
Why Free Plans Don’t Work - nsoonhui
http://www.softwarebyrob.com/2010/08/18/why-free-plans-dont-work/
======
shadowsun7
I loved this article, but after thinking about it for a bit I realize that
there _is_ an argument for going free. Two pretty strong ones, in fact.

1) If you want to get acquired - and we're talking about a big acquisition
here - it would do to go free so you manage to score a big-enough user base to
get noticed. And so the bigger company is interested in acquiring you not only
for your technology, but also for your users. (That said, acquisition may be a
risky bet.)

2) Going free also makes sense if you want total market dominance. In which
case, free is really the only way to go. The writer is speaking from the POV
of a micropreneur, and it makes sense for him to retract his free plan (in
fact, it makes sense for 37signals/the 37signals model to do so too).

But if you're in the position of being the next Facebook, going free and
dominating the market is really the best thing to do. (Or Youtube, or Google,
or Flickr).

You find lots of users, lock out the competition, and _then_ you can figure
out how to monetize.

Which only goes to show that there are all kinds of businesses out there, and
the advice you read on the net really should be done through the context of
your particular business and/or market.

~~~
revorad
_Going free also makes sense if you want total market dominance. In which
case, free is really the only way to go._

No it's not. The other way is to make the best damn product in the market. I
hate to give cliched examples, but since we are talking market dominance, see
Windows, Adsense and iPod.

~~~
damoncali
I can see iPod and Adsense, but Windows? Windows won for very, very different
reasons. When Windows first appeared, it was far from the best product on the
market. It won because it was already everywhere (because of DOS). Microsoft
practically invented the "give it away to ensure market dominance" game (Ok,
slight hyperbole there). It took the court system to slow them down.

~~~
revorad
What consumer OS on affordable computers (that leaves Macs out) was/is better
than Windows?

 _It took the court system to slow them down._

That was not for their dominant desktop OS, it was for using their monopoly to
push IE and server products.

You can call out Microsoft on dodgy anti-competitive behaviour in some
respects, but you cannot take away credit for building the solid product that
is Windows. Heck, even now after goofing up with Vista, they are back with
Windows 7.

~~~
damoncali
Windows won because DOS was already everywhere. It wasn't the best product. I
would argue OS/2 and Macintosh were pretty significantly better. It's not a
coincidence that it took this long (Windows 7) for MS to produce a decent
operating system - they are now having to compete on quality. But you don't
even have to buy the argument that Windows was sub-par. It doesn't matter,
because that's not why MS won.

Just as MS used the omnipresent Windows platform to push Office, IE, and
countless other products (with varying success) they used DOS to push Windows.
_That_ is why Windows won.

There's nothing dodgy about it - the point is there is more than one way to
win the market, and being the best product is pretty far down on the list.

~~~
revorad
Of course, Microsoft used DOS to push Windows and perhaps OS/2 was better in
some ways, but the Wikipedia article suggests OS/2 lost because Windows was
better in some important ways.

 _The collaboration between IBM and Microsoft unraveled in 1990, between the
releases of Windows 3.0 and OS/2 1.3. Initially, at least publicly, Microsoft
continued to insist the future belonged to OS/2. Steve Ballmer of Microsoft
even took to calling OS/2 "Windows Plus".[9] However, during this time,
Windows 3.0 became a tremendous success, selling millions of copies in its
first year.[10] Much of its success was because Windows 3.0 (along with MS-
DOS) was bundled with most new computers.[11] OS/2, on the other hand, was
only available as an expensive stand-alone software package. In addition, OS/2
lacked device drivers for many common devices such as printers, particularly
non-IBM hardware.[12] Windows, on the other hand, supported a much larger
variety of hardware._

<http://en.wikipedia.org/wiki/OS/2>

The other question to consider is why another PC OS didn't come up to compete
with DOS/Windows considering that Microsoft actually helped open up the
hardware ecosystem. A dominant player with most of the "market share" need not
stop a new better player (see web search). Maybe it's worth acknowledging that
making a good OS is a hard problem which MS cracked better than the rest.

