How Freemium Can Outperform Free Trials – Shaun Steingold, Momentum Labs

David :

Welcome to the SubClub Podcast. A show dedicated to the best practices for building and growing app businesses. We sit down with the entrepreneurs, investors, and builders behind the most successful apps in the world. To learn from their successes and failures. SubClub is brought to you by RevenueCat. Thousands of the world's best apps trust RevenueCat to power in-app purchases, manage customers, and grow revenue across iOS, Android, and the web. You can learn more at revenuecat.com. Let's get into the show.

Hello, I'm your host, David Barnard, and with me today, RevenueCat CEO, Jacob Eiting. Our guest today is Shaun Steingold, founder and managing director of Momentum Labs. Where he helps to acquire, operate and scale mobile apps. Shaun is now CEO of Healthi, a weight loss and wellness app acquired by Momentum Labs. On the podcast, we talk with Shaun about the power of community, the importance of testing your freemium strategy, and why you might not want to offer a free trial.

Hey Shaun. Thanks so much for joining us on the podcast today.

Shaun :

Absolutely. David, thank you.

David :

And Jacob, always lovely to chat with you.

Jacob:

Hi David. It's a beautiful day here in the Midwest. Spring has sprung and I'm ready to talk about tiny software on tiny computers. Actually big software on tiny computers but I'm excited for today's conversation.

David :

Shaun, I wanted to start with how you got into the app world. You worked at Hewlett Packard. Before that you were actually at SVB. So you've had quite a career and then transitioned to apps so I'd love to hear the story behind that.

Shaun :

Thank you. For me, quite simply, I love opportunities where you have a business model that fundamentally disrupts an industry. I'll say it another way. You and your business and products have a bigger margin than your competitors. And so that's been the thesis behind a lot of my career and what I've worked on. And so we look at apps, what took Coca-Cola, what, 60 years and 20 billion to build, any app publisher gets it for free at day one. And that's global scale and distribution. Every single app sells every single second of every day in every country around the world for free. And if you think about the growth of commerce and business, Coca-Cola took decades to build this. Nike, decades. And we get a day one for free. That's unparalleled. So I love the ability to harness an advantage like that. And then secondly, when we talk about apps, there are two other key things in my thesis about why I love the app industry.

One is the app store rankings basically become a moat for you. If you can get to the top of a category or even the top of a niche section of a category, it becomes self-fulfilling because you come up highest on search, you get the most users, you get the highest ranking, and then the cycle repeats. The last piece is there's a whole world within the app industry where I say apps compete with real tangible products. So I'll give you an example of an app that we bought, which is iNavX. We're a marine navigation app. Think of us as Google Maps for the water. We all know the parallel use case, which is your car's GPS. You're going to go down the road this weekend and go buy a Toyota Camry, you're going to be paying $2,000, $2,500 for the inbuilt navigation. And when you drive the car home that afternoon, you're going to take out your phone and use Google Maps for free.

I love when a mobile app can replace a tangible product. Because again, in that competitive landscape, we're going to win. Is the average person going to get in the car and drive down to the store, look at the shelves, take something to the cash register, swipe a credit card, come home before they even try the product, or are they going to sit on their couch and download an app? And there are products out there where a mobile app will replace tangible product. And so marine navigation is a great example of that. And so you put all three of those together and I just think we've had an opportunity the past decade and obviously the decades coming to fundamentally change or better compete in global commerce with mobile apps.

Jacob:

I want to interject and call back to an episode we had with Eric Stromberg, I think last year, David, where he posited that the app store is probably the biggest marketplace in human history. There's probably never been a single larger uniform marketplace ever constructed and that alone should give you chills. And I think it's exactly what you're hitting on there. It's like for free and somebody's going to chafe and go, oh, it's 30%. But no, no, no, no. Listen. I think the analogy of these consumer companies from the 20th century are really apt because that was the very dawn of globalization. You had to build the roads yourselves. And then we come in the 21st century and all the roads have been built for us and we just get to distribute and deliver product, which is fascinating and fantastic.

