Conversion Rates and Funnels

The freemium model relies on enough users paying for premium services to meet the cost of servicing all users, including those who use take the free option. One of the key metrics for a freemium service is conversion rate from free to premium.

Toni Schneider notes that this rate is about 2% for WordPress.com, for Box.net, for Evernote, and for many other freemium services. He wonders if there is some kind of “2% rule” at work.

This reminded me of Funnel Analysis, as described in a Mashable guest post by Tim Trefren. Funnel analysis is about conversion rates, is a more general sense. A funnel is defined in terms of user actions, such as visiting a site, signing up for a service, becoming a premium/pay user, and so on.

Conversion rate, in this broader sense, is the percentage of users taking a particular action. Hence a firm’s funnel has multiple conversion rates/actions as it narrows. A freemium service using funnel analysis would probably define a payment action, marking the transition from a free user to a premium customer.

Tim is CEO of Mixpanel, a web analytics startup. (See Mixpanel for more about Funnel Analysis and the API.) Mixpanel itself uses the freemium model; I signed up for a free account.

Funnels can be transparent: a firm can publish its conversion rates. Funnels could be aggregated: Mixpanel could, with the cooperation of its client firms, publish aggregate data on various conversion rates. It could make it worth the clients’ while by, for example, offering early or deep looks at the aggregated data.

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