Posted March 19, 2007 6:17 pm by with 1 comment

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Forget what your mother told you: start giving away the milk for free, and some people will still buy the cow. (If this were about video, I’d say, “Give the milk away, and make tons more money than you could from selling the milk by slapping some ads on the cow.” Anyway…)

Everyone’s sweetheart, Linden Lab, creators of Second Life, is the featured case study for MarketingSherpa (free access until Wednesday, so hurry if you want to read it!). The study details how Linden Lab’s use of a hybrid “freemium” content model actually improved their paid subscription rate.

Did you sign up for Second Life before September 2005? Way back then, a basic lifetime membership was $9.95. Premium memberships, which enable you to own land in the virtual world, started at $10/month. Linden experimented with their sign up procedure to see what would happen if they eliminated the $9.95 basic membership fee.

Unsurprisingly, this had a positive effect on the number of members that completed the registration process. (So did reducing the number of pages in the registration process.) Their completed registrations increased 350%. After the test, Linden made the change permanent.

In the first five months after the change, basic memberships tripled from 42,000 to 129,000. Second Life was giving away the milk for free; but were people still buying the cow? As it turns out (and as I’m sure you’ve guessed at this point), yes, some were. The number of premium memberships in the same period grew from 39,500 to 68,000.

Before you get too excited, note that this growth rate is considerably slower than that of basic free memberships. Basic memberships tripled; premium memberships less than doubled. Hm…

On the one hand, this is to be expected. Lots of very cheap people (like me) who would have been excluded from signing up for $9.95 are now signing up for free. These people have no intention of becoming premium members. By removing the $9.95 lifetime fee, Linden opened up the door to my fellow cheapskates. While they are probably contributing to the Second Life economy, they never had any desire to become a premium member.

If the conversion rate from free to premium membership is the main concern, it might be good for your company to weed out people who may never be willing to pay for your content/goods/services with a one-time registration or membership fee like Linden’s old $9.95. However, if it’s more important for you to get members/participants/visitors now that may some day convert, go with the freemium.