~~~
slug
There were other PC DOS, but MS had something up their sleeve:
[http://en.wikipedia.org/wiki/DR-
DOS#Competition_from_Microso...](http://en.wikipedia.org/wiki/DR-
DOS#Competition_from_Microsoft) and <http://en.wikipedia.org/wiki/AARD_code>

------
emanuer
I was just thinking this about Evernote the other day. I really want to pay
them. They make a great product that serves me very well. I do believe they
deserve my money. The problem is, the payed plan would be a complete waste for
me. I don't need it. The free thing fulfills my needs perfectly. If it would
be a 30 days trial, I would be a happily paying customer by now.

The same thing is true for dropbox for me. After the first month I was
actively looking for a "donate" button on their website. I love the product,
it works perfect, I would pay for it without thinking a second, I just have no
need for the paid plan.

I understand the free plans are for marketing purposes. In my case I had more
than 10 different choices for a note taking application, or a online backups
system. The factor that pushed me towards Evernote and Dropbox were the
consistent great reviews. Free was the cherry on top, but not the reason why I
choose those two apps.

~~~
Groxx
I'm not touching Evernote again until they get exporting features. It's a
_really_ impressive, useful service, but despite their repeated claims of
supporting open formats they've provided utterly squat in the past few years
I've watched them.

 _Years_. More than enough time to write exporters (not even .txt / .rtf!) if
they value it at all.

~~~
mortenjorck
Sounds like a good freemium upsell to me.

~~~
Groxx
I might actually go for it if that were the case. It'd have to be damn-good
exporting, however - quite frankly, I don't trust them with my data,
especially given their lack of export progress + claims. The company as a
whole doesn't seem too trustworthy. I want a panic button.

~~~
frossie
I am very confused by this subthread. If you run the MacOS client, and you are
a premium subscriber all your evernote data is locally available on your hard
drive - it's unencrypted and easy to see and parse.

------
krschultz
Startups are too skiddish about charging. This shouldn't be novel or
surprising, this is regular business 101.

Businesses charge money for useful products. People are used to paying for
useful products.

The only difference is that the variable costs associated with hosting more
users are tiny. How much does each user cost you? Basically nothing in the
scheme of things. The problem is that the fixed costs are high - development,
overhead, etc. Just becuase the variable costs are low doesn't mean you can't
charge your users for the fixed costs.

Other businesses do this all the time. Startups should not be afraid of
charging their fixed costs on to their customers. Advertising is fine if you
are a media website and are trying to be an online newspaper or a website with
no real function at all, but if you are a full fledged web app with useful
features, CHARGE!

~~~
chmike
The freemium model pertinence depends indeed on the free user cost. A service
for which the cost in minimal (i.e. no support, low bandwidth or storage
needs,...) for free users, could benefit from it as a marketing tool.

The perceived added value for paying users should be significant, obvious and
justify the fee.

------
loewenskind
Looks like "the web changes everything" is coming around full circle. To see
the future one need only look in the past. What are retailers doing today?
They've been at this for, what? Thousands of years, right?

In other words: some things are going to be expected to simply be provided
(e.g. free wifi at starbucks). Some things people are just not going to pay
much for, not even as much as you did (e.g. loss leaders like Milk). Some
things you can mark way up.

------
bmcnamara82
Instead of saying that "free" plans don't work outright, I argue that they
work for some type of products and don't work for other products.

He provided examples of niche products that so far, serve small markets.
LessAccounting, Crazy Egg, - what is their user base numbers? One example he
gives has a user base of 5,000 users. If you are a niche product, I don't
think the free plan is ideal since you are serving a small market and need to
build a user base before it makes sense.

Conversely, if you have an app that is going to get a really large user base,
and I'm talking 'millions', then it _probably_ will work (i.e. google,
twitter, facebook, ect.). The example of those are far and few.

The other comment I would make is, maybe you aren't creating a compelling
enough product to get a user demand that supports a 'freemium' biz model.

~~~
michael_dorfman
_Conversely, if you have an app that is going to get a really large user base,
and I'm talking 'millions', then it probably will work (i.e. google, twitter,
facebook, ect.)_

Actually, not. None of those are using a "freemium" model; they are all ad-
based products. If your business model is dependent upon giving advertisers
eyeballs, "free" is a great way to go-- but that has nothing to do with the
topic at hand.

~~~
bmcnamara82
"Give your service away for free, possibly ad supported but maybe not, acquire
a lot of customers very efficiently through word of mouth, referral networks,
organic search marketing, etc., then offer premium priced value added services
or an enhanced version of your service to your customer base."

From Fred Wilson's mouth (he coined the term "Freemium")

~~~
revorad
_acquire a lot of customers very efficiently_

First of all, people who don't pay are users, not customers. Secondly, how are
conversion rates of less than 2% considered _efficient_?

