What Jason Learned: You Need 50 Million Users to Make Freemium Work

Having spent six-plus years building the web's leading freemium e-signature service at EchoSign, I've learned one thing if nothing else: Almost everyone gets the math wrong in assuming how much revenue they can make from giving away a free product and how many users will choose to upgrade to a paying version. It's tempting to believe in the fairy tale that posting free stuff will generate waves of inbound fans who convert to paying customers at a high rate.

But 9 times out of 10, don't expect a freemium model to generate most of your revenue. Especially if you want to Go Big. There just aren't enough businesses in the First World to get to a $100 million freemium business all that often.

Let's do the math:

• Assume you can get $10/month per paid user (many times you can't).
• To build a $100 million business, you'd need almost a million paid seats to hit that.
• Assume a 2% conversion rate, for simplicity's sake of active users converting to paying customers. You'd need 50 million active users—not pretend users and not users who registered and never came back, and not even users that use you once a year, but 50 million active, passionate, engaged users who are using your business regularly. That is extremely tough, but it can happen. Facebook is at 1 billion. Twitter is past it, and Pinterest may be, but in SOHO (small office or home office) or SMB (small and medium business) apps, 1 million paying customers almost never happens. There are not too many businesses with 1 million business customers, or 50 million active users, beyond Intuit, Microsoft, Adobe, and PayPal. Even if you're trying to create a $10 million business, you'd still need 5 million active (not total) free users. Still tough.

So is freemium hopeless to build a $100 million business? Absolutely not. It can create, build, and seed it.

For example, at EchoSign, pure freemium (i.e., no human involvement, where people started with the free version, then auto-bought some kind of upgrade) never exceeded 40% of our revenue. As we passed the first $10 million in ARR, freemium sales began declining and never exceeded a third of our revenue.

Another great example is Box. Box has grown past $100 million in revenue but “tilted” from a mostly freemium product to an enterprise focus aimed at landing six- and seven-figure annual subscription deals. Today freemium is a minority of their revenue; a big piece, though not big enough to get them to $100 million.

DropBox is past $100 million on freemium, but they have something north of 500 million users. That proves just how many millions of folks you need to be truly, actively using your utility to make freemium scale to the nine-figure level. An exception that makes the rules. Most important, DropBox's growth would be on the backs of consumers, not businesses.

Freemium can expose you to millions of people, which creates leads, some poor, some qualified, and many of which should go to a salesperson. They've already used the product, love it, and are almost ready to buy … but they need just a couple of questions answered before they do.

Pure, automated freemium—where you put up a website and the money automatically rolls in—is a wonderful vision, when it works. However, it's much harder to achieve than you realize, if you haven't done it yet.

But getting to a big exit, alone? It can happen, but it's highly improbable. The point is, don't buy into some dream that launching some free thing will create a magical growth curve. It's a starting point. You'll need to use it as a launching pad and build on top of it, adding more pricing tiers and helping bigger companies buy bigger packages.

Small Deals Get You Started, Big Deals Drive Growth

Which is the fastest way to get to $5 million in revenue, selling a million orders at $5 each, or selling 100 at $50,000 each, or selling 10 at $500,000 each?

You can make millions without needing millions of users.

In Part 1: Nail a Niche, we mentioned Avanoo, the corporate employee training company, going from a few thousand in revenue to $5 million in a bit more than a year.

They couldn't have done that—at least that fast—if they'd stuck to their first price, selling courses to consumers at “name your price” prices for an average of $5 each.

But in closing $50,000-plus deals now (and on track to sell six- and seven-figure deals), they can grow revenue much, much faster. They're selling to companies that have the ability to pay (Fortune 2000), have a clear need, and have reference-able customers. It's just a question of time before they increase the size of their big deals again. Of course, only time will tell how far they can take this, and still stay competitive and grow fast in a noisy market.

When you're attempting to grow by major leaps, work on doubling your average sale size as much as you work on finding and closing twice as many deals. Or if you already have lead generation machine working smoothly, it's how you can quadruple growth—doubling deal sizes while doubling leads.

You can do it through a mix of targeted lead generation, changing pricing, designing higher-end packages, through premium products with enterprise features, carefully developed channel partners, or whatever. It doesn't happen overnight, but you can take concrete steps to get there.

But start with the question, “What conditions would have to exist to close deals that are 10x larger than we are doing today?”

Many entrepreneurs, especially first-time founders, have expectations of what people will pay that are far too low. It's also easy for experienced executives to fall into a rut with a division or team, through either inertia or habits. Push yourself past those limits, to come up with ways to double or triple your revenue per customer by also asking:

• What would it take to grow our revenue 10x?
• What would it take to grow our biggest sales size 10x?
• How can we find and work with customers to whom our solution would be worth 10x the price we're currently charging?

This works for early-stage companies struggling to get to a million-dollar run rate—companies that need a “sanity check,” because they're chasing after $500 or $1,000 customers, but they aren't doing the funnel math, realizing they may need hundreds or thousands of them to hit their revenue goals!

This works for companies who are so obsessed with “getting new customers” that they've taken their eyes off “growing revenue,” which is different.

Except for the top ∼0.1% of the Apple App Store, most companies struggle to market and sell lots of small deals. How can you think bigger? For example:

• SaaS products: What kinds of management features would you need to sell packages of 50, 500, or 5,000 seats?
• Freemium or cheap products: What do companies need so badly that they're willing to pay for a five-, six-, or seven-figure annual subscription deal? Or what kinds of channel and distribution partners would have a big audience hungry for your stuff?
• Smartphone apps: Is there a way to sell bulk packages to businesses? Or resell the technology or your unique expertise to other business?
• Books, online programs, or workshops: Are there partners who can help sell bulk orders? How can these lead to five-figure consulting/services, then six-figure, then seven-figure?
• Jeans or t-shirts: What kinds of companies would bulk-buy them, or be a great channel to profitably sell lots of them for you? (For every successful “Threadless”-type T-shirt success, there are probably 50 other companies that struggle to profitably sell single T-shirts and other small items direct.)