David :

Yeah. And actually I'd love to add a 3.5 to your list and that's how apps augment physical activities in other parts of life. So actually ... And we're going to have one of the co-founders on the podcast. I think the next episode is an app called Fitbod, and I'm using it to lift weights in my garage now. And I don't even know what I'm paying because I don't care because it's so valuable to me. It's like 50 bucks, 60 bucks a year. Fantastic app. And fun little aside too, they have videos. They show you exactly how to do the exercises and stuff. And so I've been paying my daughter to be my trainer. And so she watches the videos while I do the exercises and it's a fun experience with my daughter, her helping me out. And so this app for less than 10 bucks a month, like five bucks a month, is augmenting this physical in real life experience in a way that's just so incredibly valuable. So a little 3.5 on your list there.

Jacob:

The time you spend in the gym ... You spend hours, maybe two, five hours a week, 20 hours a month potentially if you're serious about it. Think about navigation. If you're a serious hobbyist, mariner, boater ... Should we just call them boaters? I mean that's something you're going to want to add software to. And so yeah, this is right in my wheelhouse. I mean this is why we started RevenueCat or why I still am excited about the project six years later. It's because I get to be a very tiny part of all of these apps and they're still cool and I still think we're early days. Like you were saying, Shaun, there's still physical products out there that have not been disrupted by apps. And maybe that's a question of time, could be a question of technology. But honestly, I don't think we've reached even peak apps yet so very exciting.

David :

So after HP, did you dive right into Momentum Labs? And tell us a little bit about Momentum Labs before we move on to some of the other topics I wanted to cover.

Shaun :

Yeah. I had the wonderful opportunity to work at HP for I would argue the best boss, manager, leader I've ever met. And so I worked with Steven at HP for a number of years. Post his retirement I realized that I wasn't cut out for a big company. I had a great time working at a big company because I worked for Steven who was, as I said, truly the best leader I've ever met. And while working for him, I had a slightly different experience to a traditional big company experience. While I was at HP, one of the things that I worked with Steven on is he was brought in to take over WebOS. Do you remember the WebOS Touchpad? The HP Touchpad post the failed launch. And so I was intimately involved in that for about three months before HP made the decision to pull the plug on it.

And that was really my first exposure into mobile and apps. And that's when I started to learn about this worldwide global distribution, the freemium model strategy. And Steven really used to ... I can't say coined the term, but he used it all the time. Where the phone is the control panel for your life. And you go back to this ... This is 2011. At that time, we were really transitioning to this model where the phone is the control panel for your life. And to be front and center and part of that control panel was an amazing concept at that time and has proven to be right.

Momentum Labs came from the idea of, hey, I love this idea of mobile apps. This is great and everybody's building apps. And how do I get into the industry and compete? And I was very aware of this app store ranking moat concept. The top apps basically control 95% of the market. And as I was throwing around different app ideas with friends and couple of people who became business partners for me, we realized that it's much harder to build something from scratch and compete when you're dealing with an incumbent that might have a million users already. Isn't it easier to go in and just buy somebody that has already proven product market fit, scale and adoption rates, and then we can come in and apply our knowledge, knowhow, expertise to take the business forward? And so that is the genesis behind Momentum Labs. From day one ... And I don't know if we were the first to start really buying apps, but we were definitely on the first wave of companies and firms who were buying apps in ... This time it was 2015, we started looking to acquire. 2016 I think is when we made our first acquisition. And we wanted to come in and find opportunities to buy an app where in their category where they were ranked three, four or five and we had the set objective of moving them up two to three spots in that ranking list.

And if we did that, our revenues didn't grow five, 10, 15%. They grew 50%, 85%, 125%, 200%. Because as much as the app store has this moat, number one owns 45% of the markets most categories, number two owns 25%, number three 15, number four, seven. So you can see how you actually double as you move up the ranking list.

David :

Yeah. That's great. Are you still buying apps or are you currently really focused on iNavX and Healthi?

Shaun :

We're always looking to buy. I want to say that. We're always looking to buy. We have not bought since Covid started, so the end of 2019. And there are a few things that have happened at that time. Number one, there's a good trick out there. A lot of people figure it out and start doing it. So we were very fortunate to start buying when we did because we're one of the first. I thought we were able to find, to use the Warren Buffett term, great businesses at fair prices and we paid fair prices for our great businesses. More recently you're paying crazy prices for fair businesses and that's a proposition that is not in line with our approach. So the market has got a little overheated, a little oversaturated, and as a result prices have gone up and we are not seeing the quality of apps that we want.

