Freemium business model case study: AdultFriendFinder ARPU, churn, and conversion rates

A case study for the Freemium business model
There’s been a lot written about the Freemium model over the years, particularly from Fred Wilson at AVC. Here’a couple articles I’ll recommend on the topic:

Anyway, given the great interest in direct monetization due to the economy, I decided to write a post on the topic as well, focusing on AdultFriendFinder, which has recently released a bunch of great data.

AdultFriendFinder files for IPO
Recently, the holding company FriendFinder Networks, Inc., the owner of AdultFriendFinder (and Penthouse), filed to go public. As such, they released a Form S-1 where they go through many of their overall business metrics – you can read the full SEC documents here.

OK, it’s a lot more boring than you might expect from an adult-oriented conglomerate. It’ll put you to sleep.

There’s a ton of data in the S-1, but I’ll just summarize some of the most interesting stuff related to acquisition, monetization, and retention of the customerbase…

FriendFinder’s business metrics
First off, there’s some good definitions for how they think about their business – everyone who is thinking about direct monetization of their customers should be familiar with all the terms below:

Visitors. Visitors are users who visit our websites but do not necessarily register. Visitors come to our websites through a number of channels, including by being directed from affiliate websites, keyword searches through standard search engines and by word of mouth.
Members. Members are users who complete a free registration form on one of our websites by giving basic identification information and submitting their e-mail address. Members are able to complete their personal profile and access our searchable database of members but do not have the same full access rights as subscribers.
Subscribers. Subscribers are members who purchase daily, three-day, weekly, monthly, quarterly, annual or lifetime subscriptions for one or more of our websites. Subscribers have full access to our websites and may access special features including premium content.
Paid Users. Paid users are members who purchase products or services on a paid-by-usage basis.
Average Monthly Net Revenue per Subscriber. Average revenue per subscriber, or ARPU, is calculated by dividing net revenue for the period by the average number of subscribers in the period.
Churn. Churn is calculated by dividing terminations of subscriptions during the period by the total number of subscribers at the beginning of that period.

And in fact, you can think of Visitors, Members, and Subscribers/Paid Users as a funnel that they manage to extract revenue. Then you combine that with the ARPU and Churn to get an understanding of monetization and retention, respectively.

Funnel metrics
And in fact, they list some of the key conversion rates between each of these numbers:

Visitors: 59 million uniques worldwide
Members: 4 million new member registrations (on 270 million members total)
Subscribers*: 900k paying subscribers
ARPU: $19.06 per paying subscriber/paid user
Revenue per member**: $0.95 per member
Churn: 18% month over month

*New subs/month number is not in the S-1, but is derived from the fact they have been about level on total # of subscribers, yet with 20% churn, so to make that up they must be adding a little over 200k to stay even.

**Revenue divided by new members (rather than subscribers)

So let’s try to figure out what their funnel %s look like. One complication is that the FriendFinder S-1 gives total members and new members within a month, but doesn’t give “active members.” At the minimum, it should be 6% since 4 million new members on 59M unique visitors yields 6%, but you might imagine it would be closer to 15%, which is closer to an industry standard.

Here’s a couple ranges, based on the above assumption:

Visitors -> Members: 6-15%
Members -> Subs: 10-22%
Subs -> Renewing Sub: ~80%
Revenue per member: $0.48-$0.95

You can compare this to Free-to-play games and Casual MMOGs via these blog posts from Jeremy Liew and Nabeel Hyatt, although you should note that their definition of ARPU is calculated from actives rather than subscribers, so you should use my above “Revenue per member” number of $0.95 rather than the substantially higher $19.06 per paying subscriber. Anyway, you’ll see that it’s actually not much different!

It shouldn’t be surprising that all of these freemium models, after careful optimization, come out at roughly the same numbers.

Acquisition
I also want to highlight a couple interesting points about how FriendFinder acquires their customers:

Marketing Affiliates. Our marketing affiliates are companies that operate websites that market our services on their websites. These affiliates direct visitor traffic to our websites by using our technology to place banners or links on their websites to one or more of our websites. As of September 30, 2008, we had over 110,000 participants in our marketing affiliate program from which we derive a substantial portion of our new members and approximately 44% of our revenue. For the nine months ended September 30, 2008, we made payments to marketing affiliates of over $46.4 million.

[also, in a separate section...]

In addition, for over 10,000 of our affiliates, we maintain private label websites that provide a seamless, turnkey outsourced solution using our technology platform for social networking and live interactive video websites. These websites have the look and feel of the affiliate’s website with the affiliate’s logo and website name but are operated by us. Users who click through the affiliate’s website are tagged with the affiliate’s identifier that tracks the user to calculate the payment due to the affiliate. Private labeling allows our affiliates to preserve their brand while generating revenue for us.

