How to Succeed with Freemium and Hybrid Monetization — Paul Ganev, Surfline

David Barnard:

Welcome to the Sub Club 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. Sub Club is brought to you by Revenue Cat, thousands of the world's best apps, trust Revenue Cat 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, Revenue Cat, CEO, Jacob Eiting. Our guest today is Paul Ganev, Vice President of Strategy, Business Development and Analytics at Surfline. On the podcast, we talk with Paul about the strategic pitfalls in modeling total addressable market, how freemium should work, and why Surfline's current success was actually 38 years in the making. Hey, Paul, thanks so much for joining us on the podcast today.

Paul Ganev:

I appreciate you guys having me on. I've been looking forward to it,

David Barnard:

Hi, Jacob. Always nice to chat with you.

Jacob Eiting:

Just a guy in Ohio ready to talk about surfing. That's what we're here for today.

David Barnard:

Let's talk surfing. I wanted to get a little bit of background, Paul, so I know you're currently at Surfline, but you've done some really interesting things leading up to this that led to the job at Surfline. Tell us a bit about what you did before in consumer subscriptions, and then how you transitioned to Surfline.

Paul Ganev:

Yeah, I guess it's a non-traditional entry into tech. I worked in the media industry for the past eight years preceding my time in Surfline. I started off in the finance department working on traditional linear media, so broadcast media, cable, things like that. Two or three years after I started, Netflix really started picking up steam, and we started seeing further adoption in SVOD viewership. I got really enamored with the streaming side of the business.

A couple years later, I got the opportunity to work on some of our SVOD products, and I spent the last four or five years at Discovery Communications, which is now Warner Brothers Discovery, working on some of their SVOD products. I transitioned from finance to strategy and analytics, got lucky enough to get a shot there. Then towards the end of my tenure, I had moved to LA. I was originally based in London, and I moved to LA with my wife. I started surfing a tremendous amount.

I was surfing four or five times a week and I was using an app called Surfline. I got addicted to the product. I thought it was great. I got lucky enough to get introduced to the CEO at Surfline at the time, his name was Jeff Berg, and we had some conversations. They had just raised some capital from The Chernin Group, and he was looking to build out a strategy and analytics team at Surfline.

I thought it was a great opportunity to work on something I was passionate about, and get some experience in a different side of consumer subscription, right, because SVOD was intrinsically a little bit different than mobile application subscription. I've been here for three years now. I oversee strategy analytics, and then all of the other commercial functions, so marketing, ad sales, product growth as well, and loving it.

David Barnard:

What's the culture like at Surfline? Is it just a bunch of crazy surfers, or kind of a mix?

Paul Ganev:

You would think so, and that was kind of my perception. I thought we'd come in and it would be that stereotypical surf culture that you'd see, and there's some of that, but I was surprised when I came in at how much talent there was at the company, and how many tech native people there were. We had at the time, our CMO came from Apple, our CEO at the time, Kyle Laughlin, had come from Amazon. They were all these people who worked in big tech for many years.

There was this half culture of we're really focused on surf culture, surf community, but there was also a work hard mentality, and people really wanted to innovate and build products that would make surfers' lives much better. Kind of in the surf industry, there aren't a lot of jobs where you have a great balance between culture and innovation, and that's what we found in Surfline, and it's been fantastic.

David Barnard:

It's funny, coming into Revenue Cat was kind of the opposite. Everybody else at Revenue Cat surfed, and my first experience with Revenue Cat in person was a little-

Jacob Eiting:

It's a little awkward.

David Barnard:

... Surf off site in 2019.

Jacob Eiting:

It was the last off site we could do at a beach. We went from five out of five surfers to five out of seven, and I was like, "This is over for us," it was just serendipitous, but the first five of us actually bonded over surfing, also apps though. It's interesting, it doesn't surprise me that, especially I think, California being the tech hub of the world more or less, and also being one of the best surfing coasts in the world, if not the best, you end up with a lot of folks that are probably passionate about both of those things.

Surfline as a product, there are other players in surf technology, but I don't think anybody's at the level that Surfline is, in terms of reach, and dominance, and functionality, and all of those things. I'm sure David, do you know, I'm going to steal your story, Paul, but the story of Surfline, do you know how it got started? It was originally a phone call. That's where Surfline comes from. That's right? It started off as an answering machine in somebody's garage or something like this.

Paul Ganev:

Yeah, it was like a paper phone number that you would call. There was actually a fax as well. You could get a fax as well.

Jacob Eiting:

Oh, this was like in the eighties, right? It's been around for a long time.

Paul Ganev:

Yeah, '85. 1985 is when it was founded.

David Barnard:

Consumer subscription app in 2023, founded in 1985 as a 1-900 number.

Jacob Eiting:

That might be a record.

Paul Ganev:

I think we hold a bunch of records. We call ourselves the 38-year-old startup. We're founded in 1985, and originally, it was a paper phone number, and then fax, and then when the web started becoming a thing, when the internet started coming to its prominence, we had a free website for a period of time. We actually launched our subscription in 2001. To kind of date that, that's six years before Netflix launched their subscription.

Jacob Eiting:

I didn't know they existed. Yeah.

