Phil Libin, CEO of Evernote, shares some of the financials behind the company’s universal memory drawer:
Evernote, of course, is free. That’s important because the company, which does no advertising, needs to acquire customers as cheaply as possible. “Our product is our marketing,” Mr. Libin says.In 18 months, 1.4 million people have tried the service. An additional 4,500 try it each day.
“Free is not a loss leader,” he says. “If we can get a small percentage of users to pay we start to make money.”
How many times has a venture capitalist heard that? But Mr. Libin showed that the magic is not only that it takes just a small percentage of customers to turn red ink into black, but also that the longer they remain customers, the more profitable they become.
About 75 percent of the customers walk away within the first four months. That’s not worrisome, because the revenue from Evernote’s 500,000 active users is growing faster than the growth in the customer base. How? Customers discover that they need more than the basic storage space or want some extra features, like the ability to scan PDF documents for a particular word. Evernote charges them $5 a month or $45 a year for these and other benefits.
Mr. Libin studied the behavior of the earliest adopters and found that the longer customers used the service, the more likely they were to start paying for it. About 0.5 percent convert to paying customers in the first month. But after about a year, 4 percent have converted. (He says he thinks the figure will top out at about 22 percent.)
It makes sense. The shoebox of data is more valuable to the customer as it becomes larger. In addition, compelling uses — like photographing those business cards — quickly eat up the monthly allotment of memory, inducing a person to start paying. The longer the customer stays, the more valuable he becomes.
The company gets about 3 cents of revenue for each active user in the first month of use, but after a year that same cohort of customers is providing 35 cents each.
Evernote made $79,000 from paying customers in July, Mr. Libin says.
That’s not enough to cover the cost of the engineers who design new features and the additional servers to store all the added data. But the cost of staffing doesn’t rise exponentially as more customers join, and the cost of adding storage declines because computing power keeps getting cheaper. (Electricity costs go up, but that is not a budget killer.)
The variable cost for each active user was about 50 cents a month when the company started, but has been dropping along a curve to 9 cents a month. By January 2011, Mr. Libin projects, the company will break even.