I’m alway a fan of business model discussions and Don Dodge this week had an interesting post regarding conversion rates of the freemium business model.

I am at DealMaker Forum today. We just finished the speed dating sessions with start-ups and I was struck by one common theme. The most common business model is Free Service with an up sell to paid premium subscriptions, commonly known as the “freemium” model. I asked each of them what kind of conversion rates they were seeing. The average is less than 3% conversion. The companies presenting include; Echosign, Seriosity, Smartsheet, Central Desktop, Oddcast, Yugma, and others.

Freemium business models usually involve a Free service, sometimes time limited or feature limited, supported by advertising. The ads rarely cover costs. The goal is to convert these free users to paid subscriptions. Most services start with a $10 per user per month subscription and scale up to $20 or $50 per month based on a small, medium, large usage scale. They all have slightly different measurements and cut-off points, but most have some notion of small, medium, large.

What it means: keep those numbers in mind when building a business case around the freemium model.