Conversion Funnels #1: Intro, Definitions & Three Types (Transaction, Subscription, and Freemium)

**I’m launching a newsletter in 2022 called Personal Finance in the Blockchain Age. It would make my day if you sign up.**

Intro

Over the course of my career, I’ve spent a lot of time working with Conversion Funnels, whether it’s analyzing data, identifying improvements, building features, or validating experiments. Each time I work with a new team, I tend to go through the same process to better understand their conversion funnel so that I can be helpful faster. Lately, while interviewing for Product Manager roles, it dawned on me that certain types of conversion funnels require specific approaches or emphases to achieve scale, and there are a considerable number of overlaps between each conversion funnel type.

I decided to attempt a deep dive into Conversion Funnels. My goal is to write 500 words each weekday about a different topic related to conversion funnels until I run out of things to say. This week, I’ll introduce the three main types of Conversion Funnels: Transaction, Subscription, and Freemium.

Let’s start from a blank slate, assuming nothing about the subject. If you notice I stray (by making an assumption or not explaining something) or you disagree, please leave a comment so that I can clarify or correct. I’m always open to a thoughtful dialogue.

Last comment before digging in. If you like what you’re reading, please show some applause or share the article (I’m actively interviewing so intros for PM roles are also welcome). If an article receives 100 claps, I will create a flowchart (or a few) to better illustrate the points below.

And away we go.

Definitions

Since we are starting from nothing, we need to define what a “Conversion Funnel” is. The Wikipedia definition seems narrow, focusing mainly on a transactions, so we’ll need something that is a little more broad. This is what I came up with:

A ‘conversion funnel’ is the end-to-end user journey that results in a given action.

It’s simple and intentionally broad. Let me explain. A Conversion Funnel typically requires one or more engagement steps (on-page landing, mobile app login, product selection, payment, login etc) that culminates in an action step (purchase, email sign-up, etc). For modern technology-based conversion funnels (web, mobile, IOT, etc), all of this is tracked to a specific user, and you can query this info via your database. Companies tend to emphasize conversion funnels that result in a sale or transaction (typically a Key Performance Indicator aka KPI), though you could just as easily have a conversion funnel that results in an email sign-up for a weekly email newsletter.

For the purposes of our conversation today, we’ll largely focus on New User Conversion Funnels. Returning User Conversion Funnels require different considerations than New User Conversion Funnels.

You could also have Nested Conversion Funnels where there is more than one key conversion goal in a single Conversion Funnel. For instance, a conversion funnel with a target action to capture emails for a newsletter could have a two-step conversion funnel (landing → email sign-up). The email campaign for the newsletter could have a target action of transacting something from the email (email → transaction). You could look at the complete conversion funnel (landing → email sign-up → email → transaction) to understand how many users started and ended this journey in the last 30 days.

The last key definition is the Conversion Rate. This is calculated as: The number that complete the conversion funnel (ie transaction / action) divided by the number that start the conversion funnel (ie landing). In other words:

Conversion Rate = Count of Unique User Transactions / Count of Unique User Landing.

Three Types Of Conversion Funnel

Conversion funnels can be implemented in many different ways since the target action can be customized. However, there are only three specific types of conversion funnels based on the different type of business models and target actions: Transaction, Subscription, and Freemium. Each type of conversion funnel has a slightly different emphasis which is important for various business owners (particularly the Product Manager) to understand.

Transaction

Transaction conversion funnels are the most common. It’s your typical retail experience where you buy something one-time. Think Amazon. Ebay. Etsy.

This conversion funnel is also the most basic. Landing → Steps / Actions → Conversion.

You will likely need a descriptive product page and some manner of a shopping cart with payment methods. You don’t always need a login system, since these are one-time purchases (ie guest mode as a feature).

Subscription

Subscription conversion funnels are what you typically use for your most frequently used items. You pay once and then every month thereafter, you’re charged automatically for the product / service. Netflix. Amazon Prime. Salesforce. Jira. LucidChart.

What separates Subscription funnels from Transaction funnels is the recurring payment. The recurring payment can have a powerful compounding effect, but it also presents a different type of friction in the conversion funnel.

Most Subscription Funnels include a Free Trial. This means that there is a Nested Conversion Funnel for the Subscription Funnel where you’re trying to convert users to Free Trial (Landing → Free Trial) and then again to Paid Subscriber (Free Trial → Paid Subscriber).

You have to consider several more complexities with a Subscription Conversion Funnel. When the payment method is requested (before or after free trial will impact free and paid conversion). How the user interacts with the Free Trial may indicate if they’ll become a Paid Subscriber. You’ll require a login system and every user must be logged in, because you have to track all the user interactions with the product (for conversion, retention, and product improvements) plus map the payment method on file to the user (which requires some form of login).

In addition, you may need to teach the user how to use your product in order to convert/retain them (Salesforce, Jira, and LucidChart) — a bigger learning curve than typical user education on the product you’d do for a typical Transaction Conversion Funnel (though some transaction conversion funnels require more education).

Freemium

Freemium conversion funnels are an interesting hybrid of Transaction and Subscription. Spotify. Full Story. MailChimp. MailGun. Fortnite. Clash of Clans.

One-time purchases (Transaction) or feature-upgraded subscriptions (Subscription) are the revenue generators for Freemium products. Like subscription products, the product is intended for repeated use, and there is a Nest Conversion Funnel (Landing → Free User → Paid User).

What separates Freemium from Transaction and Subscription is that the user’s product usage directly impacts conversion and revenue generation on an on-going basis and it’s a core focus for the entire team. For a Subscription (without Freemium), only the Free Trial period would be measured in the same manner and there has a defined end. Capturing and measuring this information for a Freemium product becomes one of the highest priorities so that you can understand which feature usage (rather than messaging) is the most likely to convert and/or retain the user. Feature usage would likely impact product messaging.

In addition, you may need to teach the user how to use your product in order to convert/retain them (Spotify, FullStory, MailChimp, MailGun, etc) — a bigger learning curve than typical user education on the product you’d do for a Transaction Conversion Funnel. Similar to Subscription.

A Note On Hybrid Models

It seems that more companies are using Hybrid Conversion Funnels in their business models. Amazon is the best-known example. They offer a Transaction Conversion Funnel (one-time purchases) along with a Subscription Conversion Funnel (Amazon Prime) that relate closer with one another. In these examples, you have to balance the needs of each conversion funnel type with your business objectives, but the main features outlined above must still be satisfied.

Tomorrow

The goal for tomorrow is to begin digging into each of the three types of Conversion Funnel starting with the Transaction Conversion Funnel.