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In today's How to Build a Billion Dollar Startup Almost Overnight
I'm going to talk about the freemium strategy.
The thought was triggered when I looked at the current valuation on Facebook,
which is a, it went up to $190 billion dollars again,
and then on Bloomberg TV I saw
Zuckerberg said that they have 699 million active users.
So it was kinda weird because the data points
came in literally within a few minutes of each other.
So I was like, hmm let me see how that works in terms of market gap
versus active users.
And then I realized that of course in Silicon Valley
if you haven't lived there, or Silicon Alley, one of the key strategies for a startup
or the quickest way
to go from zero to a billion dollar valuation
is to actually focus on the freemium strategy.
And if you don't know what "freemium strategy" is,
I'm sure you do, but I'll just say it. It's basically using your
product or service digitally and offering it for free.
So let's go through it. It's kind of actually a very
interesting case study of
How to build a billion dollar startup almost overnight.
If you, once again, look at the graph. and you have...
market X here,
whatever your market is, congratulations. And sizes here.
If you look at a lot of products or services, they usually go through a
diffusion curve. A lot of times people think that when a company
goes from 0 to accelerated revenues, that they hit a tipping point,
But in reality when you
look at the graphs, it's probably
a diffusion curve. And in fact, Facebook...
a lot of people talk about Facebook having an inflection point when in reality
when you look at their growth patterns, it really was a classic case
of fast-growth infusion.
What I mean by diffusion verses tipping is
that what you're using a freemium model
your objective is to get as many users
as quickly as you can. So usually you want,
as a startup entrepreneur, even if you're rolling out
a new product, you want to kind of go like that.
because basically
you're building a market right here to a certain point
and then one more customer,
one more service out there just amplifies the curve.
And instead of going the traditional diffusion
fast-growth route, you're actually going the tipping route
and a lot of times you'll see the tipping data points come
in biology with the spread of viruses.
So one of the key things
when you talk about the tipping strategies is that
you want to make the product as viral-like as you can.
A perfect example, I know is overused but I'll use it again,
besides Facebook, Twitter, Linkedin and all, is that
in the early days of the Internet Hotmail went hot!
I mean they literally went from zero to 100 million users overnight.
So what do you have to look at
when you're looking at it freemium?
Obviously it's a function, if you look at freemium, it really is a function of
what I call "Function of D." And D equals
Digital Percentage. So obviously, most of the
startup companies out there that you see going the freemium route
are digital-based, because it's kind of hard so
that really fine line between
analog and digital, if this is 100 percent,
and this is 100 percent analog on this side and
is 100 percent digital,
obviously if you want to go the freemium route and offer it for free
you've got to make sure that, you're as far as 100% possible.
Also the other component of using a freemium strategy is that
once you choose that strategy, you really have to segment it
very carefully. And actually we're going through it on one of our
stealth startups right now,
where I spent a substantial amount of time,
literally days, going over the business model.
And one of the thing that I looked at was the conversion rate.
And the conversion rate can get tricky because
obviously you can make the conversion rate from freemium to your payment service
however way you want. But before we talk about the conversion rate
I actually want to go over a couple of things on the freemium side.
So if you are using a freemium strategy -
offering your product for free, you want to segment that
that product and you're always going to have some percentage
usage of this product for free forever. Because you're going to have
some consumers that are never going to want to pay
for your service. They're cheapskates. They just want to use it for free, okay?
But if you look at it from a revenue vector standpoint,
then you have to look at advertising,
obviously transaction component,
subscription and usage.
Facebook for example has done really well by amplifying their
advertising vector.
And of course they were initially pc-based
and then as the internet started migrating towards mobile,
Then obviously they kind of got a little into the funk
right after they went IPO, where there was a conversion of
PC usage up towards smartphone usage.
Now they're amplifying their advertising revenues on the mobile side.
You also have to consider that. So for Facebook
the advertising model has done really well.
They've obviously made revenues off transactions,
subscriptions, they could make money on subscriptions,
but at this point in time it's not really what they're focused on,
and obviously usage. And what I mean by usage, whether it's
using something per hour, per event, you name it.