Paul Ganev:

We're better than Netflix in at least one way. At least the founders had the foresight to move in that direction pretty early on. It's been a serious evolution even since 2001. Yeah, it's a crazy story. It's very unconventional.

David Barnard:

Yeah, I thought AllTrails was early to subscriptions. I didn't realize y'all had started your first consumer subscription product in 2001. That's crazy.

Paul Ganev:

Yeah, it wasn't really a key focus back there in 2001. If you think about the market back then, there weren't many digital subscription products that were out there, so it was a challenging proposition in the beginning to get people comfortable with a recurring payment through some digital product on the web. It took many years to get to-

Jacob Eiting:

Technologically, how'd you even do it? It's not like today when there's tooling and all of this stuff to make payments so much easier than it was 20 years ago.

Paul Ganev:

100%. Again, it predates me quite a bit, so I can't say, but they definitely hacked some stuff together and got it working.

David Barnard:

Well, I think that's a good segue into the first topic I wanted to discuss, and that's understanding and calculating TAM, Total Addressable Market. In 1985, I don't know that the founders could have ever imagined how the TAM would grow, but then also what it would actually look like in 2023. Yeah, tell me about your thinking on TAM, and how to calculate it, and common mistakes on how people think about TAM.

Paul Ganev:

TAM is really important for a company like Surfline, when you think about the total addressable market, how many people are out there that might be willing to pay for your product, there aren't a hundred million surfers in the US, so we have a niche TAM. It's very important we understand what that addressable market is. It should influence our product strategy, our monetization strategy, all of those things. I'm sure the founders weren't thinking about TAM back then, right back then.

Jacob Eiting:

Yeah, they didn't have to pitch anybody.

Paul Ganev:

Look, surf forecasting wasn't really a thing back in 1985. We kind of pioneered it.

Jacob Eiting:

Yeah, I learned that recently, that even wave forecasting wasn't until recent times that they even could predict when there were going to be swells and things like that.

Paul Ganev:

Big shout out to Sean Collins for doing that back in the eighties, but today, it's really important for us. When we think about TAM, really what we're trying to calculate is what is the size of the opportunity in the market? There's some great use cases for TAM, the big one being really, it's like a sales tactic to be candid. From a TAM standpoint, you're going out to investors talking about how big the opportunity is, telling a story there.

The flaws come when you start trying to calculate the addressable audience from a modeling standpoint and what you should do strategically from product strategy and monetization strategy. I'll give you an example. Let's say we're a golf company, and you go out to market and you say, "Okay, there's 50 million golfers in the US," that's our TAM. If you're launching a subscription product, you'll probably find pretty quickly after you launch the product that there's 50 million golfers out there, but there aren't 50 million golfers who play golf on a frequent basis.

Maybe it's 20 million that actually play on a frequent basis. You're kind of omitting a key factor, which is commitment. You really have to move from a metric TAM to another metric that's used in the industry called the Serviceable Addressable Market, SAM. That's the biggest issue that I see with most companies that are going out to market and putting together their commercial strategy is they'll use TAM, and they'll model everything off of that. They'll say, "Okay. Well, TAM's a hundred million people, and we're going to go and acquire 5% and call it a day." That's how they model things out.

In reality, when you start digging in, you find out that, "Hey, really, our product isn't something that's going to service all 100 million of these people. It's going to service some fraction," because there are other variables that have omitted. It's really important to figure out what the serviceable addressable market is, and there's a number of different variables that you should look at. One is commitment.

It's very important, especially in a niche direct to consumer space. You want people who are committed because they are going to be paying a subscription, and that's often omitted in the modeling and the estimates that people put together. That's the biggest one, to be candid, that I see out when people are calculating the metric.

Jacob Eiting:

How do you think about the SAM? I sometimes feel like SAM is actually the true TAM. Like you said, TAM is like the TAM people dream. SAM is actually your TAM. I think as an argument, and maybe this goes into more long range modeling versus short range modeling, but that your SAM should maybe evolve into eat more of that TAM. It depends on what the limits to serviceability are, right?

If it's commitment, golfers are not going to become twice as committed by 2028. I'm not going to read that in a Gartner Report or whatever, but they might become twice as open to using software or something like that. How do you think about SAM evolution and regards to serviceable versus addressable difference?

Paul Ganev:

I think it's all about timing, candidly. You should always have TAM in the back of your mind, because as a product leader in the space, you're going to look out and say, "My product's going to continue to evolve." Serviceable for me in the future is different than what it is today. It's always important to have that TAM number in the back of your head, and figure out what the delta is between your TAM and your currently serviceable addressable market.

I like using the serviceable addressable market for a couple of reasons, and the reason it's important more than anything is, if you have a good idea of what's serviceable, it can really influence your commercial strategy. Another example is if your TAM is really small or your serviceable addressable market is really small, you might want to weight your investment in ARPU more than you do subscription growth.

You might say, "Okay, really, we might reach saturation a little bit quicker than we originally thought. We should focus on growing ARPU," or maybe the strategy is, "Hey, we know that we're going to get pretty significant market share within this audience. We should look at adjacent audiences or new geographies." This is an exercise that a lot of big companies do, and if you look at the growth of companies like Spotify for example, the growth isn't coming predominantly from the US anymore.

