By Uzi Shmilovici, Future Simple Jan. 29, 2012, 12:00pm PT
After studying this topic thoroughly and talking to many entrepreneurs, I found that there were two questions that people kept struggling with:
- What happens to the customer acquisition cost in freemium?
- What is the right free/premium segmentation?
Customer acquisition cost in freemium
Some people argue that freemium significantly increases the customer acquisition cost, and that the increase might in turn lead to disastrous results. The argument is that it costs money to acquire every new user, while only a sliver of them end up paying.
In order to understand what happens to the customer acquisition cost in freemium, let’s assume that your marketing investment is a given, so we’ll consider what happens to the total amount of premium users in the case of freemium.
The total amount of premium users depends on three factors:
- the amount of people visiting your site (traffic)
- how many of them sign up (signup conversion)
- how many of those who signed up become paying members (premium conversion).
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