Google’s Freemium Leverage5 min well spent
Google starts charging for Photos in June 2021 and narrow the Freemium offering down to 15gb after 5 years.
From The Verge:
“After five years of offering unlimited free photo backups at “high quality,” Google Photos will start charging for storage once more than 15 gigs on the account have been used. The change will happen on June 1st, 2021, and it comes with other Google Drive policy changes like counting Google Workspace documents and spreadsheets against the same cap. Google is also introducing a new policy of deleting data from inactive accounts that haven’t been logged in to for at least two years.“
Note that Google will also count files from Sheets, Docs, Slides, and other services toward those 15GB. Not just photos.
Considering that Google Drive has about 2 billion users (ZDNet), even a 1% conversion rate would yield in $1.4B ARR – and that’s only considering users upgrading from free to basic ($6 per seat). A 5% conversion rate from free to paid would yield at least $7.2B ARR. The potential gains are significant.
Who can hold their breath the longest?
The move comes amid increased pressure on Google to monetize its products more. As I mentioned in The most successful Startup in History, Google is under increasing pressure to diversify revenue streams beyond ads. In contrast to the slowdown of Google Ad revenue over the recent years and the drop in Q3 2020, Cloud’s and Youtube’s revenue are growing. The problem is that they still just make up 0.8% and 13% of total revenue.
When it comes to revenue engines, Google’s were always driven by a Freemium strategy. Even Search is technically free. So are Gmail, Android, Chrome, and other Google products. The overall tide in the world is shifting from ads to subscription, though. Look at publishers or some of the most successful companies in the world like Spotify, Pinterest, Zoom, and Atlassian.
Google has always been great at holding their breath longer than other companies to build leverage. So has Amazon, by the way. “your margin is my opportunity” (Bezos). Leverage comes from models with significant upfront user value while delaying monetization as much as possible.
Google was able to offer unlimited storage for five years (and longer for other products) because they have a lot of cash. That point of leverage allows them to develop other products better and faster than competitors. Whereas Microsoft needs to charge for Office, Google can allow itself to offer Docs for free.
Freemium is not a pricing strategy
Against intuition, Freemium is not a monetization model but an acquisition strategy. Free products are easier to market and provide a lower barrier to entry.
There are many types of Freemium:
- Paywalls, as used from the New York Times
- Seat-limited, as used by Atlassian
- Feature-limited, as used by Asana
- Usage-limited, as used by Dropbox
Besides a lower barrier to entry, freemium products push data network effects. Putting a part in front of the paywall allows you to learn and understand what users love and how they use the product. It gives product teams a chance to iterate faster, and Marketing teams to learn what works. Some companies go as far as launching a completely free product to quickly iterate or Product/Market-Fit and then start charging.
Organic Growth channels, such as SEO, direct traffic, and referrals, drive most Freemium sign-ups (OpenView). Paired with a product-led loop where the product drives a big part of the growth itself, Freemium creates a mighty Growth strategy. It becomes were easy to invite friends and colleagues, and for them there is hardly a reason not to try the product out. Everybody wins.
As an acquisition strategy, Freemium is very well suited for secondary and tertiary products. Think about a company that has a significant cash cow and can afford to provide one or several products basically for free. In essence, that’s what Google is doing.
The challenge is getting users to pay and that’s where I’m not sure how successful Google will be. I notice in my own usage that I don’t delete Google Suite documents. If my storage was limited, I’d change my behavior, but I’m not sure I’d pay for more.
Signups are not enough
After initial Freemium Growth comes the question of activation and retention. It’s not enough to have a lot of users, you need to convert and keep some of them. At this point, you add a bit of friction you initially took away. Striking the right balance between Freemium value and sign-up incentive is tough and changes over time.
A good example comes from Casey Winters and his time at Pinterest:
When I switched from marketing to product at Pinterest, they actually made me the SEO PM. But when we started looking at the data as a team, we saw we were actually getting quite a few visits from SEO, but the conversion rate was really bad. We said, “Screw SEO. Let’s actually work on the conversion rate for SEO traffic.” We did a two-day project, where as people came from Google, they would scroll down, and instead of just letting them see all the images forever – and not asking them to sign up – we stopped them after a while, and said, “Sign up.” If they clicked on a pin, we also stopped them, and asked them to sign up. It took two days to implement, and we saw 50% improvement in conversion rate just through gating that. Tell people there’s a product to sign up for and it turns out some people will sign up. There was no decrease in activation rates, so all of a sudden we were getting a lot more users, and they were retaining, because the product was good.https://www.intercom.com/blog/podcasts/greylocks-casey-winters-on-how-to-create-meaningful-growth/
Google can iterate on the friction they introduce to monetize Photos and the whole Suite. A 15gb storage limit can become a 10gb limit if users react positively and the numbers work out.
Another option to keep leverage and drive monetization is to make benefits exclusive for a group of customers of another product you own: Google Pixel owners will be not be affected by the storage cap.