It's they've realized, "Hey, we are starting to saturate a little bit in the US. We're going to look at markets outside of the US, and start getting market share there." Same thing with a lot of the big S-FOD companies. It's really important that you have your finger on the heartbeat there of what is actually serviceable and addressable today, but not lose sight of what is possible in the future.

Jacob Eiting:

Yeah. You use the word investment, but you end up putting effort into something that you can't change. Once you've hit the limits, or at least the reasonable limits of your channel, or your market, or whatever you're pulling into, it's just wasted money. Now, on the acquisition side, Revenue Cat, I think we've had the similar experience, where I think if we had gone full into go-to-market three years ago, we probably would've been in a lot of pain because of shortfalls in our product market fit, and our ability to service those customers, and things like this.

Maybe unintentionally, we strategically didn't, but now after three years of product development, okay, now, actually, maybe each dollar we invest on growth is probably going to have a much higher ROI, now that the product's position that SAM has increased for us, which kind of, I don't know. When you're thinking about managing a company over many years and benchmarking it against peers and benchmarking it against maybe peers outside of your space, can be a little, I don't know, depressing is the right word.

I don't know. Sometimes you're like, I know for me personally, I look at other SaaS companies that have essentially infinite TAMs, and they'll just be like, "Yeah, we're just doubling every year we spend $200 million on sales and marketing, and then we add $200 million in revenue, and we just do it over and over again." Revenue Cat exists in a niche in its own, which is this consumer subscription. We have some of the same mechanics where it's not an infinite TAM, at least not today.

I'm curious, how do you think about, in surfing too as the particular mechanics of it, there's some interesting natural limits to surfing's total addressable market, because for anybody who's surfed, especially in some of the more crowded places in California, there's only so many people that can surf practically at a spot. The laws of efficient markets really start to play out once a spot becomes too busy, can maybe only handle so much traffic.

There's sort of a natural economic upper bound. Do you take that into your models, like how many surf spots are there that aren't developed? If you have that list of undeveloped surf spots, I would appreciate you sending it to me so that I can go there, but we can save that for off the pod.

Paul Ganev:

We don't have a list of undeveloped surf spots, but you're right, it's a finite list of locations. Just naturally in surfing, there's only a certain number of locations you can surf, and you're dependent on the conditions being reasonable for surfing. If it's flat, you can't actually get out. Also, a few things though, surfing is one of the sports that's been growing quite quickly.

Jacob Eiting:

Right. It's had a crazy run since even the last 10 years. It's been crazy.

Paul Ganev:

Not just surfing, but there's a lot of other sports that have seen the same adoption. I think golf and pickleball, and all these companies, sports have really been picking up. In surfing, now, we are seeing some other innovation that's interesting. They're building surf parks all around the world, so these are artificial wave pools where you can go surfing.

It's interesting, because a lot of these pools are being built in places where people don't have access to the beach. It could be, right now, there's a huge pool being built in Munich, for example, and funny enough, there's a lot of German surfers who are just traveling to Morocco and Spain and different places.

Jacob Eiting:

Every time I went to Central America, everybody at the surf camp was German, just about.

Paul Ganev:

German? Yeah. We do see a lot of growth in the industry coming from those surf parks, right? It's going to drive a lot of adoption, and again, with demographics that are non-traditional in surfing, which is also very interesting. These are urban areas. People don't have access to the beach. Obviously, living close to the beach is very expensive, so this might bring in cohorts of surfers who couldn't traditionally afford to go surfing. It's a challenge for sure.

Jacob Eiting:

Well, especially if you're a surf forecaster, because if you create a wave pool that has consistent waves, it must create some interesting product strategy challenges for you guys.

Paul Ganev:

It does to a degree. We kind of have two parts of the business. One is surf forecasting. The second piece are the cameras and the camera technology that we're developing. There's some interesting synergies between the camera technology we're developing in [inaudible 00:14:55] surf parks, so I don't want to give away too much here.

Jacob Eiting:

This is where 20, 30 years in, you guys can leverage a brand into that market shift, which not all companies all scales have that luxury, but there's a good example of widening your serviceable addressable market. Looking at the TAM from a top-down perspective, what's going to shift in surfer inches and surf parks are, I think, going to be... I live in Ohio, I would really love for somebody to put an indoor surf park up within five hours. That would change everything for me to continue my hobby.

In terms of strategy, that's the kind of stuff you want to be thinking about with TAM, I feel. I'm curious. When I learned computing in addressable market, I was taught two methods. There's the top-down method, where there's a million surfers, and we'll get whatever, versus a bottoms up, which maybe I have these wrong, but it's like, "Well, I only need to get five of these folks to whatever, and I can sell this many this year and whatever, and I'll build up to how many I can reasonably sell."

Do you find when you're approaching a problem, do you start with 6 billion people, and what percentage of those are surfers, or do you start from the bottom up?

Paul Ganev:

For most companies, I think they start top-down, traditionally, mainly because the data's easier to come by. It's an easier exercise to do, so you can hire a company to go out and do market research for you, and get you some estimates. Candidly, there's so much market research out there today that I'm surprised. Most industries, you should be able to find some data points to get you started.

