Jul
23

The “Freemium” Model (Part 1 of 3)

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Today we’re going to discuss “membership marketing”, and how it’s almost a requirement for a successful website.

If you’re selling anything online, whether it’s ebooks, digital products or anything of that sort,
then the membership system we discuss below can deliver those products in the most effective and profitable way.

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Business Success Means Avoiding Churn and Increasing Revenue Per Customer.
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To be a business success, you’ll need to avoid customer churn (or “turnover”).

If you get 100 new members, but 99 of them quit after 30 days, it’ll be hard for your business to survive.

In a membership context, it’s the period of time someone will keep paying their membership fees.

So while it’s vitally important to constantly acquire new customers, it’s just as important to maximize the revenue of each customer you already have.

So what we’re talking about is the backend, and the marketing funnel you have in place.

With a subscription membership model – where you have a recurring billing system in place – the backend is the recurring fee itself.

The issue becomes keeping people as members at your site.

Let’s see examine how this plays out in the context of three popular business models:

– Traditional Product Sales.

Let’s first consider the traditional Internet marketing (publishing and sales) model, which is used
by most online business owners.

In this model, you create a product and a sales page, drive traffic to that page, and hope the traffic converts into sales.

The average for that conversion rate is somewhere around 1% to 2%.

Assuming you have a $37 product at a 2% conversion rate, it means that for every hundred people you send to that page you’re going to sell two of those products at $37 ($74 total), and you’ll have a visitor value for each of those 100 people of $0.74.

– Recurring Membership.

The average conversion rate for a recurring membership site is often less than the traditional one product sale model; it’s generally 1% or less.

So let’s now assume now that you’re going to charge $17 per month, rather than the original $37 product price point.

But we start to encounter churn with monthly billing.

In our experience, the average membership stick rate is between three and five months.

So for every 100 visitors, we’ll get one membership sale, and that customer can be expected to stick around for approximately four months.

That means you’re going to generate $68 in revenue from that one signup (four x $17 = $68).

That gives you an average visitor value of $0.68.

When you use the membership model, you can also put backend offers in place.

So once you already have a paid member, you can assume additional backend sales and commissions from that member – around $5 per month.

Now you have that one member, and they’re paid the $17 for the first month – will likely do so for about four months – and they’re also worth an additional $5 per month over that same period of time.

So now you have $88 from that signup, and the average visitor value for the 100 visitors is $0.88.

– Single-Payment Membership.

The next structure is a paid membership with a single payment.

Your conversion rate will increase because you’re asking people to make less of a commitment, and a membership generally has a higher perceived value than a simple product sale.

You can expect a conversion rate of 2.5% to 3%.

Because there is less commitment, you can charge more still keep the conversion rate up.

So let’s assume a one-time fee of $37 instead of that $17 recurring.

Now your churn goes way down.

The customers have already paid, so very few of them will actually terminate their membership.

You’d be safe in calculating an average stay of 12 months.

So the calculation is as follows:

You’re going to see a 3% conversion rate, and the total one-time fees are going to be 3 x $37 = $111.

Factoring in the backend offers ($5 a month per paid member), and over 12 months you’re looking at $180 in backend sales and commissions, for total revenue of $291.

This brings your visitor value up to $2.91.

But there’s an alternative model that blows all three of these out of the water when it comes to down to making money for you – the Freemium model.

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The Freemium Model.
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The Freemium model is basically a free membership with an upgrade offer.

It works like this: you put a “free” offer in place on the front end of the site (in a later article we’ll discuss how to make this free offer not appear to be “free” – and why you’ll want to do so), and you’re likely to see a front end conversion rate around 35%.

If you then place a compelling offer on the backend, you could see a conversion rate between 5% to 10% on that offer.

It can be higher but let’s use 10% for our analysis.

This means that for every 100 visitors – you’re going to get 35 free members, and then a 10% conversion rate on these 35 members on the backend.

So what you end up with on average is 31.5 free members and 3.5 paid members.

On your front end that’s 3.5 x $37 = $129.50.

The paid member back-end value is $5 x 12 Months x 3.5 People = $210.

The free member back-end value is $1.50 x 12 Months x 31.5 People = $567.

Adding these amounts and you have $129.50 + $210 + $567 = $906.50, so your average visitor value is $9.06.