We have had the opportunity to sell a couple into this environment and that has been very good for us. And at the same time we have two businesses that we've acquired, iNavX and Healthi, which have really grown beyond our expectations. And so they have been taking up more and more of our time to help them grow. I will also add that we are not a firm, we're not an investing fund. We do not have LPs or investors. This is our own money so we have the opportunity to invest our time and resources only on projects that we want to.

David :

I keep forgetting that you bought one of my apps back in in the day.

Shaun :

We did.

David :

I don't even remember when that was.

Jacob:

Wait. Which one?

David :

My mileage logging app.

Jacob:

Oh.

David :

Yeah. Actually I still get a check from you. At every quarter or something I get a bill pay. It's funny because we've just moved on from that for so long that I always keep forgetting that. One of the tiny parts of your portfolio.

Jacob:

It's really interesting to hear an insider's perspective that the market has overheated, which doesn't surprise me. I mean just anecdotally from having heard more and more folks go after this model ... Which when there's margin, when there's an arbitrage opportunity, it gets discovered and then exploited and then used up pretty fast. But yeah, I think that doesn't mean that there's not still arbitrage opportunities within your own portfolio and opportunities for growth. I think the point you made about rankings being non-linear, I think is unintuitive to folks because you really don't see that on the app store. They're presented to us in a linear fashion but it's really a power law. So if you go up one step, you're going up more than a super linear step in distribution, which generally I think we're evolved not to understand power laws well. So when you can understand that and see that yeah, potentially even just to move one place, the ROI on that can be really high if you have a way to do it. If you see a weak competitor or something like that I'd be really interested to hear how the playbook goes for you guys and when you're trying to crawl up the rankings.

David :

One of the interesting things about that power law too is that the data AI app figures and sensor tower and other folks who track the top charts, they don't account very well for that. And we've seen that at RevenueCat. We've had customers hit number one in the app store multiple times. We're fighting fires, keeping the servers up because the traffic is just insane. And then you see a report, oh it got X downloads and we're like uh-huh, no. That's not correct. So it's interesting how even with the charts and with these companies tracking the charts, you just can't even account for some of that power law distribution.

Shaun :

100% correct. And I want to add on two tangential points to this topic. The first one is when I say going up in the rankings, I'm talking about consistent stable performance in the rankings. Now we all know we can buy rankings. There are companies out there that will help you buy downloads, that'll help you buy users. That doesn't necessarily translate into sustainable pro or paid subscription models with strong retention and renewal rates. Apple and Google have learnt this in my opinion. That they understand that there are apps or businesses out there that buy rankings. And those apps may show at the top of the charts on the downloads list, but what you want to pay attention to is not necessarily the top of the charts of the downloads list, it's the top of the charts of the grossing list, which is the revenues list. Those are the apps that I'm making the revenues. From my perspective, cash is king. I like money. Capitalist. The apps that impress me are ones that over time can hold their position on the grossing list and move up. And when they do move up, you definitely see that exponential growth there.

David :

And how much does the search ranking factor into that?

Shaun :

I think everybody's got a perspective on ASO and how to game ASO. I don't know if there's any special sauce to it, little secrets. We generally take a very light touch to ASO. We do a lot of work and a lot of cleanup when we initially acquire the app and then we almost like to not touch it. And part of our thesis has been the longevity of performance and consistency of performance. Our approach with search is very much a light touch. But the other point I wanted to bring up ... Which Jacob, I love what you were sharing earlier and it got me thinking back to when we started Momentum Labs. We did have some conversations with advisors and there were people who were interested in investing in this concept. And the question we got all the time was what's the life cycle of an app?

So the app's been around for a few years, three, four years, you're now looking to buy it. Does this thing have a three, four year additional life cycle from where we stand today? And I remember laughing every time I heard that question. Because I knew if you bought the right app, the lifecycle's 25, 30 years. You can definitely talk about games and there's a life cycle in games because of the attention span and the hype nature of the gaming category. But if you talk about a utility function ... David, you mentioned Mileage Log Plus. We are always going to need a mileage log tracker. So what's the life cycle on that app? 20, 30 years easily? Really until enough new competitors with better algorithms or better tech can come out to replace you. But if you can stay on top of those tech trends, Mileage Log Plus will be around for generations.

