Underscore Price Dynamics
marco.org
marco.org
The last two businesses I started are Stack Overflow, which is free, where the careers business on the side makes money on the small fraction of Stack Overflow users who are looking to get better jobs, and Trello, which is free, but the business of providing administrative tools to large organizations using Trello can sustain the whole business.
This is more than just "freemium" or "advertising-supported." Freemium and Ad-supported business models are special cases of this general model. The real insight is that the free product has a chance to reach an enormous audience which provides distribution/advertising/marketing making it trivial to go to market with your paid product.
What Marco is reporting here is that the old-fashioned "make something and get people to pay for it" business is much harder to pull off and likely to always be left in the dust by someone making the same thing for free, getting 100x the user base, and getting 1% of them to pay for some value added feature.
The only challenge with that is you have to be really skilled/gifted to get traction in a very noisy environment.
The other challenge with something like "consulting" - is that you don't get a lot of opportunity to scale - you are limited by the number of hours a day you can work (as opposed to conferences, where you are limited to the size of the venues you can book/fill)
I guess I need to give it more thought.
I just spent a couple weeks with 7 other people learning about Cisco Routers from a single instructor - Total cost was $7300 each - so, $50K for a two-week class.
There's really good money in in-person class training.
Well, great food for thought, thanks.
The kicker is that this plays really really well with established companies. Pretend you're hypothetically a Cisco Routers consultancy. Parachuting into a random company and solving their Cisco Routers problems requires a very experienced consultant, both in terms of technical mastery and in terms of soft skills like interfacing well with clients' technical staff, dealing with political problems where you have imperfect background of who the key players/concerns are, and generic client relations.
Presenting about Cisco Routers (after the presentation has been substantially pre-written) and talking about them intelligently in response to audience questions requires a more limited, and far less expensive, skill-set.
This allows operating consultancies to do training offerings using more junior staff than they use for their consulting offerings, but to sell them at rates and quantities pegged to their consulting reputation rather than at the rate/quantity suggested by the person who will be tasked with delivery. And customers will often be quite thrilled, because training existing employees is often far, far cheaper than hiring pre-existing experts on the open market.
(There exist many other ways to do it. Pure-play training companies exist, for example, and there are companies which focus on synchronous online training, asynchronous online training, hybridized models, etc etc.)
Ideally, you do both. One fills in the gaps for the other depending on the cycle of product/service you are in.
I did what you outlined in the first paragraph in a niche market. I have huge foothold, though it took me 4-5 years to get here, and there's a lot of upward mobility to still be had.
I travel a lot during the fall/winter for conferences and large group projects, and do a lot of consulting during the spring/summer. That tends to be how my industry cycles.
IMO, you want to have a broad service offering behind a veil of a major product. For example: Giving talks and conferences is my main product, fueled by a book/DVD set. Profit margins are highest there and scale well. However, this just doesn't work for certain segments of the population, so doing high-priced consulting to pay the light bills is always good - or my current strategy: Doing consulting for a discounted rate while taping the conference for later use in products.
Another interesting example in this area is Michael Hartl with http://ruby.railstutorial.org/ which is now perhaps the most popular Rails tutorial out there. You can read it all online for free but he makes very good money selling the PDF and screencasts of it.
Common sense, creator's optimism, and B-school economics all suggest that paid beats free, I get it. But, sh-t's changed. Chris Anderson wrote Free: The Future of a Radical Price five YEARS ago, but I wish more creators and developers on HN took the ideas described there to heart.
>What Marco is reporting here is that the old-fashioned "make something and get people to pay for it" business is much harder to pull off and likely to always be left in the dust by someone making the same thing for free, getting 100x the user base, and getting 1% of them to pay for some value added feature.
Joel started both SO & Trello bootstrapped off of the revenues of FogCreek, if I am not mistaken.
So don't see why he would disagree with seeing bootstrapping as viable.
(I can't speak to Trello as I haven't needed/used it)
I'd argue that the success of the IAP model used in the app stores is much more of a response to the lack of free trial versions, which is kind of like the drug pusher "the first hit is free" sales method...
On the other hand, many self-funded businesses are doing quite well charging for services targeted to non-mass markets -- for example, SmugMug (for professional photographers), FreshBooks (for invoicing & accounting), 37 Signals (for team productivity), etc. Some of these businesses are essentially one-person operations -- e.g., AppointmentReminder.org.
I would include FogBugz in this list.
"Make something and get people to pay for it" seems to works well for many vertical/specialized markets, some of which are quite large.
