Introduction - Freemium Economics: Leveraging Analytics and User Segmentation to Drive Revenue (2014)

Freemium Economics: Leveraging Analytics and User Segmentation to Drive Revenue (2014)


Freemium Economics is a survey of the freemium business model from an analytical perspective: the book aims to dissect the model and explain how its component parts contribute to its success in software products. The freemium model has become the dominant means of generating revenue on mobile devices. Freemium Economics was written to provide an instructive and, more importantly, holistic overview of how freemium products generate revenue, keep users engaged, and grow.

This book serves to formalize the commercial and logistical principles that accommodate the successful application of the freemium business model, both in the abstract and within the context of software development. This book is not a product development guide; it does not prescribe a certain set of actions or best practices to take under concrete circumstances when developing specific products. Rather, it establishes a theoretical framework, informed by both economic principles and the practical realities of software development, that can be applied to the process of building freemium software products.

The scope of the material covered in this book is broad because the book is written with no particular audience in mind. Freemium Economics is not dedicated solely to prescribing an approach to analytics or catalyzing virality in product design or outlining user experience best practices; rather, the book is meant to inform an individual’s understanding of how the freemium model generates revenue for products priced at $0. While understanding the structure of freemium components—how an analytics stack tracks data, or how virality can be quantified, for instance—is important, the interaction between those components is much more significant in terms of revenue relevance.

Dedicating chapters of the book to fairly esoteric topics, such as analytics and quantitative methods, is not to render experts out of generalists or to make the book accessible to practitioners of those subjects. Rather, the book covers a diverse set of subjects because the freemium business model is sophisticated and requires at least a basic level of savvy in a set of disparate competencies.

The goal of Freemium Economics is to provide the reader (whose occupation, experience, and goals with the freemium model are not assumed) with an understanding of why and when a product should be released at a price point of $0. After finishing the book, the reader should have a firm grasp on the following elements of freemium software development:

ent The prerequisites to success in the freemium model, including the size of a product’s addressable market and the product’s ability to scale;

ent Data-driven product development, facilitated by a robust analytics stack, clear and informative reporting, and a basic understanding of quantitative methods;

ent The core principles of choice and product catalogue strategy in monetizing freemium products and how freemium products should be structured in order to optimize each user’s “lifetime customer value”; and

ent Freemium product growth facilitated through virality and paid user acquisition.

Chapter 1, “The Freemium Business Model,” begins with an overview of the basic components of the freemium model, each of which is elaborated on individually in later chapters. The chapter expands into a discussion of three economic principles—price elasticity of demand, price discrimination, and Pareto efficiency—and the role each one plays in building and measuring freemium products. The chapter ends with case studies of three high-profile freemium software products: Skype, Spotify, and Candy Crush Saga. These case studies set the stage for discussing aspects of the model in later chapters and are meant to bring various elements of the freemium model to the fore of the reader’s mind for later consideration.

Chapter 2, “Analytics and Freemium Product Development,” discusses the role of analytics in the freemium model and its importance in not only developing a freemium product but maximizing its revenues after launch. The chapter begins with a definition of the term “insight” within the context of the freemium model and then progresses into an overview of an analytics stack—the combination of software and hardware elements that allows for product data to be stored, analyzed, and reported—and the ways in which the stack interacts with a freemium product. The chapter ends with a discussion of data-driven product design and how it is best implemented in the freemium development process.

Chapter 3, “Quantitative Methods for Product Management,” is an introduction to various quantitative concepts that can be used to measure the success of freemium products. The chapter begins with an overview of the analytical techniques and concepts that can be used to measure products, such as exploratory data analysis, probability distributions, and visualization, and their proper interpretations. The chapter then segues into an overview of A/B testing and its role in data-driven product development, followed by an explanation of regression analysis. The chapter ends with a discussion of user segmentation and the means by which the statistical and quantitative techniques previously discussed allow for freemium product developers to tailor the product to the preferences of each user.

Chapter 4, “Freemium Metrics,” expands on the foundation laid in Chapters 2 and 3 by providing a practical set of guidelines by which analytics and quantitative methods can be used in a freemium product’s development process to iterate upon and improve it. The chapter begins with a definition of a freemium product’s “minimum viable metrics” (the minimum set of metrics that must be tracked by a freemium product to facilitate data-driven improvements) and then proceeds into a detailed description of each of the four broad categories contained therein: retention, monetization, engagement, and virality. The chapter ends with an outline of a practical, instructive strategy for using metrics to inform product development.

Chapter 5, “Lifetime Customer Value,” is an overview of one of the most important concepts in freemium design. The chapter begins by defining lifetime customer value and its significance in the freemium context. The chapter proceeds into descriptions of two methods of calculating lifetime customer value: the spreadsheet method, using spreadsheet software to estimate a rough yet accessible lifetime customer value metric, and the analytics method, which algorithmically tracks lifetime customer value. The chapter ends with a discussion of the lifetime customer value metric in an organizational role and how it can be used to make decisions.

Chapter 6. “Freemium Monetization,” dissects the various forces at work in the dynamic between freemium products and users and offers a strategy for optimizing revenues while maintaining trust and goodwill with the user base. The chapter begins with an introduction to choice theory and an explanation of the different monetization roles users fall into in a freemium product. The chapter then expands into a description of the role data plays in forming a monetization strategy, including a definition of data products and the means by which they can contribute to freemium revenues. The chapter ends with a discussion of “downstream marketing” and its use in preserving and optimizing revenue streams.

Chapter 7, “Virality,” discusses the viral effects that freemium products can benefit from. The chapter starts with a definition of virality within the context of a software product, including an approach for calculating virality, and then discusses a detailed step-by-step guide to modeling virality in a spreadsheet. The chapter ends with a product-centric discussion of virality and the ways it should be considered (and intentionally engineered) in the product development process.

Chapter 8, “Growth,” presents a framework for growing a freemium product’s user base. The first focus is “strategic growth,” which outlines the considerations to make before product launch, at the time of product launch, and after product launch to maximize the size of the product’s user base. The chapter then discusses paid user acquisition, including a detailed overview of the networks and systems by which paid user acquisition is achieved, treating paid user acquisition on mobile as an independent topic. The chapter ends with a discussion of various alternative techniques for user acquisition.