@andrewchen

 

New monetization option for app developers launches
Today, my friend Noah Kagan launched a new payments service called Gambit which you can check out here. The focus is on virtual currency-based Facebook/OpenSocial applications, and supports credit cards, mobile payments, and offers-based monetization. He also has a blog and twitter account.

Given the proliferation of these services, I wanted to spend a couple minutes talking through the new monetization funnel for apps and some of the metrics that are being thrown around.

Spreadsheet model
First off, I wanted to quickly share a very simple spreadsheet model which you can download here.

Funnel steps
At a high level, the key issues to track for an offers-driven monetization looks something like this:

• total installs / registered users
• monthly active uniques
• daily active uniques
• daily paypage uniques – how many users go page where you can pay or fill out offers?
• daily lead clickthroughs
• daily net lead completions (lead completions – chargebacks)
• daily revenue
• monthly revenue

From top to bottom, you can see that the focus is around uniques, and how many of them translate to completed offers and ultimately revenue. Of course, many of these transactions will actually end up as direct payment via credit card or mobile, and that is trivial to add to this model – I won’t cover those just for simplicity.

One quick note on leadgen though, for those who are unfamiliar – essentially, leads are opt-in forms that users can fill out in order to generate virtual currency. This might be subscribing to a Netflix offer, for example, or giving out a real address to get a direct mailing from a university. More about the leadgen industry here. As a result of this construct, users may not have to use credit cards in get money to the publisher, which can be great.

As a result of this offer-based monetization, it becomes important to track not only how many people click through to begin filling out a lead, but also how many folks complete leads, and ultimately how much revenue each lead is worth. Different demographics, geographical areas, and lead types generate different kinds of revenue. There’s also chargebacks that happen when the leads are rejected for being complete or incorrect.

Example numbers
If you plug this into a monetization table, then you can see the flow.

Here are some example numbers derived from games that Noah’s company Kickflip had previously developed and operated – he was comfortable sharing the data that came out of his own apps. The numbers below would represent a large and successful app with millions of actives per month:

and of course these numbers are driven by all the percentages of how much dropoff there is at each step. For quick reference, the percentages are listed below and drive the numbers in the table above.

Now that we have these metrics, we can start to calculate to other metrics.

Let’s define a new term, “ACPM” which stands for “App CPM”
As someone from the online ad industry, I was saddened to hear that the term “CPM” had been co-opted by these app monetization companies to mean something entirely different and weird.

In the app monetization world, this is the definition:

App CPM = (daily revenue / daily uniques to the paypage) * 1000

Recall that this is very different than the standard definition:

Online ad CPM = (daily revenue / daily ad impressions) * 1000

They are certainly not apples-to-apples, even though they are represented in some literature as such. And unfortunately, now that some of the market leaders are using these misguided terms, everyone is following suit. Yuck!

So as you can see, the “app CPM” (which I’ll refer as ACPM) is defined by uniques to the payments/offer page, rather than by pageviews or impressions. Using the above numbers, we’d get:

ACPM = ($5,670 / 45,000) * 1000 = $126

I’ve been told by multiple people that numbers from $50-$200 are all possible here.

Measuring ARPU
You’ll notice that the ACPM has no relation to the overall usage of the product – in fact, you might have $300-$400 app ACPMs but still have low revenue, since the ACPM is only defined once the users hit the payments page. Maybe you have a small number of users who do so, or maybe you only have a small % of users who are active at any given time.

To measure how the numbers fit together from top to bottom, instead we’ll have to calculate the ARPU:

ARPU = revenue / total actives

This means that this would include any and all actives, regardless of whether or not they visited the payments page. For the numbers above, they’d translate to:

Monthly ARPU = $172,935 / 3,000,000 = $0.058

On Facebook, I’ve been told from multiple sources that numbers from $0.01 to $0.25 are all reasonable, and that off of the social platforms you’ll find more niche destinations that generate closer to $1 ARPU.

Conclusion
Ultimately, it’s very exciting that multiple monetization platforms are getting created in the industry, and that competition will be great for everyone. Gambit is certainly one of many new creative companies that  will come out with great stuff.

At the same time, it’ll be up to publishers to figure out how to squeeze as much monetization they can from their properties, but without compromising the user experience. By looking at the numbers above, it’s clear how you can increase both ARPU and ACPM in very systematic ways, but it’s potentially at the cost of retention or engagement within the product.

Ideas or questions? Leave me a comment.

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UPDATE: thanks to Jared Fliesler for correcting a silly mistake in my arithmetic

Today we have a fantastic guest blog from Ranjith Kumaran, on his adventure going from an ad-supported free service to a subscription-based freemium model. Ranjith is the Co-Founder & CTO of YouSendIt.com, a Silicon Valley company that allows businesses and individuals send, receive and track digital content securely and easily. Enjoy! -Andrew

Free to Freemium: 5 Lessons Learned
by Ranjith Kumaran

Introduction
A tech reporter recently asked me if YouSendIt.com had made the switch from a free ad-based business model to a subscription-based freemium model “just in the nick of time”. After all, with death chasing every ad-revenue-fueled startup these days, surely we must have been scrambling over the last few months!

