Nir Eyal posted on TechCrunch about Encouraging Users to Work for You

Several studies have shown that expending effort on a task seems to commit us to it…After a user has been triggered into action and duly rewarded, the investment phase is where the user is asked to do work and starts building commitment. It is here that the user is prompted to put something of value back into the system, typically in the form of time, money, physical effort, social capital, or personal data.

This pattern is the key to success in freemium businesses. One of our companies, Expensify, exemplifies this pattern well, but with a twist.

The Trigger

Expensify assuages the pain of filing expense reports and uses this animus to drive people to download their application.

The Reward

On open, the app encourages the user to photograph a receipt and then throw it away. A few seconds to a few minutes later, the receipt has been processed and is ready.

Once a user has uploaded a few receipts, the user creates a report and with the click of a button sends them to be approved. That’s it. And all of this can be done on a mobile phone. In fact, one of Expensify’s challenges is informing their million plus users about their web app.

In every great consumer product, there is magic – this easy expense process is Expensify’s magic. This ease of use drives word of mouth and soon a few cabals within teams or companies begin to use the product.

Returning Value

When a manager receives a report, he/she can easily approve or decline it; reimburse the expenses via direct deposit; and send to an accountant or Quickbooks. Unlike most freemium businesses, Expensify has to win over two customers: the report submitter and the manager/accountant.

But once two users in a team have switched, the account switches to paid. And then every team member contributes data in addition to their monthly fee.

The Process

No freemium business is perfect. The biggest challenge for most is optimizing the conversion funnels. But each one uses the same trick: find the trigger, deliver the reward quickly and ask for value in return.


7 thoughts on “The key to freemium monetization

  1. Freemium business models are tricky. Ask Yahoo, Youtube, Blogger, Diig about whether they ever figured it out. Free services as a marketing ploy only works if there is a tightly linked service or product that people are willing to pay for. And the relationship between the two is adeptly managed. VocabularySpellingCity.com, for instance, allows teaches and parents to save lists for practice spelling and vocabulary tests and for use in a dozen learning games for free. The paid features are the record keeping and the premium games. While the free use of SpellingCity has reached 10% of the elementary school kids in the country, the paid percentage is still down at 5%. Time will tell.

  2. Yahoo, YouTube and Digg are all media businesses selling advertising – not freemium businesses. Yahoo is publicly traded and worth $19B. YouTube is generating hundreds of millions in annual revenue.

    And those conversion rates are typical for freemium businesses. Which is why the top of the funnel has to receive lots of traffic.

  3. Hi Tom,
    Why is it that conversion rate are only of 5-10%? Is it because the reward doesn’t inspire the other 90-95% to make the effort? Could a reward achieve 20 or even 40% conversion?

    • It has to do with the nature of conversion funnels. Even on most ecommerce sites the conversion to paid within a visit is about 1%.

      To increase the conversion to paid rate, you would need to prequalify your visitors/customers by contacting them through phone. In that case, it’s possible to achieve 20% conversion rates.

      • Tom,

        Could visitors qualify themselves if for example they had an emotional attachment to the platform (i.e. if they actively contributed to creating it)? From there, the objective would be to share their creation with their entourage (friends, family, colleagues). This motivation could be reinforced by the prospect of earning meaningful money (i.e. recurring income rather than a one-off payment or discount).

        The users would earn money that they’d spend within the environment (retail site) to purchase goods / services + spend more because of the emotional attachment.

        There are social commerce sites that achieve 40% conversion because of the attachment. They probably relate to a fewer number of customers, but the concept could be adapted to larger scale sites, couldn’t it?

  4. Pingback: The key to freemium monetization | ex post facto « Andrew Scripts

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