Jacob Eiting:

Yeah, I was going to say, if you can't find those numbers, you're probably in a market you don't understand enough.

Paul Ganev:

Yeah, or it's too broad. Yeah, you're absolutely right. The exercise is really this, at least the way that I've found it to be most successful is you find some market research out there, and it gives you a general sense of what the scale of the market is. Then if you have great analytics on your platform, you can learn enough about your consumers to figure out what segmentation actually matters, like what your SAM should be.

The market research that you find out there is typically just going to be very high level, and you're going to have to cut it down, but it's up to you to determine how to cut it down, and what variables do you need to factor in? Are there geographical variables, demographic variables? Is there commitment? It's important that you kind of go from both angles, start with market research, do some analysis of your consumer, and then try to hone in on what a serviceable addressable market is.

You can make it as complex or high level as you want. The moment you start factoring in competitors, it starts getting really complicated because you have to factor in... That's kind of the next step down, which is serviceable obtainable market is what percentage of the market can you actually acquire, compared to the other competitors in the market? I think it's probably a little bit detailed for this conversation, but...

Jacob Eiting:

We talk about modeling a lot, and modeling is wrong always. I find that on the line of complexity, I'm always saying, "The more complex you make a model, the more likely you're going to get it to say what you want it to say, and the more likely it is to be wrong." Simple is better if you can start with the simplest model and get answers that are reasonable.

Then, I don't know if you found this, but I find that it's useful to not just revisit the same model every time you need it, but if your model is so complex that you can't rebuild it in a sitting, then your model might be too complex. What I also find is nice is that if you start from first principles and rebuild your models once in a while, one, you'll rethink your assumptions.

Two, if you get an answer that reasonably matches your first attempt, then you have some confidence that you didn't just torture your model to say what you wanted it to say. That applies not just for addressable market modeling, that's for building any kind of predictive thing. Yeah, it's definitely something for our listeners in App Land, we have probably a lot of folks that aren't thinking about having to pitch investors, having to tell some massive TAM story, but it doesn't matter.

You are the investor. You're investing your time, do some math and make sure that you have a TAM that seems pretty big to you, because if the smaller your TAM, unless that TAM's going to grow, the harder time you're going to have. It's just going to be tougher. If you have a small enough TAM, even winning isn't that good of an outcome if the TAM's small enough. I think it's, especially for hobbyists looking to build something, do yourself a favor, build something a lot of people can use. It'll be more fun.

David Barnard:

Or build something a small niche want to use, but then-

Jacob Eiting:

A lot.

David Barnard:

... Understand that it is a small niche, and then charge appropriately to the size of that market. I did want to dig into service obtainable market. I know you kind of said it's a little too complex to dive into, but I think this is an important thing that is part of the modeling that is often overlooked is that, okay, there's 50 million surfers, or that's probably even high, that's the TAM.

Our SAM is actually 20 million, but then you have willingness to pay, and pricing, and all those other things that factor into how many of those folks in the SAM are you actually going to convert to a subscriber? That's the obtainable. How do you think about that willingness to pay? Then I'm going to out Jacob and some of the early Revenue Cat employees, surfers are notoriously cheap.

I think the first five employees at Revenue Cat were sharing a Surfline account, so you have-

Jacob Eiting:

My Surfline account, by the way. Just want to put it out there that I was the good boy-

David Barnard:

You were the payer.

Jacob Eiting:

I was always paying, and I have one now. Even though I live in Ohio, I have almost always an annual Surfline subscription going, because it'll expire and then the next trip I take to the coast, I resubscribe. I've made up for my sins.

David Barnard:

How do you factor in that willingness to pay? Then obviously, the goal for a Surfline is to continue evolving the product, and to get more and more of that service addressable market to be service obtainable market. Yeah, how do you think about that willingness to pay, in modeling from TAM to SAM to SOM? Whatever.

Paul Ganev:

Maybe we decouple them a little bit. Really, what we're talking about is price sensitivity, how price sensitive a consumer is, and even that term is maybe a tiny bit misleading. It has three components, at least the way I like to think about it. First is purchasing power, which is what we're traditionally talking about. If you say surfers are cheap, really what you mean is that maybe it's a purchasing power situation, possibly.

The other two variables are commitment, how committed are they? How passionate are they? The last is how strong is your value proposition? It's really relationship between those three things, and you have to assess how strong that relationship is and where the gaps are. In surfing, for example, if you think about where most surfers, let's say domestically, where they're located, typically in California and coastal areas, or Hawaii and coastal areas.

Those areas aren't cheap to live in. When we've done market research, we've found that actually the audience is a bit more affluent than you would originally believe. Now, when you go to commitment, I have not met a more committed, passionate group of people than surfers. These are people waking up at four in the morning to drive two hours away to catch a swell window of an hour and go surfing-

Jacob Eiting:

Then going to work after that.

Paul Ganev:

Yeah, and then going to work right after sitting in a five-mil wetsuit and 55 degree water for a couple hours. Commitment level is super high. Then the last piece is how strong your value proposition is. That's the kind of relationship we're talking about. If you think about SAM and SOM in that kind of light, really, the first thing to think about is how strong your value proposition really is, and then over time, how much stronger do you believe it's going to get?