The truth is that we got our first paid subscriber at YouSendIt on the night of February 28th, 2006, over three years ago. The company recently passed the 100,000 paid subscriber mark but that first customer was where it all started: the transition from free to freemium. As startup pundits we expect business models to iterate but this particular switch was a thrill-a-minute ride.

So if you’re ready to take the plunge or are still on the fence between free vs. freemium then read on. I’ll highlight five key lessons learned over the last three years as we went from a 100% free model to freemium:

Lesson 1: It’s all about DNA
Lesson 2: Funnels come in all shapes and sizes
Lesson 3: Compound growth is a double-edged sword
Lesson 4: Don’t let pricing psyche you out
Lesson 5: “Boring” things can give you lots of conversion lift

It’s all about DNA
It doesn’t matter how smart your team is or how hard you work, everyone has to want to make the switch from free to freemium. The thesis of our first venture round of investment was to test both models to see how they scaled. But the reality was we already had a significant free business (advertising revenue helped my co-founders and I keep the lights on, sound familiar?) so the lion’s share of the first six months were spent building a team that could keep the viral, ad-impression-generating parts of the business growing. When the subscription service launched and showed great promise (we collected our first payment within 4 minutes of pushing the code live), the business model was changed but many of the team’s mindsets were not. Reconciling these differences was exhausting but we got there.

Do yourself a favor and pull the band-aid off quickly. If you re-channel all effort into improving conversion and building your brand your subscription business will get out of the blocks much faster. A change in DNA is the hardest thing a company can endure and some don’t; get through it early.

Funnels come in all shapes and sizes
Once you’ve made the switch a number of things will happen:

• People who don’t believe in paying for web-based services will call you a sell-out. Unsurprisingly, these folks aren’t in your target market. If you provide a valuable service the majority of your users will stay with you (most for free and some percentage will subscribe right away). YouSendIt.com’s traffic took a 30% haircut in traffic during this process. If we didn’t have anything further down the funnel this would have been devastating.
• Expect to see a drastic change in the mix of users you serve going forward. YouSendIt’s business is international (everyone sends files), including geographies that any startup will struggle to effectively monetize showing ads; in general the same geographies also yield weaker subscriber numbers. This pruning of who you serve and how much (by, say, asking for payment) is very, very, common and often more deliberate; it’s a cost-to-serve discussion every web business that thinks beyond customer acquisition will eventually have. Over time we found that the users who were willing to pay for our services attracted similar users to the site.
• Plan to change the metrics by which you measure your business. Our dashboard went from plotting CPMs, impressions and make-goods to conversion rates, churn, and ARPU. Acquisition cost, cost-to-serve, and lifetime value start to rear their ugly heads. If you want to fully understand your freemium business, learn to love them.

Compound growth is a double-edged sword
Once the freemium engine has run for a while you’ll see that, unlike fluctuations in ad-impressions and CPMs, subscription revenue is very predictable; your shareholders will appreciate this. Step functions in revenue are seen when new products are launched (including up-selling to the current base and convincing more users to subscribe) and new channels into the top of the funnel are created (making our way onto the desktop was a big one). Compounded subscriber growth is very powerful: convert more users in January and you’ll have a chunk of the year’s revenue in the bag, provided you’ve got churn under control; fall behind and revenue shortfall amplifies just as quickly over time.

Don’t let pricing psyche you out
Balancing market penetration and the fear of leaving money on the table is no fun and more than one startup has failed to even launch a paid product because of the pricing hurdle. Here’s a quick and dirty way to put a stake in the ground:

1. Make a list of your competitors or find adjacent markets / potential substitutes with similar users and use cases. You should already have this list.
2. Plot the spectrum of all the price-points of their offerings.
3. Plan to release at least two paid tiers: one at the bottom end of the spectrum that is driven by volume and one at the top that is clearly differentiated by value.

By doing this you can accomplish the following: fill in any market share vs. revenue maximization discussion rat-holes (now you can test both); give customers a way to compare between three offerings (free, a little more, and lot more; being able to compare is an important part of any purchase decision); feel good that you’ve done some diligence on pricing without prematurely shelling out a lot of cash on market research.

If the above exercise seems unscientific that’s because it is. Your pricing work has just begun: constantly observe the rates at which users move through the funnel at different price-points, use promotions to get buyers off the fence, and re-price as you get more price elasticity data. At YouSendIt we raised prices (yes, it can be done) successfully several times in the early days as we learned more and more about buying behavior.

