Evernote CEO Phil Libin's 3 Steps to "Freemium" Success

The "freemium" business model really can work. Look no further than Evernote.

When Phil Libin set out to develop the Next Big App, he put forth one cardinal rule: "I didn't want a clever business model." Come again?

"Data analysis, referrals, advertising — it was all kind of sleazy," says Evernote CEO Libin. "I wanted a clever product. I wanted that product to reach hundreds of millions of people. And I wanted 99% of them to be using it for free."

The "freemium" model — giving away service to users and making money when some opt to pay for additional features — has become wildly popular among Silicon Valley entrepreneurs, all banking on reaching the critical mass of a Facebook or Twitter (or being acquired). The competitive advantage is tantalizing. A product that's largely free can't be edged out by something cheaper. "But for most startups, freemium is a cop-out," says Lincoln Murphy, managing director of Sixteen Ventures, a Dallas-based strategy consulting firm. Even if a company can eventually persuade users to shell out for something they've been getting for free, it's extremely difficult to deliver freemium's other requirements: a massive potential audience, next-to-nothing operating costs, a gotta-have-it value to consumers, and a sky-high retention rate. Ning, for example, abandoned the model because its few free-to-paid conversions weren't generating enough revenue, and Flickr hedged its bet by folding premium subscriptions into a larger moneymaking strategy that includes merchandise and advertising. "Freemium is a numbers game," says Murphy. "And most companies lose."

Evernote is a rare exception, remarkable for both the devotion of its users and the slope of its revenue curve. Libin's two-year-old Web and mobile app bills itself as "your external brain," letting its 3 million — plus users clip Web articles, take photos, record voice or text notes — and store everything in the cloud. During users' first 30 days, 0.5% convert to its paid version ($5 a month or $45 a year), which offers perks such as added storage space and offline access. At the six-month mark, the rate has gone up to 1%. After two years, almost 6% of the initial group have started shelling out — and one-third of them are still storing content on a monthly basis.

Those numbers are a testament to the success of Evernote's engagement strategy, which hinges on maintaining a high-quality free product. "The easiest way to get 1 million people paying is to get 1 billion people using," says Libin. Periodically, Evernote unveils features that save users time or make their stored information safer; some updates are free, while others are available only to paid users, such as the ability to revert to previous versions of notes. The add-ons trigger conversions and turn customers into advocates. "The more memories users store in Evernote, the more invested they become," says Murphy. "Whether they're paying for premium access or telling their friends how great it is, they're willing to do their part to keep Evernote around."

From the start, Libin modeled Evernote to be profitable at a 1% conversion rate. It helps that the service relies on word of mouth for customer acquisition, and that most users write their notes on their own smartphones or computers, then sync to Evernote's servers. Right now, roughly 2% of all Evernoters are premium customers, which is good for business. As the service adds more users, both free and paid, Libin wants to maintain that rate at 5% or less. If people start converting en masse, "that means our free product isn't good enough," he says. "And if our free product isn't good enough, what's the point of being freemium?"

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  • Andrew

    If people start converting en masse, "that means our free product isn't good enough," he says. "And if our free product isn't good enough, what's the point of being freemium?"

    This is a very interesting thought, but I am not sure Phil Libin believes in this statement. If the user base is still growing at an exponential clip and you have a 5%+ conversion rate then I don't think there is any reason to give your product away just to stay "freemium". If the growth of users and the viral aspect of your product starts to decline, then yes, it makes sense to give away more of your product for free.

    Freemium still appears to be a very hot business model. I was just reading a post from a VC on freemium - http://www.forentrepreneurs.co... - and he puts freemium in the "Green Zone". He describes this zone as "a great place to make money." Freemium certainly isn't for every product, but it can be extremely successful with the right mix.

  • Gerald Irish

    Freemium can be profitable in short and long term if the business plan is structured to make money from the start, not as an afterthought. Businesses that give away everything free at first, then at some point flip the switch to charging for the same product usually will have a tough time being successful. On the other hand if freemium is a deliberate pricing strategy from the start you can get people to upgrade and you can be profitable. Basecamp is a prime example of this.

    The internet has created an expectation of free simply because the internet dramatically reduces the costs of doing all types of things. The incremental cost of running server side code that stores a few MB of data approaches zero, so naturally costs come down or sometimes end up at zero. This absolutely destroys some old business models, but that's the way it should be. Otherwise we'd still be paying to have ice delivered to our homes.

    The demonetizing of products and services by the internet simply frees up capital to be spent on something else. It's not like the money saved by all of the people who use OpenOffice instead of MS Office disappears from the economy. It just goes towards something else.

  • Stephen Abbott

    The benefits of getting something for free sound great, until it's the thing YOU make that becomes "free" all of a sudden. Not necessarily the case here, of course.

    The idea that demonetizing products frees up money to be spent elsewhere fails, somewhat, when income is no longer generated by one's labors - and one is now no longer *expected* to benefit from one's work. Then one cannot even go to the store to buy ice cream because one doesn't have the money to buy it (or the car to drive to the market, nor a fridge to store it, nor a house, for that matter.) That's today's economic reality as we drive prices to zero. We should get out of the ivory tower and see how the "free/zero compensation" theory works in the real world.

    This isn't to put forward the idea of Ludditism. Obviously, things change, like ice cream delivery to homes (did that really happen? Huh.) But if the expectation was that ice cream should be free - as the growing online expectation is - then entire industries would go out of business trying to please the consumer in that irrational belief.

  • Stephen Abbott

    The key words here are: "Evernote is a rare exception." Giving away one's products and services is a great "come-on" but unless it's a temporary measure, it's not profitable in the long-term, or even the short-term. And with such a tactic, one risks alienating those who have come to demand the service or product at no cost.

    This is all tangential to, but intimately related to, the entire "expectation of free" culture that the Internet has created. It has devalued (literally DE-valued) many products and those offering professional services, and that has contributed to the massive wage deflation of the last decade, which has devastated our tax base just a government spending is soaring.