Forget Freemium

http://blog.priceintelligently.com/blog/bid/159885/Forget-Freemium-Why-It-s-Killing-Your-Pricing-Strategy

by pccampbell • 14 years ago

48 31 14 years ago

blog.priceintelligently.com

kurtvarner• 14 years ago

An asterisk in the title? I think this is unnecessary. For me, it set the wrong tone as I was dismissing things until I knew what the asterisk was.

[Edit] Looks like he removed it. Good call.

pccampbell8• 14 years ago

Yea, thanks for the advice. :)

Totally set the wrong tone by undermining the argument before we even presented it.

neya2• 14 years ago

The author is specific about Saas. Does this apply to apps /games on a Marketplace like Google Play or Apple's app store? Just curious.

pccampbell8• 14 years ago

Hey. Really depends on the approach to the revenue model. It's more common in the Web App world to sell for free or $0.99 (to limit spammy downloads) and then really double down on providing a lot of value to move folks up to a higher priced tier. In app purchases are also a great move if you can get them to work, but these take time to optimize. All of that being said, there are some phenomenal apps that are defending a price point, rather than giving away the farm.

A cool hybrid example of free to paid is Speech4Good (pretty specific market though). They're free app shows you all the features you could have with the premium app (they're greyed out while you're using the free version). The big note here though is that their free features are only marginally useful.

neya2• 14 years ago

Thank you for your detailed insight, and for the examples too!

thedufer• 14 years ago

This is a bit nitpicky, but the math in that example makes no sense. If you're losing 10% of your customers each month and only gaining 30% each year, you are bleeding customers. Not sure how you're coming out ahead in this situation.

justincpollard• 14 years ago

I read things a bit differently; the assumption is that the product experiences 30% customer growth per year (around 2.2% growth per month) and loses 10% of those <i>new customers</i> per month. I think you may have read it to mean a loss of 10% of all customers per month.

AJ007• 14 years ago

Even if the math was fixed it is bullshit because the numbers are made up.

I can think of a few companies who lost out on my business because I was able to test out their competitor, for free, before handing over all of my billing info. If someone wants to know the impact of killing their free plans, then they can easily test it.

Each company has its own math formula for what works, and that formula will change, if not by the day, then by the month, as the market evolves. In the case of most start ups, it is going to change very rapidly.

My rule: offer just enough to free so a customer can see the value, but not enough that they can do "damage" (e.g. derive a massive amount of sustained value to their own business.)

lloyddobbler• 14 years ago

Agreed.

The best use of a 'free' pricing tier is for an extremely-limited version of your product - one that someone can't use on a regular basis and get what they need out of it. You have to stack your features in tiers that encourage users to upgrade in order to gain the features/scale/whatnot they need to gain sustained value from your product.

If you're giving away the basic plan product for free, you stand a lackluster chance of converting free users to paying users. But if you look at the free tier as part of the conversion funnel, it becomes a useful part of the path on the way to gaining more and more paying customers.

(The big difference is that a lot of users - myself included - are wary of free trials. But we'll definitely go ahead and sign up for something that doesn't cost us anything, with the intention of kicking the tires. And once we've signed up, we're now prime candidates for continued encouragement to upgrade.)

cinbun8• 14 years ago

It comes down to conversion rates from free -> paid users. Is there an itch that your customer must scratch and is willing to pay for ? As long as that motivator exists you will see good conversion rates. However if the idea is to sell 'cool' things that add bling to a service / app, it is less likely to sustain profit.

pccampbell8• 14 years ago

Boom. Great summary/point.

lnanek2• 14 years ago

These numbers are non-sense. He drops the price from $49 to free, then assumes you'd have exactly the same number of customers, and says how much money you lost. But if you made the service free you'd have a hell of a lot more customers at the lowest tier.

It doesn't matter because he made up a % for the amount that upgrade to higher plans, which would be the paying plans if free was the lowest, and that % would be completely different for free users vs. already paying users. You can't just change one number like this.

Google has released stats that apps that moved over to in-app payments from paid apps make 20x the amount they did previously. Making people pay to enter is not good business.

pccampbell8• 14 years ago

Hey...I'm the author of the post. You're completely right. The numbers are non-sense. We wanted to outline a quick example of the impact of freemium with all things being equal. Of course, things would change, especially with differing market forces. We probably could have been a bit clearer about that or explained it in a much different manner. Additionally, we could write a follow on post with a real world example based off white labeled data to prove the point much more efficiently.

In terms of making people pay to enter, I think it really depends. As we explained, if you're not in a position to truly move folks from a value limited free taste of a product to a premium tier, then I'd say you're better off growing slowly before opening up the floodgates. Take a look at Wistia or MailChimps approach. Of course, there are great counterexamples, as well.

Thanks for the feedback!

incongruity• 14 years ago

Forgive me, but that's fundamentally intellectually dishonest – if you make an argument with completely fictitious numbers and know its seriously flawed but still put it forward as if it's genuine, you're simply lying to support your argument.

If you have real numbers, use them.

If you don't, this all sounds a lot like the sort of "numerical" support for anti-piracy measures made by record companies. The interconnection between the marketing role of a free option and its numerical effect on sales is going to be highly nuanced.

Further, there are clear-cut reasons that "Big customer databases" are valuable even if "they’re [not all] ponying up cash."

The first, discussed elsewhere here, are network effects. Dropbox gets more and more valuable for paying users every time a free user signs up because it makes it all the more likely that the next person they need to share a file with will be able to easily handle a DB share.

Second, building a big user-base of devoted users, even if a large percentage are free users, potential builds a barrier to entry for any possible competitors – thus protecting the revenue from the existing paid users and encouraging future paid users.

