The freemium model is a business model which blends a free of charge basic product with a premium paid for product.
The objective is to use the free product to build up a large user base of free users and then convert a small portion of them into premium paying users.
The freemium model calculator takes inputs relating to monthly visitor numbers and calculates the peak free and paid for user bases, the profitability of each user, the profitability of the business, and finally provides an estimated valuation for the business.
Using the Freemium Model Calculator
The Excel freemium model calculator, available for download below, calculates the peak user base and profitability of the business model by entering details relating to visitor numbers, churn rates, revenue, and costs as follows:
Freemium Model Calculator User Base
- Enter the visitor numbers. This is the estimated number of monthly visitors to the website.
- Enter the visitor conversion rate. This is the percentage of visitors who convert to a free user.
- Enter the retention rate. A number of free users will try the service and leave within the first month. The retention percentage is the percentage of free users who are retained beyond the first month. The freemium model calculator calculates the number of monthly free users retained.
- Enter the churn rate for free users This is the percentage of free users who leave each month.
- Enter the freemium conversion rate This is the percentage of free users who convert to paying users each month.
- Enter the referrals per user This is the number of visitors that each user generates each month. The freemium model calculator calculates the viral growth as a result of the referrals, the net churn for free users, and the peak free user base.
- Enter the churn rate for paying users This is the percentage of paying users who leave each month. The freemium model calculator calculates the peak paying user base, and the peak total user base.
Freemium Model Calculator Profitability
- Enter details of the user revenues Enter on a per user basis for each user type, the amount of subscription revenue, the number of page views, and the advertising revenue per 1,000 page views (CPM).
- Enter details of the user costs Enter on a per user basis for each user type, the cost of providing the service. The freemium revenue model calculator calculates the per user gross profit for each type of user and weighted average gross profit for all users.
- Enter the fixed costs for the business This is the total costs of operating the business excluding the per user costs of providing the service included above. The freemium model calculator, works out the net profitability of the business on a monthly and annual basis.
- Enter the discount rate This is the discount rate to be used in the net present value calculations. It is the return required from the investment in the business. The freemium model calculator calculates the valuation on the basis that the net profit continues in perpetuity.
Freemium Model Calculator Download
The freemium model spreadsheet is available for download in Excel format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.