Jacob:

Yeah. You can think of Strava. Strava's been around since 2009, I think even earlier, and they've managed to just continue to innovate and push and here they are 15 years later still pushing. It would be interesting for somebody to do a meta-analysis on category winner over now the decade plus of the app store we've had and see what the churn is because there's probably more churn in the number two, number three. But in the number one ... Which for app builder folks looking to hit it big, it's like imagine what that next category is and go and own it. Because even if it's small today, which people putting GPSs on their bikes was small in 2005, '06, '07, '08, '09. Own it, stay on top of it, and that's going to be like you said, a generational company for something that seems very much like a utility. But that will be a revenue generating and a growth source of not just flow. I also believe these are growth equities still. Maybe they're not in their 15th year. Then maybe it's not in their first five years or something like this, but I still think it's going to out compete a lot of different places you could put money most likely just because also of all the still underlying trends, the devices are still improving, the technology is accelerating.

And mobile ... We're seeing this now with GPTs and AI. Mobile's going to benefit from that technology. Mobile is a delivery platform now for basically any ... Now that connectivity is so good and that it basically doesn't matter if you do it on the device or in the cloud. Cost-wise, it's not that big of a difference. You'll be able to pour all ... You can expand that to VR and AR. Those are trends that I don't think really have hit commercial viability yet and those likely will in the next decade. So yeah, I think you should start stashing some capital because you might want to buy up some new ones in the next 10 years. Anyway, I'll stop waxing philosophical about technology and apps because I'm into them.

Shaun :

I think we've got a whole spinoff series coming up David. A podcast about FBP. We're going to have a podcast about AI and GPT. I think you just mentioned, Jacob, AR and VR too.

David :

Well I do want to jump into the rest of the topics because we can't go for five hours like a lot of podcasts do.

Jacob:

I don't know. Maybe we should try it one day, David. Just do the long meandering. We got to get a producer who can bring stuff up on the screen. I don't know. We should play with it. But yeah, let's talk turkey on growing apps.

David :

Yeah. So one of the main things I wanted to get your insights on is freemium strategy. I know this is something you think a ton about. So first let's just talk about why use freemium and why you think it's so important to an app.

Shaun :

I have probably 17 points I want to share here, but I'm going to start at the top. And I think it's important when we talk about freemium to start with the concept of subscription. When the app store was launched, remember there were paid apps and there were free apps and then there were in app purchases, consumables. But the industry really change or evolved or found its footing when subscriptions came about. And there was initial backlash from consumers against subscriptions. If I pay you today, why do you now need me to pay you every week or every month or every year? But we as developers know that software and app is a living thing. It takes work. You have to invest in it every single day. You can't just build one and have it live forever. The subscription model I think aligned the developer and the customer or the user. And I think it's fundamental to understand that.

The next point is the strategy behind your product. Why do freemiums work? It gives somebody the opportunity to try before they buy. So the first concept around freemium is, can you give your customers enough of your product for them to try it, see if they like it, and then is there a hook or an incentive or an additional feature that will get them to start paying for it? The strategy around where that point is I think is 90% of the success of an app or of the app's business model. But in my opinion, I think developers spend 10% of their time thinking about it. If you can get that right ... And it's not to say you get it right right away because you have an initial idea or a strategy. Test it. AB test it. Put this feature on the side of the paywall, now move it free. See what happens.

And when I say strategy, it's not just features. It's also how do you want to engage with your user base? So I'll give you an example. And David, I know you and I have spoken about this and I think it's great to share it here, which is Healthi. Healthi is an app that we have. It's one of the largest food tracking in diet apps. There's a very core function around diets or fitness, which is while it is something that we do individually ... David, you mentioned working out in your garage with an app. You do that by yourself. People who are on a weight loss journey are making decisions by themselves every day about what they eat, how they meal prep and the emotional journey that they go through. The commitment to it is something they do by themselves. However, you mentioned incorporating your daughter as your personal trainer.

The concept around a health and wellness journey is actually better done with others because we need support. We need motivation, accountability, sometimes advice. And so within Healthi, we built a community feature. It's a function in the app. It serves as essentially a mini Facebook. What we did is we made viewing the community free. If you're a free user you get to see the community. You get to see the comments, you get to see the threads, you get to see the advice that's shared. You get to engage. However, we made paying a component for writing into the community. You can only post if you are a paying member of our pro service. And that puts a really big line in the sand in a very good way for us. First and foremost when we talk about weight and weight loss, it is a very sensitive topic for many people. And unfortunately fat shaming and bullying is real in our society.

