In discussing business models at the Dealmaker Forum this week, Don Dodge found that the "freemium" model is popular in the start-up scene. (Freemium = a free service, usually ad-supported, with an up-sell to paid premium subscriptions / services).
He asked asked each of them what kind of conversion rates they were seeing and heard that the average is less than 3% conversion.
Don did some math:
"100,000 free users convert to 3,000 paid users. They pay between $10 to $50 per user per month. Lets use $25 as an average. That is $75K a month or $900K per year. That is an excellent revenue stream for companies that typically have 3 to 5 employees. And, it is an annuity stream that continues to grow every year. By the 3rd or 4th year these small companies can be generating $3M to $5M a year, still with less than 10 employees. Most of these small companies don't take Venture Capital so they own the whole company. pretty good cash flow business."