So these four revenue vectors
are very important to look at from a business model perspective
if you're using a freemium model. So obviously the intent of
using a freemium model is to get as many
customers as you can.
You want to get a lot of people, with a lot of eyeballs
into this equation. And obviously the quicker you can go from -
whatever you do, if you're going to use the freemium model there's gonna be
X amount of time where
you're struggling to get your network up and running,
your platform, whatever you want to call it. And then you want to be able to
hit those tipping points as much as you can.
I think one of the best examples of hitting a
tipping point quickly is Dropbox.
The way Dropbox designed their product was really cool where
you store your information on the Internet in their cloud
but then they encourage you to ask others
to join the storage platform, you could call it,
and by doing that you get extra space and they get extra space.
That's quite a brilliant move from a viral perspective
or standpoint. And another company that's doing really well is Evernote.
They have 65 million users. I don't know the current data
but I know that of 41 million freemium users they had converted
1.5 million into payment, subscribers
at five dollars a month. So basically, when you're looking at
freemium, you have to
look at the conversion rate. And this is the part that actually
has been very difficult for me to decide on
on one of the business models we're working and under stealth mode,
which is what is the conversion rate? So for instance, with Evernote
when they were at... because they're a private company
it's hard to get data, but when they were around
41 million users, they were able to get 1.5 million
at five dollars per month.
Their conversion rate was pretty high considering 41 million, 1.5 million
it's like 3.7 percent I think.
And so when you're looking at your freemium strategy the conversion rate is
very important so keep that in mind.
So your conversion rate, like let's say freemium,
if you're going the subscriber route,
which is what we're working on in one of the stealth startups because
this particular stealth startup does not really have
an opportunity to kick in on the advertising
revenue vector, it's more a subscription.
You have to really look at the percentages and you have to
make it in such a way
where the usage of your product, whatever that is,
there's a certain amount of people that will always use it for free.
Then try to push some of them to pay you five bucks,
ten bucks, whatever ... 50 bucks
per month to get them activated. So that's very important for you to see it
because if you can show a couple of things, if you can show that
you're getting a lot of free eyeballs
on your platform - a lot of people using it for free, but then that
there is a methodology and framework for how to get those
freemium users and convert them into subscription users
as an example. Or if the other revenue vectors
are obviously transaction, advertising and usage.
I think there's going to be, on the internet, a large trend toward pushing
as many users as possible under the transition
transaction model, which is commerce- based, as well as the
subscription model, because right now I can tell you one thing that really
irritates me, every time I'm on my smartphone
the amount of ads coming through on my little screen.
All the sudden my little screen on my iPhone has become
one-third occupied by some
schmuck ad that I really don't want to look at, but it's happening.
When you look at the power of freemium,
I'm going to give you some perfect examples
and then you're going to really recognize
why Silicon Alley and Silicon Valley loves the freemium model.
Let's look at Facebook
they have...
total number is, they have
1.4 billion users.
Let me start this again. I made a mistake.
Facebook...
they have 1.4 billion users.
Their active-- according to Mark, is that they have 699 million
active users so their ratio is 49 percent.
If you look at it from that perspective.
So out of total users, active is 699.
Percentage is 49 percent.
You can look at it a couple of ways. You could say well what's the user worth
based on the revenue, but in reality whether you're raising money
through your venture capital rounds or not,
you can quickly analyze the worth of each user.
Active user, in my opinion, is actually more important than
total user by the market cap.
So Facebook today
was 109 million... excuse me... 109 BILLION.
So what it comes down to is that dollar
per eyeball ... eyeballs, I guess,
is that it's about $158.
And their primary
business model obviously is still advertising.
The do have some on transaction. So now we're going to
do another example, LinkedIn.
I'm using these two companies and I'll also
use Twitter because they're obviously
social platforms, but they also
use a lot of the network effects and when you're talking about building a
a business through a freemium model one of the key things you want to do
is set up a platform where
your growth of new users... free new users is
growing as fast as you can.
So if you look LinkedIn, they have 238 million users.
Their active users according to the most
current stats is 160 million,
and then their percentage rate is 67 percent
between active and total, which is pretty interesting.