There’s also a block of text on the extent to which they spend money on Search Engine Marketing:

We rely on both algorithmic and purchased search results, as well as advertising on other internet websites, to direct a substantial share of visitors to our websites and to direct traffic to the advertiser customers we serve. If these internet search websites modify or terminate their relationship with us or we are outbid by our competitors for purchased listings, meaning that our competitors pay a higher price to be listed above us in a list of search results, traffic to our websites could decline.

How much do they spend on SEM? Turns out it’s over $50MM per year:

The largest single selling and marketing expense item for Various were “ad buy” expenses which amounted to $54.8 million and $55.3 million for the 2007 period and the year ended December 31, 2006, respectively, the cost of purchasing key word searches from major search engines, together with expenses related to associated personnel.

This means that between their affiliate payments and SEM, they are spending around $100MM buying traffic!

Conclusion
There’s other neat info in the S-1 about their chargeback rate, the split in revenues between their magazine side (Penthouse) versus AdultFriendFinder, and also the breakdown of all the smaller demographics they service. For example, did you know that they also run a bunch BigChurch.com for Christian singles?

Anyway, there’s lots of fun information in there – if you find something fun in there, let me know and I’ll update this blog post to reflect it.

As always, comments and questions are welcome!

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Written by Andrew Chen
December 29th, 2008 at 8:00 am

http://www.jofarnold.com Jof Arnold

Really interesting stats – thanks for sharing that with us. In particular, the advertising/SEM spend is enormous; this will be my new case study!
http://www.altgate.com/ fnazeeri

I saw they filed and wondered what was in there…thx for sharing!

I'm actually surprised at how poor the economics are. There is a preconceived notion that porn is a cash machine (which it may still be) but just not here.

Lastly, and this might be old news, but isn't “freemium” a pricing strategy and not a business model? In this case, I'd describe their business model as member subscriptions and their pricing strategy is freemium. Same thing with Salesforce.com. Maybe it's just semantics, but calling freemium a business model seems to rebrand the “free trial” pricing strategy as something new when in fact it's been around since, well, there was commerce.
http://chrislunt.net Chris Lunt

How much do you think their ability to get these strong conversion numbers stems from the adult-nature of their content? Do you believe porn will outperform all other freemium models?
http://erickerr.com Eric K

Their $120 CPA payout (paid when affiliate drives a paying member) is the among highest I've ever seen. I find it very interesting that it -directly- drives 44% of all revenue. I would expect that the downstream is very effective as well because of all the brand recognition it creates.

Payout information – http://tinyurl.com/8b9mlp
http://andrewchen.typepad.com Andrew Chen

I don't think the conversion numbers are all that strong, actually – their overall rate from registered users to paying is 1%, whereas a lot of subscription services are several times that. Maybe you have other metrics you're thinking of though?
http://andrewchen.typepad.com Andrew Chen

The fact that their CPA is $120 but their monthly revenue per subscriber is 20 months also tells you that their average customer lifecycle lasts more than 6 months. I've read that Netflix is closer to 11, which is always interesting to compare.
http://andrewchen.typepad.com Andrew Chen

Probably just semantics, but I'll give my opinion nonetheless

I think of Freemium as a business model because it has several implications beyond just pricing – it dictates how you try to acquire traffic, what the key metrics are that you track, how you design your product, etc. I think of it as in-between advertising-based models and subscription-based models, which are two clearly distinct business models.
http://erickerr.com Eric K

Are you aware of any resource comparing company customer lifecycle lengths? It would be very interesting to break down total revenue per customer and average lifecycle by market and payment model to optimize revenue (individually maximizing paying users, payment lifecycle, and revenue per cycle).
http://andrewchen.typepad.com Andrew Chen

er, 20 months meaning $20/month
http://andrewchen.typepad.com Andrew Chen

There's very little data out there about this – I'm guessing that the Wall St. analyst firms or something like Harvard Business Review has covered this kind of info.
spanky

Interesting post, Andrew. Yes, all acquisition is via affiliates, except for adwords. If you look at affiliate payouts for FriendFinder, it's 100% of what FF makes. The strategy is to get the mainstream user in the door, and then introduce them to “the good stuff.” The users converting to paid is low, but the LTV for them is pretty high. (I plan to look at this later – stated numbers seem low) I could go into more detail, but it might get me in trouble. But I can say that Andrew Conru, the founder, was obsessed w/ funnel metrics, and spent many, long nights coding the reporting for everything mentioned above…
http://www.ethanbauley.com Ethan Bauley