In the freemium model, even if cost of customer acquisition (COCA) for a free
"customer" can be considered to be zero, Life Time Value (LTV) is increasingly
negative.

------
scrrr
Yes, but would those companies have become popular if there hadn't been a free
version in the beginning? Would as many invest in an unknown product in the
beginning to eventually make it known?

~~~
eldimo
That's why you offer free trials. :)

~~~
scrrr
So the real advice is: Offer free accounts and then get rid of them.

~~~
dagw
That was basically what I took away from the article. Start by offering free
accounts until you gain some sort of traction and people become aware of your
product, but once you start getting significant traffic stop with the free.

~~~
hasenj
Something else to take away: don't require people to give away their billing
information upfront when signing up for a trial; simply downgrade their
account if the trial period ends and they haven't paid yet.

------
dagw
Perhaps a good balance is, instead of free, charge a small one time setup fee.
pinboard.in for example does this and it seems to work really well. They offer
a premium version with a monthly fee and a "free" version, which cost
something like $5 or $6 to set up.

To me, the difference between free and a one time $5 fee was minimal, but to
the people running the site difference in revenue is probably pretty huge.

~~~
chc
That's worse IMO. Maybe the $6 is minimal for you, but it's not in the average
case. Studies have shown that there is an enormous difference between "free"
and "cheap" in people's minds. The difference between free and $1 is bigger
than the difference between $1 and $10 in terms of customer resistance. The
point of a free product is to eliminate barriers to entry. Most people are not
that dedicated, and even the smallest snag in the conversion process can shoot
them out of the funnel. Charging a small setup fee combines the worst aspect
of pay (much harder to gain users) with the worst aspect of free (anemic
revenue).

------
VBprogrammer
I feel this really should have been titled "Why _My_ Free Plan Didn’t Work."
Since free plans have and will continue to work for some people.

I don't know about you but I doubt GitHub would have taken off had it been
exclusively pay-ware. Even if it did gain some traction someone would have
made a free with upgrade option version of it.

~~~
shantanubala
The main thing with GitHub that makes it a great example of freemium is that
they have two separate audiences for free and paid accounts. The free accounts
are for open source projects and random hackers who write code for fun. By
doing this, they attract talent and popularity to their service that convinces
a different audience (businesses) to pay.

GitHub probably still has many more free than paid users, but the upfront cost
was probably well worth it in the end.

~~~
xiongchiamiov
I would guess that there are a decent number of paid users who aren't
"businesses", but just people.

I myself have a paid account because: 1\. I want private repositories for
school work and cba to set them up on my own server. 2\. I run my website off
of github, and only paid accounts get CNAME support. 3\. I think they're
awesome guys, and I want the service to stay around. This is the most
important one.

------
arnorhs
I would argue that in order for a free account to work you will have to meet
the following criteria:

\- The free account is only useful while you're starting to use it - so a real
constraint has to be in place for you to want to upgrade.

\- Your product has to be useful enough on it's own.

\- Your product is not too niche. If the percentage of people on planet earth
that can benefit from your product is low, then there will be less chance that
a user finds somebody else to recommend the product to.

I haven't looked at Bidsketch, but if people are signing up for free and the
free plan has enough constraints in place but people are still not upgrading,
that could be a sign that people don't like the product enough or don't get
enough value out of it.

Also, the article doesn't state what features the free plan had, but if the
free plan used to be what is now "basic plan", maybe the free plan was too
good ?

The website looks good btw.

 _edit: added a bullet point_

~~~
arnorhs
You would also have to measure and account for over how much time the free
users convert to paid users. If it happens over two years, you have to take
that into account.

As the gigaom article mentions: _The thing is, over time inactive users drop
off, and active users start paying. Once Evernote finally figured that dynamic
out and started talking about it, term sheets and partnerships requests
started flowing in, Libin said._

------
aycangulez
A free plan is often a replacement for advertising spending. It gets you users
who wouldn't otherwise consider using your product, and you hope that they
would tell their friends about it, and some of those friends would eventually
pay.