Freshbooks -- started 2004
37Signals -- started 1999, basecamp in 2004
FogBugz -- started 2000
Point being, these are "old" business. If you are starting something today with all the hundreds of thousands of free apps and freemium based models, the same lessons would not apply.
I'd hypothesise that both of these are more important factors than being started in 2003 vs 2013.
For a freelancer, $100/month is a good deal if it allows you to get a few more billable hours per month. For a larger established business, $500/month is pocket change that nobody will even notice (and the customer who signs up isn't even spending their own money).
With regards to the larger point: there are many, many ways to successfully take money from customers.
If you want to build a business mostly on the $20 to $50 per month low-touch SaaS model, you can do that, quite successfully. (ConstantContact, 37signals, SmugMug, etc)
If you want to build a business which addresses customers with low-to-medium touch sales and costs between $25 and $X,000 per month, you can do that.
If you want to build a business which dogfights for $75k to $250k a year enterprise deals, you can do that. (Welcome to the world of boring enterprise software, where there exists surprisingly little visibility since the relevant people don't blog so often, but it basically makes the world go round.)
If you want to do a hybrid low-touch model in the $20 to $50 space, mid-touch in the $X00 to $X,000 a month space, and high-touch in the Enterprise space, you can do that, too. (Some companies move there after discovering that the mathematics of the low-end model are a bit painful if you happen to hit constraints on e.g. market size.)
And may I suggest zero touch until you get to $XXX/mo or you are very, very confident that Mr $50/mo will almost never ever cancel.
This even works on an individual level. I would say that contributing to open-source development on Github is a great way for individual developers to "Give Away Valuable Stuff" and in term become more visible and attractive to respected software businesses who may want to hire them (as full-time employees or freelancers).
[1] Brendan Dunn and Eric Davis have a great podcast about this which provides an excellent definition of content marketing: http://brennandunn.com/episode-006-the-sales-pipeline/
I think Angry Birds priced it right -- here is a complete product for free, here is an _expanded_ complete product for a buck.
But it's worth warning founders that choosing where to draw the line between free and paid is the life-or-death tricky part, and it's not always obvious.
I wrote a fairly popular article about this: http://wensing.tumblr.com/post/25167979206/the-anatomy-of-pr...
Interesting. I've never heard anyone having this misconception. Everyday people seem to know that app developers are completely different from Apple or other mobile phone manufacturers.
For everyone's complaints about Apple's stringent review process, there's a ton of crapware on there, which makes customers really hesitant to buy.
In [some] ways you're better off charging _more_ money and targeting a highly specific user base. Then you at least have a good shot at reaching the top-grossing lists in niche categories and gaining visibility.
Edit: to be clear, there's a lot of different types of apps and the free or IAP route can be the right choice. But, IMO you need something that has mass appeal if you're going to rely on converting small percentages of free users to paid users.
If marco gets good traction with his design team (Pacific Helm again?), I'm sure he's going to blow away the "quality" podcast-player market. Only problem is, the market for people who are looking for quality podcast players is probably in the tenths (or even hundredths) of a percent of the iOS users.
But, if he makes Overcast free....
I'm very interested in seeing how he manages to In-App charge for a free podcast player.
I don't think this is a particularly surprising phenomenon. People work very hard for their money and have far too little of it. If they can get something for free, why would they not? Moreover, if everyone else is distributing their thing for free, why on earth would people pay for anything?
Money is valuable because it is scarce, and if people can avoid paying, they will.
A moderately profitable app can give an independent developer the runway they need to bootstrap and follow up with more mainstream ideas.
EX : I wouldn't have paid 10$ for flighttrack pro without the in app purchase option. I would go as far as theorize that the main reason why the average price for an app has remained stuck at 1$ is exactly that fear of paying for something worthless without much of a recourse.
in-app purchases all the way.
What's truly evil, is the cognitive manipulation that "free" games engage in on those who are most vulnerable to those manipulative techniques. The "Candy Crushes" of the world.
You want there to be a virtuous circle, in which developers are rewarded for creating new, and improved apps; not for buying extra boosters so you can clear the jelly without developing the skill required to (or wait long enough for an easier level). How stupid do you feel purchasing "Diesel" for your "Tractor" in a game? Particularly when you consume it and just have to buy more diesel to continue at any reasonable pace.
That's the evil part of In-App purchases - I can show you a dozen places where In-App purchases and/or subscriptions have been very well executed to the benefit of everyone. (LetterPress, Flickr, Whatsapp, Path, evernote, Pioneer Lands, Paper by Fifty-three - just to name a few)
However, there is no doubt that "evil" approaches are more profitable than the doing the right thing.