That’s a huge difference from the more “traditional” models we discussed above (and more than 10 times higher the most common product sale model)!

Here we’ve opened the doors, we hope, for a lot of people to recognize that this Freemium model is a very profitable model.

Hope you learn something good today.

Let me know your comment and I will release part 2 soon. The more comments I receive, the faster I will let you access it.

Hit the comment button now.

Comments

  1. Zul says:

    Hi Jaz,
    I think the freemium model seems great. Looking forward for more of this type of models / tactics. Would like to know more about it.

    Hope to hear from you soon.

  2. Hi Jaz
    These are interresting numbers indeed; but I remember having read that keeping a membership up and running is a lot of work (finding new content and constant updating, to keep your members).
    But you might have a solution to this?
    Anyway thanks for the insight, as usual very enlightening stuff from you 🙂
    Best wishes
    Kimmo P

  3. Jaz Lai says:

    Kimmo,

    Yes there are definitely ways to keep
    your membership site easy to maintain.

    Once we got enough comments, I will
    show you all how to do it.

  4. Carson Leong says:

    interesting topic. How can I start doing this type model?

  5. Audrey Smith says:

    Hi Jaz
    Very interesting. You break it down so that even I can understand it.
    I will keep this in mind when I get started.
    Looking forward to the next info. You really do send over some very
    interesting articles for this internet business.
    Thanks

  6. Sheri says:

    Hi Jaz Lai…….
    Excellent information on the differences between memberships. Your knowledge is impeccable & never-ending. The Freemium Model membership is NO DOUBT, the way to go as your conversion percentages are much higher which means more PROFITABLE!!!!
    Thank You, Jaz Lai, as I’ve been learning a great deal from your blogs and the wealth of information you’re so kind & generous in teaching us, newbies!!!!!!

    Please continue to extend your generosity to all of us who do take advantage of your “wealth of knowledge” and who continue to build upon everything you’re teaching us because you’re an AWESOME teacher, Jaz Lai!!!!!!!!

    THANK YOU once again & I look forward to your continued education regarding INTERNET MARKETING, as I have to make it in this field and would like to talk to you more about that(details, why, what happened in the past, etc., etc., etc.)……..

    Take Care, Jaz Lai!!!!!!!

    Sheri R. Kreiner
    skreiner81@gmail.com

  7. yairsh011101 says:

    שלום רב גאז…
    נעים לי מאד להכירך.
    אתה איש מאד נחמד!
    יש לי בלוג באתר שלי אבל אין לי דומיין בינתיים.
    יש לי בקשה אם אפשר גאז
    תיכנס בבקשה לאתר שלי ותגיד לי אם מתאים לי
    לכתוב בלוג ולהשקיע בדומיין ובעזרה שלך כמובן
    להתחיל להשקיע כסף בבלוג היו לי חיים מרתקים וגם אכזרים
    אבל היום אני 7שנים נקי
    מחכה לתשובתך הכנה
    יאיר שאולוף

  8. orna says:

    loking good – i wel be hapy to know mor ……….

  9. Nishant says:

    Firstly i want to know is this activity wordlwide accepted?
    Its an excellent workplan, keep updating the 2nd part as i m eager to work on it. Make me a into your contacts may be we will make it more large. I also want to know the thorough details about the same. As i wish to work for the same.
    Once again excellent plot of mind. Wish you luck.

  10. Jaz lai says:

    Nishant, yes this is definitely accepted world wide. And I’m seeing quite a number of business moving to this model.

  11. Christien says:

    Hey Jaz,

    I’m looking forward to knowing more about the “freemium model”. It looks like it passes value in both directions. Having authentic value will always be good for business.

  12. Hi Jaz ,
    Wishuh u good luck , and very appriciated for your business/tactes etc….

  13. M Shahrin says:

    Hi Jaz,
    Tell me more about this “freemium model” ..

  14. Johan says:

    Hi there Jaz,
    I have a few websites but struggeling to sell anything on them.
    Is there something you can recommend as i have tried almost every traffic generating product out there.
    Another thing i don’t have all day to sit in font of my pc and write articles and so on.
    Thank you.
    Johan.

  15. Jaz Lai says:

    Johan, buying products won’t give you any traffic. You need to work on it. If time is an issue then I suggest you try solo ads.

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