Still, I believe that underlying your whole post is the important point that you must have a solid business plan and understand just how you are going to drive profits – be it freemium or otherwise and that's a very important point, so thank you for calling it out.

dchuk4• 14 years ago

I've written about freemium here before: http://www.layeredthoughts.com/startups/the-psychological-di...

The best advice I can give regarding when it's appropriate to use freemium and free trials:

-Use Freemium when: your per user usage costs are trivial (Examples: Evernote, Basecamp, Freshbooks...sites that don't incur transactional usage costs like having to pay for data access to other systems or have high royalties to pay like Pandora)

-Use a Free Trial when: It costs you a non-trivial amount of money for someone to use your product (this also helps prevent free account abuse) or if your trial is able to answer someone's question that is preventing them from directly converting. An example would be that if your product's code benefit is that it creates beautiful reports for clients, you might offer a free trial to prove to product leads just HOW beautiful those reports are before committing to a purchase.

The problem I see with Freemium plans (and I have actual hard data to back this up that I plan on blogging in the future) is that they cause a fundamental shift in your customer's mentality which often times leads them to not convert to a paying customer. When a customer gets the seed planted in their mind that there is possibly a way to get your product for free (even if it's crippled in features or usage limits), they will morph their own needs to match the freemium plan rather than the other way around.

TL;DR: you can't just slap a freemium plan on your product and assume success, you need to look at your customer data and design it perfectly to fit in with historical trends (which is what the OP is arguing for here actually). Freemium can be detrimental if not designed and applied correctly and in my opinion should be avoided most of the time by SaaS startups.

pccampbell8• 14 years ago

Love the line, "you can't just slap a freemium plan on your product and assume success." Also, great post. Thanks for sharing here.

debacle3• 14 years ago

I think "often times" is an understatement. If you have a 3% conversion rate from your freemium users, you're doing a great job. Secondly, the people using your service for free are _users_ not customers. A customer pays you.

Finally, if I'm a customer and you have a freemium offering, I'm very likely subsidizing the usage of upwards of 50 other users. Is that fair?

pccampbell8• 14 years ago

If you're making those free users work for the value their receiving (shares, referrals, etc.), then I think it's fair. Yesware is phenomenal at this, they allow you to track opens on your sent emails, but their free plan only gives you a 100 tracks/month unless you share and get others to sign up. Dropbox is the poster child of this though (spoke about it below).

dchuk4• 14 years ago

3% conversion rate in this context is an empty statement. Conversion rate is entirely subjective to the product, its price, and the margins on the backend.

EDIT: I agree that a non-paying customer is just a user (duh) but the goal of a product is to grow your customer base (to meet the real goal of increasing your profit). So anyone using your product for free needs to be doing so as a means to an end: Either they will convert to a paying customer at some point, or they will refer paying customers.

If you're building a fun side project, free users are groovy. But if you're trying to grow a profitable company, and your free users aren't working for you in one way or another, they're just a liability.

unoti• 14 years ago

It's worth noting that Facebook and LinkedIn both benefit from network effects: every new user increases the value of their offering. This can help serve as a justification for the existence of a free tier.

pccampbell8• 14 years ago

Completely agree, especially when used correctly. Dropbox is also a phenomenal example we spoke briefly about in the article. Every "sharing" feature they make you do to get more storage space has a value that should be considered in the "free" plan. Unfortunately, a lot of folks just look at freemium as a norm, rather than tool that needs to be sharpened and precisely used.

readme• 14 years ago

"Download your free e-book now" red button is a dead link/typo.

Here is the corrected link for anyone who wanted to download the ebook. http://www.priceintelligently.com/?hsCtaTracking=920c607f-4f...

That link does break their click tracking though. So if possible, click the red button, and fix the typo yourself after by placing an 'e' between the c and i in price intelligently. Then I presume they will still get their valuable data.

pccampbell8• 14 years ago

All updated. Thanks for the find. No worries on the clicks, we're more than happy to just make sure we provide some valuable content all around. :)

dumb-dumb• 14 years ago

Doesn't Dropbox use the freemium model?

I generally agree with dchuk's comments.

lkrubner• 14 years ago

Maybe there is a successful model to be had here, with some changes. Think about games -- the big trend over the last year or two has been toward bundling. Consider these sites:

http://bundle-in-a-box.com/

http://www.indiegala.com/

http://www.indieroyale.com/

http://www.gamemusicbundle.com/

Most of the time, the problem with freemium is that the conversion rates tend to be low. My company has talked with hundreds of app developers over the last year, many of them working with a freemium model. We know that even successful games get conversion rates that are usually less than 1% (that is, more than 99% use it for free, less than 1% of the users pay). With conversion rates that low, only a handful of companies will have success with the model. But there are variations on this model that might work very well. Bundling helps with the "first penny" problem -- some users need a very large temptation to make a payment. A subscription model would be especially useful -- and something like a subscription model is what companies like App.net are trying to do (and my own company too). If you can build a base of users who pay a regular subscription to support a bundle of apps, something like the Freemium model becomes a bit easier to manage. User's who would not pay to get a particular app might be more willing to pay if they are getting a bundle of, say for instance, 10 apps that all have some interest to the subscriber. In theory, you can make a lot more money by getting a small amount of money from 50% of your users, or even 100% of your users, then you can get by charging 1% of your users a medium amount. And, to be sure, the app developers that we have talked to have all offered huge discounts to put their stuff in a bundle, because for most of them, even getting $0.50 cents from 50% of their users would bring them a lot more money than trying to get $4.99 from .05% of their users. An elaboration on this argument is here: http://www.youtube.com/watch?v=zkGRHI7xnjo&list=UU4AWURx...

Forget Freemium

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