Thanks for doing the homework on this, great stuff!
http://chrislunt.net Chris Lunt

I find the fact that they can get 10% of their visitors to register impressive, but you're right, the 1% visitor to payer rate seems fairly standard.
http://andrewchen.typepad.com Andrew Chen

My guess is that the reason they can get 10% to register is that all of their traffic is pre-qualified, paid traffic. So there's already some intent there, if you click on an ad or interact with an adult-themed affiliate site. It would likely be a lot less otherwise.
http://www.altgate.com/ fnazeeri

Online dating sites generally see churn skyrocket after 3 months. Presumably these guys are doing better, but 2-3X better?
ryan

And hey they have been around since 1997
http://andrewchen.typepad.com Andrew Chen

these guys are NOT a dating site
http://www.cheaprevolution.com Skip Shuda

Andrew – thanks for highlighting this very useful overview of the conversion metrics around AFF. I'd love to see a wiki/cloud of known metrics across different eBusiness models. Do you know of any such beast?

Also, I was curious to see what their overall revenues/profits were. $240 millionish through the first 3 Qs of 2008 (a $320 million run-rate) with a very healthy 69% gross margin and about 6.7% operating margin. After their interest (debt service?), they turned a loss on the year. It seems that they are running a profitable business as of this year – but need the IPO to get rid of the their debt.

So porn is profitable – even in (maybe especially in?) a down economy.

Thanks for the thread
- Skip
http://www.ignitepr.com Carmen Hughes

hi Andy,
this is a great and insightful writeup so thanks for sharing your analysis. Keep up the great work!
http://millionshoemarch.com chrisco

You need to slice and dice these metrics down some more, such as sussing out average customer acquisition cost vs. average average customer lifetime value,which requires you calculate average customer lifetime (month). Next we look at trends in these numbers. This these are the basics of any subscription business. Next get over to the cost side
http://millionshoemarch.com chrisco

Looking forward to hearing/seeing your results, spanker. Thanks
http://500hats.typepad.com dave mcclure

funy, i was actually thinking i should ask you to write about this… thanks for reading my mind
http://buzzpal.com/chrisco chrisco

Hehe. I just figured some blogger somewhere must have already done it since it's been over a week since the AFF IPO news broke. If some solid number crunching and analysis doesn't show up soon, I may do it and put it one or both of my blogs. Cheers! PS: I spent '99 to '03 venture investing (debt and equity) in subscription-based business models. I love getting into the metrics. Them and marketing (everything about it) are everything.
http://andrewchen.typepad.com Andrew Chen

Chris, you're clearly a pro at the field – but you don't get credit for talking about writing a post, you get credit for writing it If you come up with something, shoot me a comment or email and I'll link to it from this article. Look forward to it!
http://andrewchen.typepad.com Andrew Chen

Chris, you're clearly a pro at the field – but you don't get credit for talking about writing a post, you get credit for writing it If you come up with something, shoot me a comment or email and I'll link to it from this article. Look forward to it!
http://buzzpal.com/chrisco chrisco

Sorry if my comment came out wrong. I'm not a pro and not looking for credit. You did a great analysisI will ping ya if I do any more work on this. Kind of swamped right now
curiouscat

spanker,

What is the good stuff? Cams.com, etc? Are most people buying a multi month package – as i dont think the lifetime would be high on month to month renewals as the value prop of strict adult casual dating is low given their are not many real women on aff – mostly decoys.
http://andrewchen.typepad.com Andrew Chen

they actually break out Cams.com separately in the S-1 and it doesn't look very impressive. Most of the money seems to be in the subscription side.
spanky

Cams comes from Legendary Lars Mapstead – he and Andrew merged their companies a few years ago. I'm surprised it isn't making much money – I know other large players in that sector, and they are making a killing.

The good stuff I was referring to was adultfriendfinder – seeing a “nude” pic of someone who lives in your same town, after looking at “clothed” photos on friendfinder. Although there are probably ten men to every woman, there are actually a lot of legitimate woman who use the service, and not decoys as noted. Andrew actually worked hard to keep solicitors off the site. The geo-targeted banners use real people. Subscriptions average about three months. And a lot of couples belong to the service – swinging is HUGE on AFF – it was eye-opening, let me tell ya…
http://www.plentyoffish.com Markus

Aff is not freemium…. Its purely subscription

You can't do anything as a free member.

Markus.
http://andrewchen.typepad.com Andrew Chen

Hmm, I've never joined the site but you may know better – but the S-1 seems to make a clear distinction between members versus subscribers, and talks about tiers of access.

