In wireless, what is the conversion rate from free to paid?

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Mike Dano

MVNO FreedomPop said that around 30 percent of its subscribers opt for its paid tiers of service. The figure is notable because it finally shines a light on a strategy that wireless carriers have been testing for years: offering a small amount of wireless data for free in the hopes users will purchase more.

Verizon Wireless (NYSE:VZ) was one of the nation's first wireless carriers to dip its toe into the "freemium" mobile data market. At the end of 2010 the carrier announced that it would offer 100 MB per month for free to people who purchased Google's (NASDAQ:GOOG) first batch of laptops running its Chrome operating system. The offer no longer appears to be available.

In the intervening years, a number of other companies have tried similar tactics. Most notably, FreedomPop launched an MVNO service on Clearwire's (NASDAQ:CLWR) network offering 500 MB of data in the hopes users would upgrade to paid data tiers or would purchase one of its various value-added services. Just last week, T-Mobile USA joined the fray with its new 4G Connect program, which provides 200 MB of free data to notebook, tablet and ultrabook users.

The freemium model--a portmanteau of "free" and "premium"--is similar to the idea of a "loss leader" in the retail world where a product is sold below its market cost in order to stimulate additional sales (think inexpensive TVs at Walmart on Black Friday). The freemium model is heavily used in the mobile content area, where mobile gaming companies and other app makers offer a free version of their app in the hopes users will like it and opt to buy a paid version with additional features. Mobile analytics company Flurry found that around 3 percent of mobile app users upgrade to a paid tier.

But FreedomPop's initial data shows that the free-to-paid conversion rate for wireless data is much higher than that, at around 30 percent. FreedomPop CEO Stephen Stokols attributed the figure to the fact that FreedomPop users must first invest as much as $100 for a FreedomPop device before they can make use of the service, potentially priming them for additional expenses. He also pointed out that the company has customers' credit cards on file, making purchases as simple as touching a button.

FreedomPop's 30 percent conversion rate is just one of the figures Stokols provided to me during an interview at the recent Consumer Electronics Show in Las Vegas. He said the MVNO's most popular paid tier is 2 GB for $17.99, and its second most popular tier is 5 GB for $35. He said that around 10 percent of the company's customers travel over their allotment of 500 MB free per month, and thus must pay overage fees.

But FreedomPop's business model isn't solely based on encouraging users to move to larger data allotments. Stokols said the company offers a handful of value-added services, and plans to add additional services in the future. Specifically, he said 30 percent of FreedomPop's customers pay $3.99 per month to increase the speed of their wireless connection. Around 27 percent pay $1.99 per month for usage alerts that will warn them if they are nearing the limit of their data allotment. And about 10 percent pay $3.99 per month for the company's equipment protection package, essentially insurance for lost or damaged hardware.

Stokols said FreedomPop eventually plans to offer around 20 different value-added services. The next two on tap are online security and anonymized, VPN-based Internet browsing, which will launch in a few weeks. FreedomPop also recently inked an agreement with textPlus to offer voice and messaging capabilities as value-added services; Stokols said FreedomPop likely will offer 200-300 voice calling minutes per month for $3.99, ranging up to 1,500 minutes for $14.99 per month.

Although FreedomPop's free 500 MB per month doesn't seem like a lot of data, it's very close to the average amount of cellular data that Android smartphone users consume, according to data from NPD Connected Intelligence. NPD's data shows that the average Verizon Wireless Android smartphone user consumed exactly 500 MB per month during October.

Though FreedomPop's Stokols was surprisingly candid about the company's free-to-paid conversion rate, there was one key number he declined to provide: the number of FreedomPop's subscribers. Obviously that's the most critical part of the equation, since it would indicate how many people actually sign up for a freemium wireless data model.

FreedomPop's grand freemium experiment is intriguing, and Stokols seems both aware of the company's challenges and excited for the company's future. I think this kind of pricing experimentation can only push the industry forward. +Mike Dano