What we learnt is bullies and trolls won't pay. So by making posting part of a pro service, we kept our community clean overnight. And our community values that and they rally around it and they support each other. And today, if you go out into our industry and you talk to people about Healthi, one of the first things they'll tell you is we love the community and it's because we prized its wholesomeness and the collaborative nature that comes from it. And that came from making a decision about where the paywall sat with the community. But remember, if the community is so important to us, we can't have it be behind a closed door. We have to show it and share it with everybody and we have to pull people into it and that's why viewing is free.

David :

You made such a good point around testing the freemium strategy. There's so much talk about paywall testing, about onboard testing, about test, test, test, test, test, but very little talk about testing the actual freemium strategy of what's behind the paywall, what's not.

Jacob:

Arguably way more leverage than what's on the paywall. What's on the paywall's downstream of what's actually behind the paywall. What it looks like is ... It goes back to value. It's again, money talks. So figuring out where people are going to pay, that's your best testing strategy. Sorry, back to you David.

David :

Yeah. Well and then free trial versus no free trial. And actually I'd love for you to talk about that. So if I remember correctly, you don't have a free trial on Healthi.

Shaun :

I have never done free trial in any one of my apps. There are many apps and companies I've mentored, helped consulted with that have tried it. I've never seen it work. One concept or assumption that I've had, it's a thesis probably, is I don't like the idea of taking something away from somebody. In a free trial you're taking it away from them. And I don't like that because it creates almost a negative experience. I get the notion of here, try it, see how great it is. Now you're going to lose it and you're going to want it back. It just doesn't feel right to me. I would rather have every moment be a delightful experience than put a user in a position where they can have a negative engagement with my product or brand. I've also found that the conversion rates don't pay out. It becomes a very hard process.

One thing that people try to do with the free trial concept is it's free, but give me your credit card today. Don't worry, I'm not going to charge you for seven days or 30 days. The users don't really like that. Because even if I'm taking out my credit card and not paying, subliminally, I am taking out my credit card and paying, even if you tell me you're not going to charge me. So there're just too many maybe trouble points on that engagement flow that I think cause friction and I've never found the model to actually outperform a very simple free to freemium upgrade. And Jacob, you're talking about these delightful upgrade screens. You can have the best conversion flow, the best upgrade screens, but if you haven't hooked your user on the freemium product yet, does any of it even matter?

Jacob:

And this is to plug RevenueCat some more. What I hope our testing tools can provide is a model. A revenue model for an app this has a bunch of inputs. One is how many people download, and if there's a trial, how many people start a trial and then how many people convert and then how long they retain. And the difficult aspect of testing these things is that all of those variables are co-related or at least those populations are related. So you can add a trial and you might convert more trials or start more trials, but you're definitely going to lower your conversion to paid rate and you're definitely going to lower your retention rate. And then vice versa. You can cut the trial, force everybody to pay real money to get any access and you're definitely going to reduce your total probably conversion to paid, but I would venture to guess you're going to increase your retention because everybody who does pay is going to have a higher affinity and just be more engaged in the product than somebody who glibly starts a trial, forgets about it.

That is a percentage of trial conversions of people and that's why you ask for credit ... We can act all innocent about it, but we all know that's part of the game is get people on a trial and then hope they forget and stay with us, which I agree with you from a consumer product builder perspective doesn't feel very good. But I will push back and say I know a lot of apps that make it work. I would wonder though if they've tested it fully. I would wonder though if they've fully gone, hey, let's forget about this trial. Let's try to set up a free experience that you can experience without a trial that's enticing and engaging and then fully get folks to upgrade. I would be really curious if folks pushed that and actually did that well instead of focusing. I tend to believe if your app delivers X value, you're going to extract .YX or whatever dollars from it.