“Boring” things can give you lots of conversion lift
Conversion lift doesn’t always come from groundbreaking changes in product, offers, or funnel analysis. These days I will look for ten 1% lifts in conversion before one 10% magic bullet; in reality there probably aren’t a lot of 10% lifts left after the first handful. Get into the groove of turning knobs a little at a time, learning, and iterating; you never did this further down the funnel when you were selling ads and you are likely out of practice. Other mundane things that you haven’t invested in start to get a lot of play: customer service SLAs, quality of service, and even the right terms of service are all areas which can drive conversion. Look for a 1% lift in conversion right now, it’s in there somewhere; then do it again a million times.

Conclusion
With any luck there are enough examples above to convince you that switching from free to a freemium business model can be done with a little perseverance and a lot of belief. I’ve experienced the rush of going from 0 loyal users, to thousands, hundreds of thousands, and millions a few times in my career. But there is a different kind of satisfaction you and your team will get when your business starts to amass paid subscribers: users who believe the things your company has worked so hard to create are good enough to pay for. This is the ultimate validation of your efforts.

These topics will be covered in more detail at a couple of panels (one on Understanding Freemium Business Models, another on Customer Acquisition in a Down Economy) I’m helping to organize in the coming weeks. If you’d like to participate as an attendee, panelist, or moderator or if you’re simply interested in hearing about more lessons learned (the hard way), please follow the Twitter feed I’ve set up.

Here are some links I’ve posted to my twitter account over the last week or two. You can follow me on Twitter if you like these! Many are work unrelated.

• TiVo Loses 125,000 Subscribers In January ‘09 Quarter http://tinyurl.com/c9gxvu
• Chinese Students Want To Know: How Do I Get Rich? – Forbes.com http://cli.gs/LXUBSp
• Crazy Numbers: $300 Billion in Annual Revenue from Pachinko & Pachislots in Jap.. http://tinyurl.com/c52zvu
• Why Amazon Is Bucking the Trend http://tinyurl.com/dzcf7y
• Facebook’s Thiel Explains Failed Twitter Takeover http://tinyurl.com/cp6d64
• YouTube TV News Upload And Viewing Numbers, Week ending February 27 http://tinyurl.com/asug59
• Today’s Threat To Broadcast TV Networks http://tinyurl.com/aqlck9
• Berkshire: Worst Year Ever, plus Credit Default Swaps http://tinyurl.com/ddf8c5
• Max Levchin Is Bored With Silicon Valley Startups http://tinyurl.com/d735ez
• The ugly truth about your favorite social networks http://tinyurl.com/bgtdda
• As first-big-domino Rocky Mountain News folds, Google begins to place ads on Google News. http://bit.ly/S37ew
• THIS IS SO COOL — Oregon Trail ONLINE: http://www.virtualapple.org/oregontraildisk.html
• Golden Parachute http://tinyurl.com/b48ry9
• Surprise! Yahoo Outperforming Google http://tinyurl.com/b9onk5
• The Shakeout Begins! Video Startups in Play http://tinyurl.com/d78zyd
• termsheets still getting done, or at least VCs still talking about them on twitter  http://tinyurl.com/dk97bw
• challenges/opportunities in brand online ad market (via @joshk) http://tinyurl.com/aa2z2z
• Apartment Buyers Abandoning 6-Figure Deposits http://tinyurl.com/dyyamd
• what happened to avg time per visit on MySpace in July? This graph looks like it’s bad data to me: http://bit.ly/4My6o
• Launch: Pitching Hacks, The Book http://tinyurl.com/by9bm6
• Building Quake Live: Carmack Speaks http://tinyurl.com/br6h4r
• Moral Hazard http://tinyurl.com/aoesd3
• What do fourth generation ad networks look like? http://tinyurl.com/ahh9of
• Bailout Hearings http://tinyurl.com/bmp4wu
• State of the Computer Book Market 2008, part 4 — The Languages http://tinyurl.com/dauyzk
• Eliminating Channel Conflict Between Publishers, Ad Networks http://bit.ly/D3Ra7
• Reboot: How to Reinvent a Technology Startup http://tinyurl.com/aodcbm
• How IMVU learned its way to $10M a year http://tinyurl.com/aqjnb3
• 5 Reasons Chernin’s Exit Puts Hulu In Danger http://tinyurl.com/alwbnr
• Leonardo di Vinci was a big time procrastinator: http://tinyurl.com/dmj74r
• Pic of Vegas, 1954: http://tinyurl.com/cj8579
• Online Video Viewing Up, Impact on TV “Negligible” http://tinyurl.com/c3naft
• Exploring a ‘Deep Web’ That Google Can’t Grasp http://tinyurl.com/dgd2fy
• Why the Click Is the Wrong Metric for Online Ads http://bit.ly/Gm0SZ
• Foxtrot comic, Jason figures how to make money in a down economy: http://bit.ly/11iwtm
• 4Chan.org: 300m page views/mo; about $6k in revenue http://tinyurl.com/czeppu
• Education Fail http://tinyurl.com/cb32u2