That's a huge benefit of freemium models, because over time, as your value proposition gets stronger, you have the ability or the time benefit of being able to convert people that are on platform. That's the first big one is how strong is your value prop, and how much stronger is it going to get over time? How does that compare to the other value propositions in the market? For Surfline, for example, there are a lot of free competitors out there. There's not many paid competitors. We are targeting a consumer that would be willing to pay for this product.

The commitment level has to be pretty high compared to somebody who surfs maybe once a month or once every couple months. Maybe the free products that are out there on the market are a better fit for them. However, over time, we have plans to produce a product that would be a better fit for these other consumers that are targeted by other audiences. There's no one size fits all, but you really need to make sure that you're aligned with those three variables, and understand really where the gaps are and what you're trying to influence.

David Barnard:

When strategically thinking about some, how much do you just write off? Like, a certain percentage of surfers no matter what the value prop just aren't going to be willing to pay, or is it a price sensitivity, where it's less that they're not willing to pay anything, it's just they're not willing to pay the price that makes sense for Surfline to charge-

Jacob Eiting:

I'm fairly certain if all the Surfline cams were free, everybody would just use it, because there's not a ton of other cams.

Paul Ganev:

Yeah. Again, it's a hard thing to calculate. I think the way that we go about it is we have a pretty large free audience, and we can do quite a bit of analysis and understanding how much purchasing power, price sensitivity affects people's conversion rates, and how that changes over time as our product gets better. There will always be a cohort of users that's not willing to pay, and it's especially important for a company like Surfline, because Surfline historically used to be free.

There's a lot of companies that have gone through this transition where they had a free product, and now it's behind a paywall. New York Times is another good example, and that intrinsically causes challenges. You've educated a consumer that something used to be free, and now it's something that they have to pay for, which again, also is something that influences whether somebody's willing to pay for something or not. Again, they just believe it should be free.

At least in my mind, there's no rule of thumb, but there will always be cohorts of users. It doesn't matter what industry it is, and doesn't matter how much purchasing power they have, that will not be willing to pay for the product. You just do your best to quantify how large that cohort is, either through surveying, or through on product analysis, and then you factor that into your models, which will intrinsically be wrong, and then we'll make a decision and go from there.

David Barnard:

This did get really nerdy, but these are the things as a consumer subscription business, you need to be thinking about. I think you're right, you kicked it off saying you see a lot of mistakes. I see that too. A lot of people, like, "Oh, yeah, there's 50 million golfers in the US, we only need 5% penetration or whatever to build a great business, and then we're going to get to 50%. Then we're going to..."

Jacob Eiting:

It's me in 2018, being like, "Oh, there's a hundred billion in subscription revenue. I just need to get 1% of that." Then you learn, well, 85% of that is locked up in four apps, and they are never touching their infrastructure ever again. Okay, now my numbers changed a little bit. Maybe the benefit of naivete in those early days, because if you totally understood your challenges, you might not ever start. Nobody ever got hurt from knowing more, right?

David Barnard:

By going through the modeling exercise as we've discussed, and I think you've had some really great thoughts that I hope our audience can take away from this to do their own modeling, to just understand where their business is going, and understand where to invest, and how much to charge. Taking those three variables you share, it's like, if you understand that your service addressable market is much smaller, then like you said, you do need to focus more on ARPU, and build something that's super valuable to that smaller service addressable market, versus trying to be the $20 a year, everybody's going to subscribe.

Well, everybody's not going to subscribe, even if it is $20 a year. If your market's small, you don't want to be $20 a year, you want to be $120 a year. I think this is all super important for anybody in this industry to be thinking about. Then that leads into the next topic I wanted to cover is freemium strategy. You understand, okay, certain percentage aren't going to pay. They're part of our service addressable market. They're going to get some value from our product, even if they're not willing to pay.

How do you approach that at Surfline of offering some amount of value for free to those users who don't want to pay, or do have a level of price sensitivity that you're not delivering quite enough value to get them over that hump?

Paul Ganev:

When you think about freemium, really what the hypothesis is is that you can launch this freemium model that over time will reduce your CAC. That's the goal is, "Hey, I'm building this model that will result in lower customer acquisition costs than if I don't have it." There's a lot of things to factor in when determining whether that's true or not, because both models, a freemium model or a completely paid model, can be successful. There's thousands of examples.

For Surfline, it's kind of funny, again, because we didn't originally get into the business and say, "Hey, we're going to have this freemium model." We were free, and then we transitioned to paid over a long period of time, but because we started as a free product, over the years, we amassed a very large audience on the platform that was habituated to the products that we were offering.

It was really important for an industry like surf, because if you're a new surfer getting into the sport, you don't really know why surf forecasting matters. You're going to go when you go. You don't understand why wind is and wonder why-

Jacob Eiting:

I learned everything I know about predicting surf from the human written surf forecast for the Bay Area. From Surfline, when you talk about habitual, first thing in the morning, surfing or not, pull up my phone. Before I look at Twitter, I'd open Surfline.

