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For many internet startups, a freemium business model is an enticing solution to the problem of revenue generation: let the world taste what you provide at no cost, and once your most avid users are hooked, let them pay for what they've come to love.

It's simple in theory, but for many startups, building a viable business on the freemium model never becomes a reality.

There are plenty of reasons for this. In some markets, it's hard to charge. Period. And oftentimes, paying customers will never pay for the freeloaders. As a result, it's never possible to turn a profit.

But startups might learn a thing or two about building a successful freemium model from email marketing services provider MailChip. In September 2009, the company, which for nearly nine years had profitably charged its customers for its services, decided to do what some thought was foolish: go freemium.

MailChimp co-founder Ben Chestnut joked when he made the announcement:

I just read about this “freemium” approach to web startups. Basically, you build a cool app, make it free, build up a bunch of users, then find a way to “monetize” later. D’oh! Why didn’t anyone tell us about this when we started in 2001? We wasted all this time building a strong, profitable company with an awesome product and over 100,000 users, when we coulda been just giving it all away?  We’ve got to make up for lost time, people!

But MailChimp's results are no joke: the company now has 450,000 users -- five times as many as it did when it went freemium. What's more: the company also increased its customer base by 150% and its profits by 650% over the course of a year. Approximately 4,000 of the 30,000 new users MailChimp signs up every month are joining the ranks of the company's paying customers.

Interestingly, despite the fact that one might assume a freemium model would grow MailChimp's base of small users, but between April and August of this year, the percentage of lists the company hosts which have more than 10,000 subscribers jumped from 12% to 20%. As Chestnut notes, "The fact that we’re attracting larger users, with larger lists, and with more advanced needs, would seem counter-intuitive to most people."

So what's the secret to MailChimp's success? It focused on paying customers before it focused on free users. Chestnut explains:

For eight years, our company never thought about freemium. We didn’t even know the concept existed. For eight loooong years, we were focused on nothing but growing profits.

I think there are too many startups out there who are interested in going freemium because that big “10″ number is so attractive. This is dangerous when they don’t even have the “1″ yet. How will they pay their bills while they figure out how to “monetize?” Answer: they will need to borrow that money.

The numbers 10 and one refer to the general theory that for every 10 free users, a freemium business can expect to acquire one paying customer. Chestnut, of course, is correct that many businesses focus on growing the former before the latter. After all, get free users and the paying customers will follow. Right? If only it were that simple.

By the time MailChimp went freemium, it knew how to sell. It had established the commercial viability of its product (because it had plenty of real customers), and consequently it therefore understood its value proposition to those customers. You can't close a sale without that, but plenty of startups that look to freemium for fortune really can't claim that they know how to close a sale because many of them haven't closed a sale.

From this perspective, MailChimp offers a valuable lesson: 'free' may come before 'premium' in 'freemium', but you might have better luck if you work your business the other way around.

Patricio Robles

Published 28 September, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2392 more posts from this author

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, Kevin Beynon

Great article.

I think there's also the scenario where people have developed a 'free' product because they had a great idea and wanted to share it.  Only later do they realise that it's so popular people may be willing to actually pay for it.

They then have to come up with a way of 'monetizing' this great idea in a way that doesn't scare off the loyal followers of the free model.  Instead they have to convert.

I think this is the stage where people fail - the business end.  How does Facebook make money?  What about Twitter?  They both started as cool applications from great ideas, not business plans.

almost 6 years ago

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Randy Johnson

Tried using their paid service. Mailchimp keep bragging on their website that they have one or two hour ticket response time, live chat etc., but I have tried to access them via live chat about five times in the last three months and there has never once been a representative available. I could say to clients such as yourself that I provide no telephone support and make life easier for myself/maximise my profits. Mailchimp overcharged us. After lots of toing and froing, Dan Kurzius, Partner Client Services, promised us a refund. Tried to email and phone him over 10 times, but he did not have the decency to reply. Mailchimp is full of hype but extremely poor on living up their words.

almost 6 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Randy,

I'm not a MailChimp user/customer so I can't speak to the quality of the service but I'd imagine that if your experience is typical, it will eventually catch up with the company as users and customers leave for greener pastures. For now, however, it's hard to argue with the numbers.

almost 6 years ago

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mark woodward

We have been using MailChimp for 2-3 months for sending out highly trageted mail campains, We find this is a fantastic resourse, that compliments our in house CRM marketing campains. I would recomend MailChimp is worth a try.

almost 6 years ago

Ed Stivala

Ed Stivala, Managing Director at n3w media

An interesting article, and I assume that they decided "freemium" was worth looking at as a way to accelerate growth. However, I wonder what the consequence of this has been on their profitability.

Whilst there is no reason why they should disclose their percentage or actual profits, from my perspective they are the only parameters that really matter. Ultimately everything else is just noise unless it is shown how it improved profitability. Therefore it seem impossible to know whether this transition to "freemium" is successful or not.

It would be interesting to see the consequence of this move to "freemium" in terms of short and medium term financial performance. 

almost 6 years ago

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, Kevin Beynon

Hi Ed,

Does this excerpt cover what you mentioned about profitability?

...the company also increased its customer base by 150% and its profits by 650% over the course of a year.

I agree though, how profitable the change has been is the main metric for any for-profit organisation.

almost 6 years ago

Ed Stivala

Ed Stivala, Managing Director at n3w media

Hi Kevin

Many thanks for pointing that out, I should have read more carefully before commenting. Naturally, I am assuming that the 650% increase in profits is purely attributable to the change in business model. But that seems like a reasonable assumption from the way the figures are quoted.

It could be that something else (more significant) happened in their business during that year, that actually drove the increase in profitability. In which case the real point would be that *despite* a move to a "freemium model MailChimp still managed to deliver an increase in profits. But I'm happy to assume that isn't the case :) 

almost 6 years ago

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Laura

Patricio, thanks for flagging this article - great stuff. MailChimp shows us the type of environment that free can thrive. If anyone is interested, another good article on freemium by David Skok called The Power of Free can be found at http://www.forentrepreneurs.com/business-models/power-of-free/

almost 6 years ago

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Victoria Lotha

The reports on mailchimp are the best I have seen and it is very easy to use.

about 4 years ago

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