefore, the segments of the funnel may need to become more specialized based on data being collected directly from the usage statistics of the free offering. For example, in our own funnel, LoopFuse knows exactly how many users, leads, forms, lists, nurturing programs, reports, and campaigns are in use by every single FreeView user. These statistics are key criteria for the promotion of a lead inside of our own funnel segments. This type of integration is usually much easier with SaaS freemium models than with pure opensource models because the usage statistics are more readily available.

The Patient Sales Model

The third distinctive feature of a freemium-based funnel is the lack of momentum in the early stages of the funnel. In a former life I worked at an opensource company and we used to discuss the concept of the “patient sales model”. The concept was based on our observations that it often took YEARS before a free user was ready to purchase a premium upgrade. A user would download the software, become familiar with it’s capabilities and limitations, and it would become part of his/her default toolkit. At some point in the future he/she would pull out that software and would run into a limitation that could only be overcome by upgrading into a premium version. At this point the value proposition is clear to the purchaser, the friction of adoption is zero, and the prospect is usually ready to pay for the value they are receiving. However, there is no magic formula that will predict when this circumstance will present itself. Freemium models front-load the funnel with lots of users on the basis that eventually they will run into this situation.  Also, traditional metrics such as days-to-close can become misleading in freemium models unless you start the clock at the point of opportunity creation rather than lead creation.

While the LoopFuse freemium offering (FreeView) is only a few weeks old, we can already see the momentum impact at the front of the funnel. We have already revised our internal funnel segmentation to better utilize the FreeView behavioral data to more accurately identify those prospects who are gaining the most value and are therefore more likely to pay. I am fascinated by the funnels of freemium and opensource companies and look forward to watching the evolution of our own funnel and the subtle patterns and idiosynchrasies we identify along the way. For a great in depth article on the “Fundamentals of a Volume Market Engine” I highly recommend reading Fred Holahan’s article on OpenSource Business Resource.

Tags: , , ,

Leave a Reply