Paul Ganev:

Yeah, yeah. It was a great strategy, because over time, what we did was we habituated users, and we educated them on the products that we offered. We ended up creating this great funnel that allowed us to educate users on the free product, and then over time, as they found value in what we were offering, they would want the full suite of product features and then subscribe.

We've ended a place today where we don't spend any money on paid acquisition, and we have this great growth funnel that effectively, we're organically getting people into the free user experience. We educate them, habituate them, and then there's some cohort of surfers that get very committed and love the product, and end up subscribing. We built this great growth engine. I will say a few things. One is like, this does not happen overnight.

If you're contemplating starting a free or freemium model business, there's going to be pain in the beginning for sure, for a few reasons. The first one being that you're adding an extra step. If people just hit a paywall, there's some percentages that are just going to convert and move through, but you're adding an extra step, a free experience, it's going to take time for people to understand what you're offering. You're going to get it wrong a bunch of times in the beginning.

Jacob Eiting:

You have to draw a bunch of borders too, I always found difficult. Every part of your product has to have a line in it somewhere, and it gets really complicated to manage.

Paul Ganev:

It absolutely does. Again, you're going to have to test and iterate, and test and iterate. There's a magic role here with freemium models that I tell everyone to try and follow. You're really trying to balance increasing conversion versus increasing free user retention. It's very important that you do that. If you don't do that, your freemium model will most likely not be a success. Here's why I say that.

You launch a freemium model, and over time, you see that, "Hey, we've optimized our freemium model and now conversions doubled." Fantastic, but it's coming at the cost of free user retention, and we're not retaining free users nearly as effectively as we were before. What'll happen is every month if the retention is poor enough, the size of your free audience starts to decline, and the pool of free users that you can convert to a paid product gets smaller.

Jacob Eiting:

It doesn't matter if you've doubled the conversion rate on half the audience. You haven't gone anywhere.

Paul Ganev:

Exactly, and that's the biggest issue that I see with freemium models out in the industry is there hasn't been enough testing, and they've waited too high on one versus the other. Now, if you have to wait more on one than the other, it's probably better to wait on free user retention if you have the capital to sustain less conversion for a period of time.

As a product owner or whoever, you have to believe that your product is going to improve over time. The great thing about a free experience is it buys you a bit of time to optimize your product and make it better. The ultimate role here is like, "Hey, we're just trying to build great products that people want to pay for." You'd much rather have people on your product rather than off-market.

If they come in, and they hit a paywall, and they don't want to subscribe, it's much harder to go out into the market and find them with social media, and then convince them to come back, versus on platform, your messaging is very clear. Your value propositions are easy to communicate. There's a huge benefit in being able to communicate people as the product gets better, i.e. like Duolingo has absolutely smashed in this category. Over years, they've optimized, and optimized, optimized-

Jacob Eiting:

It still doesn't seem like a paid product even though it makes a ton of money, such a magical hack. How long, they were like six or seven years in market before they started to monetize in a real way. It's crazy.

Paul Ganev:

Yeah, and I can't tell you how much they've optimized that free experience. They've made it so fun, and they habituate their users. It's like, learning isn't intrinsically something that all consumers come in with, like, "This is fun," but Duolingo has found a way to optimize their experience in a way that you come in, you use the free product.

Over time, you start having fun using the product, and they've realized that's the best way to convert somebody to a paying subscription. It takes years and years and optimizations, and there's so many different freemium models, by the way. It's not just a one model out there.

Jacob Eiting:

Duolingo is a great example of that, right? They've had Gems, and a Premium subscription, and lots of different things that they've tried. I don't know, I'm sure they've experimented with ads at some point too. I don't know if it's in the full product, but we had a guest from Duolingo on a few months ago, and the experimentation there is crazy, which is what you probably need to swim through that freemium universe and find an optimal...

The behavior you mentioned, of trading off between free user retention and conversion, and then focusing on the product makes me think of the sub-model, as I think about. It's like value creation. Your app is going to create value. Conversion rates, and paywalls, and all this stuff is a motion of capturing value. If you capture all of the value, users aren't going to hang around. There needs to be a value surplus that they're able to maintain.

I think that's what you're kind of describing there is if you squeeze those free users so that there's no value, there's not enough value there for them because you've shut it off or closed it, you're actually going to end up in a worse position, versus spending your time actually just increasing the big pie that you're trying to capture value from, then your job gets a little bit easier. I'm a fan of monetizing early.

I do think it gives real numbers and real measurements on things, but that can go too far and not get enough people in. Also, in the early days when just small numbers, if your app is so paywalled that you can't get enough people in to really learn, you're going to have a hard time going anywhere. You can't improve a product without users. I think a lot of folks like to pretend that they're smart, and like Steve Jobs or whatever, and they can just tell you what's a great product, but I don't think even Steve did that, really.

Everybody's doing it in conversation with users. It's hard with freemium because so many of the benefits of freemium are non-P&L line items. It's like, growth, word of mouth, things like this. You mentioned acquisition and that you don't do paid acquisition, or it's all organic. What's your primary channel? Is it SEO, like people searching surf spots? For apps, it's really tough, but I imagine you guys have a big web presence too.

