

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

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dchuk
I've written about freemium here before:
[http://www.layeredthoughts.com/startups/the-psychological-
di...](http://www.layeredthoughts.com/startups/the-psychological-difference-
between-freemium-free-trial-plans)

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.

~~~
debacle
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?

~~~
dchuk
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.

~~~
debacle
> Conversion rate is entirely subjective to the product

Actually, conversion rate is completely objective - it is the percentage of
users you have who 'convert' and become customers.

What that means for your company might be different from product to product
and industry to industry, but a 3% conversion rate for freemium is awesome.

~~~
dchuk
I suppose I was unclear, I meant the value from a 3% conversion rate for a
product is subjective to that product or niche.

~~~
adgar2
That isn't what the word "subjective" means. For each market, there are
objective numbers to be researched and acted upon.

You mean 3% conversion being awesome "is relative to"/"varies by" a given
product or niche.

~~~
dchuk
"For each market, there are objective numbers to be researched and acted
upon." and "A 3% conversion rate being awesome is subjective to the niche or
product" are compatible statements.

EDIT: "subjective" is traditionally used when someone's opinions or biases are
influencing a decision or conclusion, so I see where the confusion is here and
the fault is mine for using that word. My main point is that there is no one-
size-fits-all "good" conversion percentage, it's entirely dependent on the
product and market.

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lnanek2
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.

~~~
pccampbell
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
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.

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lkrubner
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...](http://www.youtube.com/watch?v=zkGRHI7xnjo&list=UU4AWURx82e_hl5dQALXJxXw&index=2&feature=plcp)

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thedufer
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.

~~~
AJ007
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
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.)

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readme
"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...](http://www.priceintelligently.com/?hsCtaTracking=920c607f-4f4b-4f03-adfe-1f7cea0702e8|cf61b233-c813-4d5b-b940-4b99766302d3)

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.

~~~
pccampbell
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. :)

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kurtvarner
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.

~~~
pccampbell
Yea, thanks for the advice. :)

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

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cinbun8
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.

~~~
pccampbell
Boom. Great summary/point.

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unoti
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.

~~~
pccampbell
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.

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neya
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.

~~~
pccampbell
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.

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

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dumb-dumb
Doesn't Dropbox use the freemium model?

I generally agree with dchuk's comments.

