Using COCA as a variable to decide between Freemium Vs Only Paid

Topics :  Internet · Mar 29, 2010  |  1  Comments

I have been following & analyzing internet business models of Free Vs Freemium Vs Only Paid for a long term because if the importance it has on our own start up- Peoplelex

One overarching realization is that being wedded to one model or being dogmatic about it does not work. Each business, service & model is different. You have to think about what makes sense for you. There are many factors going to pick the model and at a minimum has to go into the impact of each model on Cost of Customer Acquisition (COCA), Customer Life Time Value (CLV), Retention, Churn etc...

However, I have found that the COCA variable is one of the most important factors in deciding which model to go with for your business. COCA essentially is a budget that one "puts" aside to acquire customers and ramp up. So, if your Operating Margin (Revenue-Operating Costs) per customer is $100, how much of that can one spend on acquiring customers. Theoretically, you could spend all the $100 to acquire customers or you can spend $50 and the rest of it can go towards contribution towards your fixed costs/profit. 

So, when you think about COCA as an input in deciding which model to go with, some questions that need to be answered include:
  • Are the free users bringing other users so your overall net COCA goes down? (e.g. Dropbox)
  • Are the free users being converted over time because they find the product engaging enough? This will also reduce your COCA (e.g. Evernote)
  • When you switch from a free to a premium service, is there any drop in the conversion? If not, & if the Free users are not bringing other users, then your COCA is actually higher because of a free version. 
  • Can you incorporate a way to ask people to bring other users without giving away the product? E.g. sell the service primarily through a referral program without people using that product? This will reduce your COCA while still being paid only
If you have any more thoughts on how COCA can be impacted by the choice of the model, please leave a comment.

Comments(1)

Thejaswi Puthraya   on 29 Mar 2010 at 11:03:13

The Freemium model makes a lot of sense for most services. It gives a chance to the user to try the service and give them an option to convert if they love it.

About COCA, I think it should be exponentially decaying ie during the initial stages, a higher percentage of revenues should be allocated to it and taper as the customers increase.

Make a comment


  (Don't have a website? Sign up for one.)