You can move that up and down a little bit, but the bigger variable's going to be that X in value delivery. And so whether you have a trial or not, it's all going to shake out and you'll optimize. These are hard tests to run because it's hard to take an entire app and be like going to throw out the trial and rerun so I understand why people don't do it. And honestly at first I was like, oh, Shaun's got a thing against free trials. But now that I'm thinking through it, I'm like, I think it's a pretty reasonable stance. And actually that's why I was like, I would love to see some really good data. We could really well A/B test it because I think I would almost stand with you there. My assumptions would be that maybe that would work better. I think also thinking about Healthi as an example, I think there's real commitment psychology about it too.

You get people to pay up front, they're starting a journey, they want to put that down. If you do a trial, there's a good chance you'll lose them in that trial period because they haven't really committed anything yet, which for that particular app could be a specific case. But I think in general ... Yeah. I was even thinking of some utility I was using to do CAD recently and it had a free trial. And I was like, I need to design one part. I'm just going to do the trial and then cancel. They extracted nothing from me. Which is unfortunate because I definitely extracted value from the product. I would've preferred to pay them something, but because I'm an also irrational economic actor, I was like not going to let that happen. So yeah. Anyway. I think that's an interesting and somewhat controversial take.

David :

The key to not having a free trial is the freemium strategy. So tell me your thinking about how you decided what's free because the free product has to deliver some value to keep people engaged, but then you need some other features that deliver more value that people are actually willing to pay for. And getting that right really is the crux. So how do you think about that?

Shaun :

As you were both talking, I was thinking of a great example to have a discussion with here right now about. David, let's take you back to your garage. You're working out on a fitness app. So let's talk through two scenarios. Scenario A is a free trial. So you download an app, you got to put in your credit card and you get either a seven or 14 day free trial and you can start working out. When you have to put in that credit card to start the free trial you have a moment's pause right there. We just do. Not everybody's going to put in their credit card.

David :

Jake Moore at Superwall shared some data with me that the number of people who tap a purchase button and then dismiss the actual payment screen is massive. In his tracking, it was something like 60% of people will tap the continue or the start free trial or whatever button but then not actually pay. So yeah, you're exactly right. It's a huge moment of pause.

Shaun :

It is. But now let's keep talking this through. So you do put your credit card details in. You start your seven or 14 day free trial, you start working out and at the end of the seven or 14 days you have another decision to make. So now I'm asking you to actually stop and think about your purchase twice. And both times are probably not a good pleasurable experience because you're leaning towards the negative first. So that's scenario A. And maybe you continue using the app so you keep paying for it. Great. Scenario B, it's the exact same app, it's the exact same service, but I'm going to put you on a free trial where you get two workouts for free a week. You can use the app indefinitely if you just take two workouts a week. And if you won more than two workouts a week, you're going to upgrade to our subscription.

So what happens here? I get you into the app with no moments of pause or no boundaries to the experience. I get you using the product. If you like the product, you can keep using it for free with a very good understanding of where the limitation of free is. If you like the product more or want to work out more, I'm now asking you to make a purchase from a perspective or a position where you have a positive engagement with me. So now when you hit that upgrade screen, what do you think the conversion rate is? What do you think the drop-off rate is? Now I'm not saying every single app is the same because different business models, different products, different industries, different customers. But in this instance ... And you want to do the A/B test, Jacob. I would love to know what the end performance is on scenario A and scenario B. And I'd love to know your perspectives too.

David :

Interestingly, the way Fitbod did it, which I actually really appreciated, was that they gave you three free workouts and every feature was unlocked. You got the full experience. So it wasn't exactly what you were saying because I did end up in that moment of decision. But what I thought was fantastic about their freemium strategy is that I got the whole app and I freaking loved it. I was so impressed. I didn't have to start a trial. You just open the app and start working out and you get three workouts. It didn't make it super clear. The very first time I was like, what's going on? But as soon as I finished my first workout, it said, you've got two more workouts for free. It set the expectations. But one of the challenges of a good freemium experience is if you're putting so many features behind the paywall that are actually core experiences of the app, then you're not creating a great experience.

Jacob:

Well, at that point you have to have the paid trial unlock everything. You have to have something, right? The Healthi example of commenting, that's pretty clear and you can continue. I think that's the challenge with the freemium I've always had. I can go back to my experience at Elevate while I was there working on where we put the paywall and how much we let people have. And we eventually settled on, hey, you have to start a trial or the experience is going to be pretty bad. And there's upsides and downsides of that. We get a big rocket in trials and all this stuff. But I think just in general less affinity. And I think something else worth weighing here is not just the upsides and downsides of having a large non-paying user base. So there's upsides in that every user who uses your app and is happy, whether they pay or not is a potential conduit for growth.