Here is an extreme example: If I remember it correctly, MySQL's conversion
rate was quoted as about 1 in 1000. If they didn't distribute the entire
product for free, they would have much less market penetration, but certainly
earned much more. Had they chosen that route, they wouldn't be able to sell
the company for a cool billion.

Nothing in life is free. If you want a lot of users, and don't have the
advertising budget for it, you give some or all of your product away for free.

------
paraschopra
I recently wrote a post tracking evolution of pricing plan of a company
(Clicktale) over last 4 years. Even though they still have the free plan, the
prices of individual plans increased 10x in four years:
[http://visualwebsiteoptimizer.com/split-testing-blog/how-
pri...](http://visualwebsiteoptimizer.com/split-testing-blog/how-pricing-
plans-evolved-over-time-for-a-saas-startup/)

------
acabal
My site uses a freemium model, and in some ways it kind of has to. The site is
a social-network type site where writers critique each other's work. Members
can join for free, but their accounts have lots of limitations that are lifted
by paying a monthly fee.

For my site, the most important part is having active members, whether they're
paying or not. If nobody is active on the site to critique writing, then new
writers won't join. Having a pay barrier to joining a community like this one
would very quickly strangle it.

Like most freemium plans, only a small percentage convert to a paid plan, but
enough do to keep making it worthwhile. I even doubled the price of the paid
plan at one point to see if it would affect conversions, and it didn't, so
people are finding the model useful.

So freemium works for a model like mine; but for many web apps, especially
ones where the customer sets-and-forgets it, it might not make as much sense.

------
someone_here
_0.8% of free user accounts eventually upgraded to paid._

When only 1% of users were using paid?! That's doubling your paid user-base!

~~~
loewenskind
But how many free users came in in the mean time? Maybe the raw number was
doubling but the paid user percentage wasn't. And even it was he found a way
to get an 800% increase.

~~~
Ardit20
He said the revenue was remaining flat. That is the revenue was not
increasing, so the core number of paid users was not increasing either.

------
zatara
"... led to an 8x increase in paid conversions. Look at that again. That’s not
8%. That’s 800%."

Technically, a 700% increase.

~~~
kranner
Good point, but he did say "increase". Perhaps he meant x+8x?

------
willheim
The article makes excellent points all around. The #1 goal of any business is
to gain positive cash flow (revenues greater than expenses). Anything else
sinks your business. It's high time start-ups learned that lesson.

Sure, starting out you need to gain traction. You do that by: 1) having a
superior product 2) gaining a superior rep

The only way to have a superior product is to identify your target market.
Nothing in life is "free". If you want to offer a service to your clients that
cost them nothing out of pocket you better be pulling in revenue in other ways
(advertising or info selling). Since many are averse (privacy issues and ad-
block) to those other options you must charge your user base.

Your product doesn't have to be the one with the most features, just the one
whose features are the best executed.

Your product has to meet the client's needs. If you don't know who your target
client is (Everybody is not an appropriate answer) then you need to refine
your pitch. Part of client needs eventually comes down to support and
interaction. If you spend all your resources (time, server, bandwidth,
development opportunities) supporting a vast number of free clients at the
expense of revenue generating clients you will quickly gain no to poor
reputation.

Note: I tried to figure out what Evernote is doing. Their free service does
meet the vast majority of user's needs (including mine). The amazing thing is
that their service is so simple and straight forward that perhaps they don't
need to spend so many resources on support and with the API (Trunk) and
partnerships their development/expansion costs are now being taken on by so
many other parties. I'm sure they bled cash brutally at the beginning but
their product was so novel and amazing that VC money came to the rescue. Fact
is that there are few start-ups in such a position. There are also few
products out there so novel that users talk about not "needing to" but
"wanting to" contribute to their success. Twitter? Ha! But Evernote is
different. People want to pay them for their service even if they don't need
to upgrade. They just love it so much. That is a truly rare and beautiful
thing.

------
mrbird
This is also an important consideration when trying to evaluate (and iterate
on) user feedback.

The type and quality of feedback that you get from paying customers is often
completely different than what you get from non-paying users. Paying customers
bring higher, and more importantly, more _precise_ expectations of how your
product should work for them. If you listen carefully, they'll tell you what
your product needs to be. You'll have fewer users, but you'll actually have a
_product_ , rather than a service that tries to be everything to everyone.

------
ivankirigin
If you get someone in the door, you can upsell them _eventually_. You have a
long time to go. I don't know if the relationship between company and user is
the same in the current mobile app marketplace.

Also, many freemium companies are actually enterprise companies in disguise,
where the pricing plans really work best for larger organizations over
individuals. Free users are a loss leader to enterprise sales.

Generally, I wouldn't paint with such broad brush strokes. Free can work. Free
might crater for you. Look hard at your product and market when designing your
pricing.

------
loumf
I am on the mailchimp free plan. One reason I think it works for them is that
it's impossible to stay on the free plan if you are successful. It's nice to
not have to pay while I'm building my list and don't get much value out of it
yet. But every day, as my list grows, I know I'm going to have to pay -- at
that point it would be silly to cancel.

Another reason it works for them, is that many of their customers probably
start with a list -- in that case, it's not free (if you have over 500
subscribers)

------
sentinel
My 2 cents:

He did get a lot of exposure from the free plan, so at least at the beginning,
a free plan is a great way to start a user base.

It is true that after that you will need to balance things out so that you
don't get too many free users when compared to paying users.

But like the guy says, it's also about looking at your business and making a
decision about whether this sort of free-plan offer is sustainable for your
situation. For some companies it is and is part of the business plan, whereas
for others it doesn't really help.

------
petenixey
This was the same conclusion that Homestead reached. They initially launched
with a fremium model but after being deluged in freebie support costs switched
to credit-card-required.

Although their overall signups plummeted, their paying signups went up by
multiples.

It would be interesting to see if being freemium for a limited period at the
very start is a profitable way to promote the company. Has anyone ever done a
"get a free account now - available only for the next 30 days" experiment
during launch?

------
angstrom
I expect in the near future we'll see more Trial Membership Plans ala Netflix
and others and the Free Plan will be removed in favor of a demo example or a
"nearly free" plan.

------
danfitch
For the launch of my next site I am going to do a limited number of free
accounts a day(starting at different times in the day). Then you won't get
overrun with free users, but allow people to give you their email to let them
know when more free accounts are available. Not sure if this will help but
worth a shot. Might force people to try it paid if they don't want to wait.

