“Free is not a loss leader”

A very interesting article on Evernote from the New York Times.

The idea driving the financial model of this company is “freemium” – the program itself and the basic level of services is free.  If you want advanced services (more storage, enhanced search capability, etc.) you pay a nominal fee (in Evernote’s case, $5/mo.).

Developed by Fred Wilson, a New York venture capitalist, the fremium model continues to gain momentum.

According to Evernote’s CEO, “If we can get a small percentage of users to pay we start to make money.”

[T]he magic is not only that it takes just a small percentage of customers to turn red ink into black, but also that the longer they remain customers, the more profitable they become.

The shoebox of data is more valuable to the customer as it becomes larger. In addition, compelling uses — like photographing those business cards — quickly eat up the monthly allotment of memory, inducing a person to start paying. The longer the customer stays, the more valuable he becomes.

The company gets about 3 cents of revenue for each active user in the first month of use, but after a year that same cohort of customers is providing 35 cents each.

I have used the Evernote service in the past, but didn’t like it enough to keep it.  I’m thinking about revisiting the service, but am still a bit wary.  Looks like I’m not alone:

About 75 percent of the customers walk away within the first four months.

Will the freemium model turn Evernote profitable?  I guess the proof will be in the pudding.

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