Conversion Rate

Your conversion rate is the percentage of free users who have upgraded to a premium plan

A rate of 1% is probably too low, especially if you rely on subscription revenue alone.

A very high conversion rate isn’t necessarily good though. One of the benefits of a freemium model is the ability to generate traffic. Suppose that 50% of the users of your free product upgrade to premium. Perhaps your free product is not very compelling, which will limit your potential acquisitions. All other things being equal, you would do better to convert 5% of 2 million monthly visitors, for example, than to convert 50% of 100,000 visitors. The best long-term strategy is generally to aim for a moderate conversion rate (many companies’ range from 2% to 5%) coupled with a high volume of traffic. If you’re targeting a small market, you should aim for a higher rate.

A free user is typically worth 15% to 25% as much as a premium subscriber, with significant value stemming from referrals.

Churn Rate

The percentage of customers that stopped using your company’s product or service during a specified time frame (say a month, a quarter, etc).

This can be the killer for freemium…

Say you have a 3% conversion rate – not bad

But then say your churn rate is around 25% per month.  Really high!  THis would mean an average user would only stick for only 4 months. Say your pricing is $5, this would mean you have a lifetime value (LTV) per user of ~$20. How will your cost per acquisition work with that LTV?!

Resources used for this page

https://hbr.org/2014/05/making-freemium-work