They will tell their friends, they will write reviews, some percentage of them will help you be brand advocates and there's ways you can improve that and all that stuff. And that's like truly ... We talk about margins. That's a source of low cost growth that you really have to exploit in order to maintain good margins. And kicking out most of your users that are somewhat interested and you can make happy is antithetical. It's part of the reason RevenueCat prices is the way we do. No offense to all my indies, I love my indies, but y'all don't make me a ton of money. But that's on purpose, right? Because I want to serve you and if you tell me the product's bad, it's probably bad and you're going to tell your friends. That's why we do it. And there's a similar argument for consumer stuff. On the flip side of that, there's also the downsides and the cost.

So you've got to support those folks. You get something out of them but I don't know what kind of splits, but if I had to guess, it's probably sub 10% of your users are premium at any given time. So it's like 90% of your support, 90% of your server costs, 90% of everything comes from non-paying users, which can be counterintuitive or potentially makes you question the investment, which I think was for us ... Again, this is seven or eight years ago, deciding at Elevate how to do it. That came into the calculation. It was like, hey, we get a ton of tickets and stuff like this. People should pay us if we're going to be doing this. Which again, you got to weight with the upsides and unfortunately it's not really possible yet, maybe GPT solves this, to build an entire world model for apps that can take all of that into account. But I'm curious, Shaun, given that you have this big freemium support user base, how do you think about supporting them through customer support and backend support and all that stuff? How do you break that down in your mind?

Shaun :

So there are two things I wanted to bring up here. Jacob, if you can just bear with me I'm going to come to your question in a second, but-

Jacob:

I got all day.

Shaun :

There was a point I thought of when we were talking about the freemium model. Where it sits, what is free. The best freemium model I think I've ever seen really was invented by the gaming industry. I think of an app like Clash of Clans where you have to build or mine or attack and there's a time delay feature in the app. So you have to mine for gems or oil or whatever it is in different games, but that mining can take 10 minutes. But hey, give us 99 cents and it'll be done in 10 seconds. That concept, that freemium strategy, that is brilliant. So I think that is the best use case I've seen. For us, Jacob, how do we think about essentially absorbing the cost of supporting a freemium or a free community really comes down to the word community. When we talk about apps, when we talk about lifecycle of apps, when we talk about moats, the biggest, best thing that you can have, the best asset for your business is a community.

If you have people that can rally around your product that can support each others, that can really be an engaged community that is irreplaceable. And as we know when we talk about community and marketplaces, the bigger, the better. I'd rather have a community of a million people than a community of 15,000. Even if most of the people in that million cohort are free. Because they are actually adding value to everybody. They're keeping everybody plugged in. And if you have a good business, there should be some type of dynamic which says the longer somebody stays involved and engaged with your product, the more likely they are to buy.

Jacob:

Yeah. The long, long, long term conversion window right? Like years.

Shaun :

Correct. So if you can build the engagement into it, you should see conversion rates go up over time. The other thing that we do within Healthi, and it is important to understand this, Healthi which started off as an app is now a full diet and weight loss business. So we have paid coaching, we have an online eCommerce store where we sell branded products that help in a weight loss journey. So we find other ways to provide value to our members and we hope that that value parlays into them essentially opening up their personal wallets and buying more products and services from us. And Healthi is unique because ... David, I keep coming back to you in the garage. If you are starting a wellness journey, you don't just download an app. I'm going to take a bet that David, you visited Lululemon either before or after downloading the app. Maybe you bought a new pair of shoes from Nike or Adidas or On. There is a bigger investment. And when I say investment, it's not always monetary, but in emotional investments in committing to that journey. And so we have an opportunity with Healthi to be a partner with somebody in that journey and be able to help them, not even just in an app but in the community and with coaching with products.

David :

Have you modeled out what that journey looks like for your freemium base? How long it takes for a person to eventually subscribe, what percentage of your free user base does eventually subscribe. What does that look like for Healthi?

