Why Free Plans Don’t Work. If you're trying to grow your startup you've come to the right place.
Get my 170-page ebook on how to grow a startup and join thousands of self-funded entrepreneurs by subscribing to my newsletter at right. The following is a guest article by Ruben Gamez of Bidsketch. Not too long ago it seemed like every product I knew was offering some sort of free plan. The strategy was brilliant: get loads of people using your product and eventually turn them into paying customers.
Everywhere I looked there were stories of people making money hand over fist with this approach. When 37signals talked about giving something away for free as a marketing strategy, it made a lot of sense to me: “For us, Writeboard and Ta-da list are completely free apps that we use to get people on the path to using our other products. So when I launched Bidsketch — a SaaS based proposal application for designers — offering a free plan was a no-brainer in my book.
Early on, things were working out nicely. Before: How to build a web service in 8 hours. I was a big fan of Jaiku (here I am) and didn’t “get” Twitter until about a year ago when a friend showed me Tweetdeck. Aha! So that’s how you’re supposed to use it! Not through the web page twitter.com but by using a third party tool. I got so excited that I proclaimed Twitter the future of the web. And I stopped using Jaiku. One thing I did miss from the Jaiku-days, though, was the long discussion threads under each “jaik” (the Jaiku version of a “tweet”). So an idea emerged: what if you could build a web service that made it possible to comment and discuss each tweet just like you did in the Jaiku-days. Thus, Discuss a Tweet was born. Or, well, at least the domain was registered. Todd Sattersten. I published Fixed to Flexible on Tuesday.
Everything was going well. People were starting to read it. They were starting to talk about it. When I check my email Wednesday morning, I had an email from Evernote CEO Phil Libin: Just read your ebook. Ugh. I asked Phil if he would help me clean up the math and answer a few questions about the company. Todd: So, I seem to have messed up the math a little. Phil: It was my fault for being confusing. I ran the numbers from January 2010. The gross margin increases every month because revenue per user grows (conversion rates go up because long-time users are more likely to convert) while variable expenses per user decline (Moore’s law + efficiencies of scale).
There are other sources of revenue (as well as fixed expenses), but they don’t move around much, so the gross margin is by far the most important factor. T: What other factors need to be taken into account? P: There are many other factors, enough to fill a book. P: You’re probably right. Three freemium strategies. I'm excited to see so much attention being paid to freemium businesses lately.
These are companies that generate revenue by offering a free product with an upsell or premium version. Their economics blends elements of the free, advertising-supported, "eyeballs" business with more traditional e-commerce and subscription businesses. For founders, I think it also has another big attraction: the ability to avoid a lot of "free vs paid" arguments. You can reach for all the scale of a free service and still make money. Pretty good deal, right? Andrew Chen recently did a great article on the economic model underlying freemium (it includes a detailed spreadsheet, too!). The key is to create the right mix of features to segment out the people who are willing to pay, but without alienating the users who make up your free audience.
Having worked in the freemium business for a number of years, I can safely report that struggling with these questions never goes away.