~~~
horacegrant
Just seems a bit arbitrary to me.

------
ww520
What does it mean for the IPhone/Android apps then? Does it make sense to have
a lite/free version of an app?

------
geuis
I just finished FREE by Chris Anderson.

It's a free download at Audible.com. I highly recommend that people listen to
the book as it's only about 6 hours long.

------
run4yourlives
The conclusion that "Free plans don't work" has been overly extended from data
that doesn't suggest anything of the sort.

What the data does suggest is that his free plan is meeting a majority of his
user's needs, and hence the "extras" that people get for upgrading are not
selling.

What he needs to do is reduce the free plan so that more users' needs are
addressed in one of the paid plans.

------
bartwe
Free plans do work as a way to get a critical mass it seems.

------
dbrannan
After reading the article we've made the free option less visible
(www.examprofessor.com), and perhaps we'll remove it completely one day soon.

Nice article!

------
noverloop
I think you should use a free plan if actively using the 'free' plan will
eventually force the user to go to a paid plan. e.g. dropbox.

If you just give your core product away for free then users will only switch
if they need the extra features of the paid plan. You can still use 'free' for
marketing, because total conversion rates with a free plan will probably be
higher, just don't expect these 'free' customers to switch if they don't have
to.

~~~
nhebb
The problem with dropbox is that they don't have a client for automating
backups. That means everything I store there has been manually dragged into
the dropbox folder (see NB). It would take me a long time before the number of
files I needed to share online exceeded their free limit.

NB: Truth be told, I run batch files via task scheduler for backing up certain
folder to dropbox, but I doubt the typical consumer does.

~~~
Lewisham
I use symlinks to the directories I want inside the main Dropbox folder. This
works well.

------
clistctrl
Maybe he should also consider changing the text on the register button?

<http://www.bidsketch.com/>

~~~
revorad
There is a 30-day free trial.

------
aneth
Free plans work if they are inadequate for customers who can afford to pay,
but adequate for a taste. Less Accounting does a great job of this. The only
reason not to offer such a plan would be the resources it requires to support
free customers, and perhaps that it has a negative price anchoring effect.

