Why Free Plans Don’t Work
softwarebyrob.com
softwarebyrob.com
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.
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.
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.
Yet I have still found it as much as impossible to buy a computer without windows preinstalled.
So do I, but that Linux didn't exist when Windows became dominant; it came much later.
I use Xubuntu, and it's the best damn work station I've ever used, but sometimes I wish gtk apps were a bit more beautiful.
Even Windows 95 wasn't great (especially for programmers) -- it was Windows NT 4.0 that was good enough to use to get work done. It was a combination of being less crashy and having more native software available.
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.
Actually previous poster made a good point with Vista problems - after a few years of bad press and Apple being a favorite, MS made a killing with Windows 7. Not for free.
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.
Windows won because DOS was already everywhere. It wasn't
the best product. I would argue OS/2 and Macintosh were
pretty significantly better.
The hardware requirements OS/2 were higher, Windows had better drivers support and provided better tools for developers. And the real battle was in '94 when IBM released OS/2 Warp. In '95 it was already game over.
People weren't using OS/2 for the same reasons they wouldn't go for Win NT 4. It was technically superior, but incompatible with what people wanted.
Win 95 had the same quality as Mac OS ... both were pieces of shit that got the job done, the difference being that you could get Win 95 for a better price and that it was future-proof (Win NT was already on sale for businesses).
IMHO, with Windows Microsoft only had 2 fuckups ... Windows ME and Vista. For all the other versions Microsoft just provided what consumers wanted.
I used OS 7.x for a good while, and it was generally speaking not better than its contemporary, windows 95.
In fact it might have been even worse, at least as far as multitasking and stability go.
Windows 98 SE was actually a fairly good system as long as you didn't overtax its somewhat limited multi-tasking ability & ran it on high quality hardware (far less crash prone than Mac OS 8.x)
That's a strange way to look at it. Publishers are selling space to Google for a cut of the Adsense revenue. Google is selling contextual ads within those spaces to advertisers.
What's free in that?
On the other hand if you have an application that actually makes money for someone or saves money (in other words translates to direct dollar amount) you might be better off charging as long as your user base perceives the value they get out of your application as more than what they pay for it.
I really think that me-too-free app mentality has to change. Startup founders (especially micro ISVs) need to understand the fact that coming up with a business model is the core of the business not an afterthought.
At one point in all these product's lives they were lousier and smaller as compared to their competitors. But they won out because the low barrier to adoption (read: free) drove usage, and from usage, more improvements.
In the context of the OP's blog post, we are talking about winning in terms of building a profitable business, for which I believe building a good product and selling it is a better strategy than getting popular by giving away a crap product for free.
The gist of the matter is that you should be clear what you are selling:
* a product
* advertising space/lead generation (if you are free)
* yourself (acquisition)
I see most web startups are going for the second and third options, but it seems it is mostly out of fear and the status quo, not careful consideration of the pros and cons.
When they first started out, both were lousier, scrappy, free products.
> In any case, this is a bit of an unfair comparison because these are examples of open source vs proprietary, not product quality primarily.
There is nothing unfair about this comparison. Releasing free products and making money on other things has always been a viable way to compete against bigger, more established players. See: http://www.joelonsoftware.com/articles/fog0000000056.html
Hope this helps.
I'm not sure what your examples where suppose to illustrate. Both Windows and Adsence rule because of the (practical) monopoly positions of their creators. iPod's only one that may have dominated for being the better product but If google started giving away crappy media players they would quickly out dominate iPods.
Go free to get lots of broke users if you want to help scammers serve ads to those users.
I almost said "and WoW isn't the best damn product," but that depends on your definition of 'best.' It almost mirrors the Mac/Windows thing. Connoisseurs tend to scoff their noses, yet they just keep on selling...
WoW is a mediocre product executed _perfectly_.
Define mediocre.
WoW is the gold standard of fantasy MMOs. It just doesn't do anything new or interesting; it only does a small set of things, but does them very, very well.
1) Network effects. If you've got friends who play WoW then that's a major reason for you to play it even if there is something better out there. Of course you could all move to the better thing but they won't because...
2) "Loyalty". Anything where people invest time which can not be transferred (for instance in levelling up characters) tends to incur loyalty, if only because they don't want to start over.
Marketplaces, social networks, ebay, etc - basically anything where the site becomes more valuable the more people use it.
I wonder if Twitter would have had a chance at all if they required payment for participating (even as little as $5 a year would probably be too much for it to take off) ?
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.
I am not going out of my way to give them money. However I am perfectly willing to pay when they change their price structure. [For dropbox I found their prices per GB are almost double of cheaper competitors. They could charge much less per GB if they would get money from more customers]
Granted, the service is very different, and Google is ever-so-slightly larger. It's still a big jump.
Years. More than enough time to write exporters (not even .txt / .rtf!) if they value it at all.
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!
The perceived added value for paying users should be significant, obvious and justify the fee.
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.
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.
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.
From Fred Wilson's mouth (he coined the term "Freemium")
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.
That sounds backwards to me. It seems that most web startups are not creating a compelling enough product to get people to pay for it. So instead, they are trying to get famous by giving it away for free and try to run the business on measly conversion rates until they can sell the money-sink to a big company.
There are free/paid products that have been around for a fistful of years that people still accidentally stumble on.
Because we spend so much time on the web we think others watch whats happening all the time and catch our moves. From a marketing perspective, you have to tell the same story for 12-18 months before it becomes "common knowledge" and you need the right PR connections.
You could change your App's name and logo 10 times in 6 months and no one would really notice except for your users.
More simply put: most people don't know if a product is "known" or "unknown" - they simply decide if it does what they are looking for and make their decision based on that. You are not your user, something we developers tend to forget from time to time.
You hit the nail on the head there. Web startups have become a popularity contest. Instead of building really good products and selling them for a price, people are trying to get as many users as possible and then tinker with all sorts of metrics to get "conversions". I can see the reason for doing this if you have big investors and want to sell to a big company one day. But, it seems like a really poor strategy if you want to build a profitable business.
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.
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.
GitHub probably still has many more free than paid users, but the upfront cost was probably well worth it in the end.
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.
- 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
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.
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.
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.
When only 1% of users were using paid?! That's doubling your paid user-base!
Technically, a 700% increase.
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.
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.
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.
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)
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.
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?
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.
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.
Nice article!
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.
In the meantime, though, my main Google account has 20gb for $5/year, and for the equivalent-lowest of 50gb/$100 I can get 400gb, which will also store my emails and photos. I can back up any email account on my machine by dragging the messages to a gmail folder, and waiting a little while. Docs now allows 1gb any-kind file uploads. I can send my photos to Picasa (the reason I have the extra space).
I'm a massive word-of-mouth spreader of Dropbox though, especially as I'm the Geek of a few families + their neighbors. I've probably gotten them more business than what I cost to host.
NB: Truth be told, I run batch files via task scheduler for backing up certain folder to dropbox, but I doubt the typical consumer does.
Dropbox is using my money to subsidize the free users, I'm not getting 10$ of value out of it.
This way, people who don't bookmark very much can live with 1000, and people who eventually will use more than 1000 need to subscribe...
I think it's a very good plan if your product is structured in a way that a user will eventually hit the limit, but I think Dropbox was not a very good example. If I hit the limit, I'll just delete a few files I don't need. I see your point, though, and I think you're mostly right.