18. Attraction Offer. Freemium. | $100M Lost Chapters Audiobook

Welcome to The Game w/ Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned and will learn on his path from $100M to $1B in net worth. Wanna scale your business? Click here. Follow Alex Hormozi’s Socials: LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Hormozi?

  Attraction Offer: Freemium Lost Chapter: Author Note I ended up cutting this section because I didn't think it applied to enough businesses, but if you have a software or media business, any business that has close to 100% incremental margins, this is a dangerous but effective model used by billion-dollar-plus companies. I learned this by studying how freemium software companies upsold me. That being said, almost every one of these companies listed in the example section has funding. If you do not have investors or large amounts of capital, I would not recommend this structure. That being said, I'm including it as a way of presenting a complete picture of possible approaches. If you have something incredibly valuable, so valuable that lots of people come towards you without marketing, then you have something that qualifies for this structure, otherwise steer clear. Description: Freemium is one of the most dangerous acquisition strategies, but it

• 0:42Alex Hormozi?

  also can be one of the most powerful. This is definitely an advanced move. To be honest, I've seen it done incorrectly by smart people more times than I've seen it done correctly. One of the key points to understand about freemium is that it is not a business model, it is an acquisition strategy. It's a very important distinction. The idea is you give something away that is so valuable that people come to get it and continually use it for free. They must come from word of mouth because the product is so good, it must cost $0 to them to use it, or just enough advertising to get it going so that it spreads virally. That is where this gets tricky. Examples: Dropbox: Online storage. Free storage up to a point, then after that, you pay. Spotify: Free music app. Free music forever with ads. Remove ads for a fee.

• 1:24Alex Hormozi?

  Wistia: Free video hosting. After a certain amount, you need to pay more. Gmail: Free email. After a certain period, upgrade for inbox space or start having your emails deleted. Fear of loss makes you upgrade.

• 1:36Alex Hormozi?

  Details: Here's what it looks like when it's done right. You give away a core piece of software that provides value to someone's life or business. They don't value it enough to pay for it, but if it's free, they'll use it continually. This means you get hundreds or thousands or hundreds of thousands of people coming to you for free. Ad spend equals $0. The idea is then to use your marketing and sales teams to make offers to these "customers" to upsell them into higher levels of service. This gives your sales team a pool of "free leads" to upsell. It's always easier to upsell someone than to sell them. Designing this can be incredibly challenging. You must give something away that, number one, costs you almost nothing to fulfill. Number two, provides continuous value, not one time. And number three, doesn't give away so much of the farm that they'll never want to buy something else. A very difficult balance.

• 2:22Alex Hormozi?

  In businesses selling to businesses, one of the key ways of doing this is giving something away that exposes a hole in their business. Something that your next paid product solves. In a business selling to consumers, this typically comes in the form of giving away something people use. At the same time, it limits their use in some way that anyone who would regularly use it would need more of. Either through advertising or limits that, once they start using it, they would want to increase. You'll notice this play works well with software because software is, number one, virtually free for each additional user. Number two, intended to provide continuous value, so the "only" part that you have to nail is how much and exactly what to give away, which is still very hard. Your true cost of acquisition when using this model is understanding what percentage of free customers upgrade and determining your cost of servicing a free customer.

• 3:04Alex Hormozi?

  So, for example, it costs you five cents a month to service a free customer, and you upsell 1% of customers. Then your cost of acquisition is five cents per month divided by 1%, which equals $5 a month. As long as your average revenue per paid user is above $15 per month, so that's three times that, then you'll have a profitable business that could grow. Because again, remember, you still have the cost of doing business before you start to actually turn a profit. Here's what it looks like when done wrong. You give away your core thing, people use it for free, then they don't want to buy your next thing. Now you're just running a business that loses money servicing customers for free. No bueno. Roadblocks. Here's just a hint of all the problems you can encounter with this model. Number one, conversion problem. Conversion percentage from free to paid is too low. Number two, value problem.

• 3:48Alex Hormozi?

  You give away something that people don't find valuable enough to tell other people about. You spend money marketing your free thing, and still people don't want to tell enough people about it for it to be profitable. Number three, cost problem. People want it, they tell their friends about it, but your costs of fulfilling them for free are too high relative to what you make from paid customers, so you're not profitable. Summary points. Overall, freemium is a very hard strategy to get right. It's also something that can be very powerful. If it's your first rodeo and you don't know everything there is to know about a freemium acquisition strategy, I would definitely not recommend it. This is a billion-dollar strategy that I mostly included for completeness. I think you need to be a seasoned pro and know your numbers like your child's names. If you can nail it, though, you can have unlimited free leads and viral growth as a result. It's important to remember that this isn't a business model. It's an acquisition strategy. It has to be free and valuable enough to spread, but not so valuable that customers

• 4:32Alex Hormozi?

  use it without upgrading. If you use this strategy, good luck. You're a smarter man or woman than I am.