Shaun :

Our numbers are strong and one of the reasons our numbers are strong is because we started off as an app business first we are the low cost provider in the industry, but we can still deliver exceptional value and quality. So this notion better, faster, cheaper, you can only have two. Don't ever ask for three. We give our users all three. So the pro service for Healthi is $30 a year. Our two biggest competitors, Weight Watchers and Noom, neither have a free product. They're paid only. Weight Watchers will run you more than $230 a year. That's their starting price. And Noom's starting price is over 400. And so when you look at that, they don't offer a free product, we do. And our paid service, which is the same as theirs is $30 versus hundreds of dollars. So part of our sweet spot of success has been how we position ourselves against our competitors.

Jacob:

When you leverage community too, it's the right strategy. You can lower your price point and then you got to hit them on the community aspect because they can't do it at $400 a head. Maybe they can, but not at the same scale that you're going to be able to do it. It's a good lesson too for how you go against big brands like that. Noom is massive. I don't know how big they are, but you hear them on the radio. That's big in my mind. Weight Watchers has been a brand for as long as I can remember. But I think that's also the exciting thing about apps. We can jump in the arena with these folks and probably beat them if we play our cards right. This is probably true outside of this space as well. It's like nimble ... And that's why you see category winners I think in so many categories are not long term.

The top cycling app is Strava, it's not Garmin. No offense to Garmin. But this is still an industry for new apps. So it's really cool to hear how you think about ... And neither of those are necessarily right. Noom is deploying one strategy, Weight Watchers another strategy, and y'all with the community focus have found another. I think there's a tendency ... And I think I'm as guilty about this as anybody is to reduce apps to a model and be like what I was talking about before, downloads to conversions, to trials, to whatever. You multiply it through and then you figure out your CAC and then boom, that's how big your business can be.

And as I learn and meet more businesses, I'm learning that, well that's not always really true. Maybe it is in the long messy middle of apps, but category winners that we talk to on this podcast always have some magic that's not in that formula. And I think you've talked about community a lot here, and I think that's true and I think it's good advice for founders or app developers thinking about if they're entering an already crowded category or even just defining something new is like what's your magic going to be? You got to figure something out. Or maybe it's technology, maybe it's just product. But often it's got to be a couple things. Like you said, fast, cheap and whatever. You give them all three, right? Figure out a way to give people all three.

David :

One of the most leveraged things in subscription apps is retention. And we don't talk enough about price in the context of retention. And I would imagine that at a $30 price point, your retention is leagues ahead of Noom, Weight Watchers and others in the industry. So while your initial one year LTV might be multiples lower, you might start to catch up to that over the years when people look and are like, "Oh, I'm still using the app a little. 30 bucks is pretty cheap. That's not that big a deal." I do think prices is an interesting leverage point for retention as well.

Shaun :

Agreed. I think everything comes together. If anything, I'd say a lot of people in our industry get maybe a little too singular focused on things like product market fits, conversion rates, engagement rates, retention rates, which all come back to this product market fit equation. The mental model exercise I would challenge everybody to go through is strategy. Thinking through where your product fits into somebody's life, their lifecycle, their emotional journey, and the decisions that they make day to day. Because there is some combination that says you can have the best app, but if you don't touch the right person at the right time in their life, it's not going to hit. So understanding where they are emotionally and with their life journey, that'll work. So putting the two together, both the tactical of product market fits and the strategic to understand where your product fits into their life and how and when. You get those two right, I think everybody's going to find a great devil of success.

David :

Well, I think that's a fantastic place to wrap up. I wish we could talk for two more hours because we only got to topic one of four that I wanted to talk to you about, but that's just so key. All app developers need to think more about how the app really fits into somebody's life. And for a subscription app, for them to keep paying you year over year, month over month, it's got to find that place in their life. So yeah, fantastic place to wrap up. Shaun, thank you so much for joining us today. It was so great chatting with you.

Shaun :

Thank you very much. This was fun. Love doing this with you, David. I remember, as I said at the start of the call, we went for over an hour and a half last time we did this, so thank you for keeping us on the clock today but time definitely flies when you're having fun, so appreciate it. And Jacob, this was great mate. Thank you so much.

Jacob:

Thanks Shaun.

David :

Thanks so much for listening. If you have a minute, please leave a review in your favorite podcast player. You can also stop by chat.subclub.com to join our private community.