You can tell that obviously this is more of a
serious network, and we'll go through that.
And then of course their market cap, at this point in time,
is about 32.9 billion,
and their dollar per eyeballs is $206.
Their model is much more interesting.
Besides the freemium, they're obviously using more like a services model
so their business model is actually more diverse.
From my perspective, LinkedIn probably has the best
business model of any or the social platforms today,
They're using obviously, part of it advertising,
the subscription and then...
and services component.
Their business model is very, very powerful.
Twitter, on other hand, they're a private company, but you can
look at this data is that
their current valuation is around
10 billion. So I kind of had to work backwards a little bit.
Their total user base is
about 554 million but
in reality, what they really means is that there's multiple people
using multiple accounts.
It's valuable but it's not as valuable from
that perspective. And then they have about 115 million
active users. And their...
their percentage is about 21 percent.
And then of course their value
for users is about $86,
something like that, per user. Now if you look at all these,
one of the key trends that you see is like wow!
You're worth something, when you get on
Facebook, Twitter, or Linkedin you're very valuable
to those companies, because look $158...
$206 and $86 for Twitter.
So now that you have your LinkedIn account
this is the value of YOU
to LInkedIn.
And notice something also interesting is that
for instance, you can look at it
Twitter more as a general type of a social network.
Obviously their social graph is different, it's based on interest.
Their graph is based on interest. And then Facebook has a social graph
which is more general too.
LinkedIn is more of a vertical type of a platform.
So the irony is that they have less people than Facebook
but the value per user is much higher.
And so if I can really prove anything to you, is the importance
of using a freemium model. And I will say that, having lived in Silicon Valley,
this is really where the freemium model is amplified the most
by multiple companies in Silicon Valley.
Dropbox obviously, Evernote, Facebook,
all these companies... Pinterest.
This is why you have to really consider, if
you want to build a billion dollar startup almost overnight,
how can you build
a freemium model that not only enables you to
grow fast
by using as much of an upright
curve as possible.
So now it really comes down to, how do you grow these curves?
Does your curve go like that?
Does it go more like Facebook's did, which was more of a diffusion model?
It really comes down to
where you're at,
and so you want to be tracking that.
Then obviously because these are all freemium,
evenly with Facebook, then out of this area,
how much of it ends up being
revenue base?
so the easiest way, obviously, and you've seen this yourself, the easiest way is
just to *** you out. And I know it's kind of a crude
statement but that's really what's happening is that you the user,
the user yourself,
you're generating all this data on Facebook, Twitter or LinkedIn,
and the irony is that they're using your data
to amplify their value and revenue stream. So there's gonna be some,
in my opinion, issues down the road on who owns the data.
And who controls the data and so you're going to see some major fights in regards
to that because at a certain point, people are just not going to be happy
not controlling their data and so that's what it really comes down to.
And when I say "controlling" and "owning" the data
you know you get on LinkedIn or Facebook, and all that
and you're putting all that data up
and it's your data, but is it really your data?
That's another topic to consider next time for discussion.
But bottom line is that, if you want to grow a
billion dollars business almost overnight, you should consider
using the freemium strategy.
And then, of course, it comes down to the function
of percentage of digital versus analog.
That's the key area.
Obviously if you are 100 percent digital
then you can use the freemium. And one of the biggest things
you should look at is the cost
to service as per user.
And there's pros and cons with that. For instance, you can use
Amazon Web Services to
basically reduce your cost of servicing your platform but there's pros and cons
to that as well.
And that's another topic but, in summary think about your freemium model.
Think about the power of the freemium model.
Then of course when your designing your product or service make sure there's a
viral component to it because
if you don't have a viral component
inside your service, then you're not going to be able to grow as fast.
So always think about the curve. If you've got a viral component,
PV, so then you're able to go quicker,
you can grow quicker because its freemium
versus having to go gradually,
because your objective then, if you go freemium, the quicker you to the
the most amount of users then you're option is to get acquired or go IPO and
that's really what's happened with
Facebook, Linkedin and Twitter's next!
Until next time.