Techniques such as the ones described in http://www.gamasutra.com/blogs/RaminShokrizade/20130626/1949... are very effective, and developers who do use them are likely to make more money. But that doesn't mean that any means necessary to make it into the top 10 grossing apps list must be considered ethical.
I much prefer the "Lite" model, where you basically have a functional demo for free, then a separate paid app. Offer the paid features in the "Lite" version as an IAP too, if you think that helps.
What it comes down to is that a good transaction should be a net gain for both sides. I give you money, and in exchange I get something that's worth more to me than the money I give you. We both win! But the way many of these games are done, the creator deliberately makes their game less fun in order to make it more lucrative. It's no longer mutually beneficial. Rather than adding value to get more money from me, they actually reduce value to try to extract more cash.
I wonder how this attitude would differ depending on whether you're an early adopter of the technology or whether you're just getting your first smartphone. I come from the Mac sphere where it's entirely reasonable to spend a lot of money on a good app (I'm considering paying $90 to upgrade to the latest OmniGraffle for example), so buying apps on a phone where most are super cheap doesn't seem so bad to me.
Either way, I think losing the paid app market is a Bad Thing. Quality apps are expensive to make, but I have an expensive phone; I don't then want to load it up with cheap, ill-designed apps. It doesn't matter how good the phone is if the apps are crap.
The depressing thing to me is how much of a minority thing this is. It's not platform-specific; Android sales have always lagged iOS in general, but the aggressive ugliness of Android apps and cheapness of Android users (don't get me wrong, fellow Android people, I use them as my daily drivers, I prefer them) has now just made the jump to iOS.
Which is insane. But, hey.
1) Charges $12 up front 2) Shows the movie for free with ads 3) Allows you to decide if you want to pay $3 for each quarter of the movie
Easy: #2 or #3, then #1.
Apparently we don't pay enough.
It seems that because you're comfortable paying for a product that you're actually more valuable to advertise to.
Slightly revising my position: The order in which people would choose this doesn't really matter
We cannot really know how many customers might make such decisions because such information is not readily available. Even when the information CAN be found, there is a cost to finding it (i.e., in time and inconvenience, usually). As best I can tell, there differences in quality across airlines is very low, and they actively try to hide information about prices.
Might app users be more willing to pay for apps if they REALLY knew the $1 or $2 was better than the free version?
It appears to me that this behavior is a rational response to a lack of reliable information. IAP purchases come after the customer has tried out enough of the app to have an informed view of its quality.
Windows Phone has the best mobile programming environment there is. The tools are much better than anything you can find for iOS and Android. I know, I programmed apps on all major platforms.
So is it a developer success? I would think so. Is it a consumer success? Not really. But it's consistently gaining marketshare, and is becoming quite popular in Europe.
And no, I don't work for Microsoft.
I have nothing against paying for apps, but after having been totally burned a bunch of times, I refuse to pay for an app I can't even try out first. Lots of people say "just look at the reviews", but they usually don't tell you what you want to know -- it's not a substitute at all.
Time trials are not allowed, if they completely disable the app's use. Also restrictions such as limiting the number of runs are not allowed. Apps should have core functionality that does not expire. However, you can use In App purchase to let certain features expire and then charge to unlock these again.
Apple contributed to the death of the up-front paid app by disallowing this. It's ridiculous.
I think most of us would pay for instagram and twitter now. I would have to think twice about it above 20$/month. I don't think they could get to where they are with a paid app model.
I tried out a few ways to solve this problem. Better app landing pages. Better app videos. Nothing works, apps are an experience. Also their utility skyrockets in certain situations.
Twitter is essential when something major is happening, like an earthquake in your area. Instagram is essential when you want to e-brag. Yelp is essential when you have a group of people deciding where to eat.
The barrier to pre-installing the app needs to be incredibly low, and the ease of use for a noob needs to be low.
Haven't heard of removing a free app and replacing with a paid. That doesn't make sense or work for anyone. That free app is an essential promotion. The only downside/difficulty is all the user support. Free users can be pretty rough.
The other case has started to really annoy me - it's where developers are starting to remove their version 1 application, and replace it with a version 2 which you have to purchase. The only problem with that, is if you were perfectly happy with version 1, you can no longer migrate it to your next Laptop/iPhone - because it's been removed from the market. Somewhat defeats the value of keeping your content in the "Cloud" - you are back to square one where you have to have local copies of everything because you never know when the developer is going to yank your functional version.
Keeping the app free for its first week on the store. This gets the app in the hands of the right people, the "early adopters". If the app is good, they'll use it and recommended it to friends long after the promotion week is over.
People are not afraid to pay when the trial was confirmed as a success by their friend (who is an iPhone genius).