Posted on Friday, Mar 20th 2015
Most apps operate on a freemium-based model, but converting the free user to a paying member is a tough hurdle to cross. Billion Dollar Unicorn club member Evernote seems to have cracked the code for it.
Redwood City-based Evernote was founded in 2005 by Russian scientist Stepan Pachikov. Stepan was earlier involved in the pioneering work behind Apple’s handwriting recognition engine Newton. He began work on a technology that would enable people to have a secondary brain that could help them remember things. For two years, Stepan and his core team of researchers and technologists developed technology around image recognition and other similar services. In 2007, another entrepreneur Phil Libin was looking for ideas to start a new business. As part of his due diligence, he came across Evernote. He was impressed with the technology and joined Evernote as their CEO. He played a significant role in guiding the team toward a product and a successful business model.
By 2008, Evernote launched their invitation-only beta app on multiple platforms including web, mobile web, Macintosh, Windows, and Windows Mobile. Within a few months of the launch, the app had seen 10,000-20,000 early adopters. From then on, there was no looking back.
Today, Evernote builds apps and products that are significantly ahead of note-taking capabilities. Users can keep notes, memories, images, and also use the app to better define the way they and their teams work. It has become a single workspace that users can access across multiple devices including phones, tablets, and computers so that users can collect, share, and present information to others. They have a user base of more than 100 million worldwide. More than 30% of their users are in Asia with particular strength in the markets of Japan, South Korea, and other emerging nations like Indonesia and Vietnam. 25% of their user base is in the US and Canada.
Evernote operates on a freemium model that lets users access their basic app for free. A premium account for a consumer is available at a price of $5 per month and grants the user access to additional features such as enhanced search and offline access to notes on mobile. Business users can sign up for Evernote by paying a fee of $10 per month per user. The Enterprise edition allows users to collaborate with colleagues and manage the app through a centralized administration.
Evernote does not disclose their revenues, but they have reported that nearly 70% of their revenues come from paying customers. They earn 15% of their revenues by providing services to businesses and the remaining 15% by selling branded products such as special pens, backpacks, and wallets.
Evernote’s biggest achievement lies in their ability to convert basic version users to a paying customer base. Two years ago, they had a user base of 41 million of which 1.5 million were paying members–a 3.7% conversion rate. It is among the highest conversion rates for a freemium model considering that most businesses operate at less than 1% conversion rates. They attribute the high conversion to high user engagement, which increases with time. As more and more memories are stored with Evernote, it becomes increasingly difficult for the member to opt out of Evernote. Instead, they begin to opt into the premium application for their additional features.
Evernote’s research has found that the longer a user stays with them, the more the chance that they will opt for a paid version. Users who pay in the first month are a mere 1.5%, but by the end of the year, that conversion rate goes up to 7%. By the end of the second year, the conversion rate is noted to be as high as 11% and for users as old as five years, the conversion rate is 25%.
But high conversion has not necessarily translated to a profitable business model. As per 2014 reports, Evernote was still a loss-making entity as they continued to invest in market expansion. They expect to turn profitable in the next few years.
They are venture funded so far and have raised $290 million from investors including Nikkei, CBC Capital, Eastlink Capital, Salesforce Ventures, m8 Capital, T. Rowe Price, Valiant Capital Partners, Meritech Capital Partners, Harbor Pacific Capital, Allen & Company, Sequoia Capital, and Morgenthaler Ventures. Their last round of funding was held in November 2014 when they raised $20 million from Japanese media conglomerate Nikkei at an undisclosed valuation. Evernote had already reached the Billion Dollar status back in 2012 when they raised $70 million at a $1 billion valuation.
More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.
This segment is a part in the series : Billion Dollar Unicorns
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