Wikipedia says: “Anyone can join and post a profile for free but cannot respond to messages from members until they pay their membership fee.”

So maybe you can't do anything very useful, but it seems like members can at least create profiles and do some basic searching/browsing of other peoples' profiles.
http://www.plentyoffish.com Markus

If that is your definition there is no such thing as a subscription dating site then they would all be considered freemium.

All the paid dating sites work the same. 1. Every time you view a profile you are presented with a signup screen. Every time you want to message someone and every time you want to view a profile as a member you must become a paid subscriber. Free members can only view 3 profiles before a paid screen comes up allowing you to view more.

Singlesnet on the other hand is a true freemium dating site. On singlesnet any user can message a paying users but only paying users can message both paying and non paying members.
http://christianbusch.blogspot.com christianbusch

Hey Andrew, happy 2009!

Nice digging here, it's actually surprising to me that they seem to be spending less than 50% of revenue on customer acquisition; i've heard from a few people who know the very large dating sites in and out that it's closer to 75% for mature sites (which AFF definitely is). So regarding profitability – this is one crazy profitable business, unless things like fraud and chargebacks are huge. What's so interesting about AFF etc is that they satisfy a basic need for a lot of people – and therefore enjoy very good lifetimes.
adultfriendfinder4u

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Thanks and Enjoy Everyone
X

i think it is less than 1% of registered members who upgrade to subscribers, not 1% of visitors.
http://www.freemium.eu Peter

It's a great overview of the numbers, thanks for doing the homework.

I signed up for a free account to see how much was free. As a free member you are able to create a profile, and you can search for other members. Yet you can only an index of the different members with their username and picture. You can not read details or contact them. Since the object of the site is to create contact, i would say that the free membership is not a free product. It is rather a way for people to get a look at the people they could contact if you pay.

As I understand freemium it is based on giving away a free product that people can actually use. Some of the most mentioned examples illustrate this, you can have great use of sites like linkedIn og flickr without paying. Since the features available for free members does not amount to a service of any use what so ever, I have to agree with Markus. AFF does not use a freemium model. Rather a “get a look at partially naked people before you pay” model.
guicookie

Andrew, thankyou for a superb analysis and post. Can you clarify whether there is a standard definition of “active members” that the dating industry has adopted? I'm currently basing this metric on number of members logged-in within the past six months.
Jason

Was anybody able to get a good idea of what their marketing cost was per new subscriber?

I'm in the process of starting up a new service oriented subscriber site and one of the hardest pieces of competitive information to find is how much does it generally cost in marketing to sign up a subscriber?

I imagine it varies massively between business types. It would be really interesting to find some kind of comparative breakdown.

The article mentions that they must receive somewhere around 200K new subscribers/month and that they spend roughly $100M/year on marketing so perhaps it's somewhat accurate to say that their marketing cost per subscriber is roughly $42?

Thanks,
http://andrewchen.typepad.com Andrew Chen

You can roughly guestimate this – their S-1 says that they acquire 4 million new members per month. So that means they go through 48 million new members per year (I imagine these are often people reactivating, or duplicates).

If they are spending about $100MM in SEM and affiliate costs, then you end up at about $2 per member.

Since the conversion from member to sub is about 10-20%, that means their cost per subscriber is roughly $10-$20.
surfer

The geo-targeted banners may be using real people, but a lot of the real people aren't using their own pictures. Just about every time I see an AFF ad, one of the photos is of some attractive woman who was long ago plastered all over dozens of myspace profiles.

I've no doubt that there is a legit business among swinging couples. Monogamy is by no means the only reproductive and social strategy pursued by the human race.
Daniel

How are they going to compete with places like AdultSpace.com which offer basically the same thing but for free? And with more social networking tools….
Bloumoune

Andrew, if AFF registers 4M new members and 200K new sub per month then the conversion rate should be 5%. and the CPA $40 as Jason says
mmacneil007

Freemium can only truly work if the service is scaled to remove all overhead so the operation can profit without requiring extra revenue from memberships.

Mark
Micky

Hard to see them as a real player claiming global dominance of the singles market without Japanese Friend Finder.com ..That's a Major domain that they missed out on. It seems that they locked up several Major Ethnic groups but come on.. Japan.. ha ha ha I think that the adult friend finder corp they should try to acquire Japanese Friend Finder.com before even thinking about IPO.. Just my 2 cents..
http://www.smooch.com/ julia

that was very interesting, thanks for the info
anthonyblake

Great post Andrew, a one stop shop/master class. Genius
anthonyblake

Great post Andrew, a one stop shop/master class. Genius

@andrewchen

Freemium business model case study: AdultFriendFinder ARPU, churn, and conversion rates

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