Paul Ganev:

We do, and remember, we've been around for decades, so the brand presence is kind of ubiquitous in the industry, so there's a lot of word of mouth, but SEO is a pretty big one. We're getting a lot of traffic through the app store as well. I would say SEO. If people aren't finding out through their buddies that are going surfing, that SEO is probably the [inaudible 00:32:48]-

Jacob Eiting:

I think that's how I came in was that way. You also do a lot of content too, right? You do some surf vids and written content, if I'm not mistaken?

Paul Ganev:

We do. Everything on the platform is really content. When we write a surf report for a certain location, if surfers are going to a new area and trying to figure out where to surf, they'll Google what are the surf conditions at El Porto, or wherever, and they'll land on Surfline or our competitor's page. There's a lot of traffic coming into those spot pages and individual surf reports.

We do a lot of content as well. We have a big editorial arm that writes not just about surf conditions and what's happening there, but we write a lot about news and other topics as well.

Jacob Eiting:

Yeah, it's interesting what we tend to call free or organic, when it's like, we actually... Revenue Cat doesn't do a lot of paid acquisition either, but we do a lot of work to get acquisition.

David Barnard:

How does the conversion over time play out for Surfline specifically? I've talked to a lot of app businesses where, "Oh, yeah, if somebody doesn't convert in that first session, they just never convert," but I've always kind of thought that means freemium probably is not working. That's not a good freemium strategy if that is the case, and it needs a rethink. I would imagine that you do see some positive year-over-year growth in being able to convert those free users into paid subscribers.

Paul Ganev:

Yeah. I think probably what that person's referring to, and I see this with most products, is when people download the app, even if you have a freemium model, typically the largest percentage of your conversion will happen pretty quickly. People will convert within the first seven days, and then there's a trickle of conversion over time. Now, again, with freemium, the hypothesis here is that the value that you put behind the paywall will continue to grow, and the value of that product will continue to improve.

It's up to you to articulate that value, and make sure there's balance between the value that's in front of the paywall and behind the paywall. A lot of companies, that's where they fail is there's just a misbalance between the value in front and behind the paywall. You need to do a lot of testing. The last three years, we've tested, and tested, and tested different options, not just messaging or what's paywall and what's not, but the different models.

As an example, there's a pretty typical model where a consumer gets unlimited access to a limited amount of features. They come in, and these three features are free, but you can use them as often as you want. There's another model that's pretty typical, the New York Times model, where you come in and you get limited access to, not enough limited amount of features, but to some features. You come in and after your third time of using these features, you are no longer allowed to use them. You see this in gaming, and all kinds of different industries, and there's pros and cons to both, and we've tested both.

Ultimately, I'm a bigger fan of not limiting engagement. If you can create some kind of habituation with a free product, it's fantastic. They'll come in on their own, and if someone's coming in 10, 15 times a month, that gives you more opportunity to message them, educate them about the product that you are offering. There's some imbalance likely for a lot of these other companies, and you have to determine whether it's a value problem, or if it's a model problem. There's no way to really figure it out until you test it.

David Barnard:

You talked about it being that trickle over time. I guess my question was, over time for Surfline, as that value prop has increased, as you figured things out, as you've done testing, does that trickle start to become a little bit of a stream, and grow into a more meaningful thing? Is that trickle growing?

Is the freemium model actually working in that way over time, where that trickle does become a meaningful part of the business, of more and more people subscribing in year one after habituation, versus that, oh, still 98% of our revenue comes from people who signed up like day one?

Jacob Eiting:

I'll anecdotally add some here, and I might not be technically a freemium user, but I oscillate between a freemium user and a paid user, depending on the season of my life. If I'm spending a lot of time on the coast or whatever, if I'm there for even a couple weeks, I will buy a subscription, and then I will let it expire. When I'm not at the coast anymore, I become a free user. I still can get cams.

I have to watch an ad for, there's an ad for board shorts that used to play at the beginning of every Surfline video from five years ago that I will never forget, but you just watch it, because you're like, "Well, I got to see the cam," and you do that until one day, you're fed up and you transition over. I might be an interesting case, because you talk about that propensity to pay. I can afford a Surfline subscription.

There's probably some users who never do, or it's never going to be a thing they do. Not to steal your answer Paul, but David, I don't even know if that's necessary, totally. The value of a premium user base has value, and ideally, you want to set it up to have value in itself. If you convert them, great, but they also provide word of mouth. They also provide feedback.

In Surfline's case, you guys also monetize with advertising, so they provide a base you can monetize for them as well. Yeah, before I put you on the spot, are you actually making money off these people? I'm like, "Yeah, in lots of ways."

Paul Ganev:

We definitely are. I'm hoping you bought that pair of board shorts on that ad.

Jacob Eiting:

I still can see it. He's like, oh, this perfect right-hander, he in the barrel. Then I do remember the brand, it was probably Volcom, and you guys should keep advertising on Surfline. Here, I'm doing you a favor.

Paul Ganev:

Love it. Over the past five years, we have seen a pretty big increase in conversion of that free audience. Typically, the way it works is if you launch a new product, or we add new cams to a certain area, you'll see an uplift pretty quickly, and then it'll slow down over time. Your baseline conversion over time continues to improve. I haven't seen too many instances, not here or even in other products where you launch something, and your conversion just kind of doubles overnight or anything like that.

What you'll see is that you'll launch a new product, you'll get a bunch of early adopters that come in, subscribe, but your baseline conversion after those early adopters have been kind of normalized is a bit higher than what it was before. That's kind of the model is over time, you're hoping that every year, your freemium conversion is a little bit better, and a little bit better, and a little bit better, but the size of your free audience has not gone down. If you can do that, then you kind of have a recipe for success. Yeah.

David Barnard:

How does ad sales and sponsorships work in that? Jacob kind of mentioned it, you are monetizing that free base, and with un-skippable video ads...

Jacob Eiting:

The cams are good, you got to watch the ads. It's the deal.

David Barnard:

How does that side of the monetization play out?

Paul Ganev:

We have an ad sales team, and traditionally, we went to market, and we would sell media packages. That was kind of our strategy, and we'd monetize the free audience. Over time, we've slowly started to transition our focus a little bit. Today, while we still sell traditional media packages, our focus has shifted a little bit to finding ways to connect the consumer and the advertiser for our premium audience in a native way.

The best way for us to do that is to find ways for brands to give value directly to the consumer. Imagine your consumer behind the paywall, brand's trying to reach them. It's not really easy to put ads behind a paywall. It's not a great user experience. I don't recommend it. Instead, what we've been trying to do is find partnership deals with these brands, where the brand will give the consumer some kind of exclusive discount, or early access, or something that the consumer didn't have before it doesn't have access to.

Then we'll market that perk or promotion natively to our consumers behind the paywall. Again, we are doing both. We're doing a traditional media strategy, but we're also pivoting in a big way to trying to get as much value to the subscribers as possible. That's our number one goal.

Jacob Eiting:

You're thinking about those as two separate strategies, right? You're doing more traditional display ads or whatever you guys are using for the non-subscribed audience, and then for the subscribed audience, also thinking about ways you can tastefully, I'm sure, monetize behind the paywall.

Paul Ganev:

Yeah, it's the same strategy. We're going to brands and trying to figure out if there's an offering that makes sense for them behind the paywall versus in front of the paywall. Usually, what we put behind the paywall is very well received. A consumer will come in and they'll, as an example, maybe they get a discount to a new surf park that opens in their area, and it's a Surfline only discount. We're not going in there and bombarding them with ads or anything like that.

We come in and say, "Hey, there's new perk, you guys get early access to the surf park, or you guys get a discount courtesy of whoever." The brand wins, because we're monetizing in a native way, which is traditionally, it performs way better than if we just put a banner ad somewhere. The consumer wins, because they're getting some kind of incremental value that they didn't have before.

David Barnard:

I imagine that's a really good audience to sell, because you've kind of proven they have some sort of disposable income. In terms of CPIs, I guess, versus your free audience, it's going to be pretty good, right?

Jacob Eiting:

Well, one, I haven't noticed, I've been a premium subscriber on and off, and I was like, "I never felt advertised to," so kudos. We don't talk about that all that much, David, on this podcast about ways of monetizing a premium audience. You talk about that ARPU strategy, increasing your ARPU. At some point, your subscription probably reaches the value peak, and you're not going to be able to go much further.

You can start to think creatively about what are other ways that we can engage with our audience, bring them value, again, create value and capture it, which can be bringing them [inaudible 00:41:16] offers and things like this, and it's probably a little bit of a narrow path to walk, but I think it can be done.

David Barnard:

I think the monetizing of the free users and understanding the value, we've talked about that a bit on the past few episodes about understanding the value that those free users are bringing, and like we were talking about here, driving user acquisition without having to do a ton of paid user acquisition, that kind of thing. It's like, when you understand that, it helps inform the strategy for freemium, but then the other layer that I think y'all have figured out that a lot of others haven't, is effectively monetizing those for users as well.

Getting some value back out through these sponsorships, through the un-skippable video ads and things like that. I think Duolingo is a great example. They don't monetize that free base at all. I will be curious, they just crossed a 410 billion valuation.

Jacob Eiting:

Do they hit a ceiling on their paid side and start to think about that?

David Barnard:

Yeah, we may see some brand partnerships and ads and other things make their way into Duolingo over time, as they have to monetize that free user base more strongly to keep the growth going, as they've saturated the kind of willingness to pay and whatnot.

Anyways, so much more I'd love to talk to you about, but we are needing to wrap up. Anything else you wanted to share as we are wrapping up? Is Surfline hiring? Anything exciting coming down the pipe that you wanted to share, especially with our subscription app nerd folks who listen to this podcast?

Paul Ganev:

I don't know if there's anything too interesting. We are going to be releasing a whole suite of new product features this year, so anyone who uses Product Lookout, we're going to have a bunch of cool new features, some really cool stuff around camera intelligence that we haven't released before. I think that'll be innovative and really improve the surfers' experience. That's what I'm most excited about. Otherwise, I'm really stoked. I appreciate you guys having me on the podcast. It was a lot of fun.

David Barnard:

All right. Thanks, Paul.

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