Posted in: Business

Thoughts on Free Powered Business Models and Why Time Beats Features

I spend a lot of time thinking about what it means to offer products that are free or basically free to users on the web. I try not to get religious about free – there’s nothing inherently right or wrong about choosing a business model that incorporates a free component so long as you understand what you’re getting yourself into and have a plan for how to make up the revenue somewhere.

With so many social media companies rushing to discover and implement a business model that will work for their service and community, I think the discussion of free sometimes gets convoluted. I think there are some really important distinctions between a model that incorporates a perpetually free version with a premium upgrade and a model where there is one (or few) offerings that users can fully enjoy for some period of time before having to make the pay vs not pay decision.

I want to make the case for more companies tinkering around with the “free trial” approach as opposed to the model focused on a neutered version of the paid product being offered for free with the hope of eventual upgrades.

I can think of two sensible ways to offer a free web product whose ultimate aim is not to be ad-supported:

1. Perpetually Free with a Paid Upgrade Option – Under this model, you build a product that has a perpetually free version that is a degraded version of the paid product. The onus is on the company to properly delineate the free and paid offering such that the basic offering is sufficiently useful to the free audience and the premium offering is sufficiently valuable to those who choose to pay.

2. Free Trial with Pay or Quit Option – Under this model, you build a product where the user can consume the full version of the product but only for a limited period of time. At the end of the trial, the consumer must decide whether or not he/she likes the service enough to continue paying for it.

For now we will ignore a more nuanced approach that blends both of the generic strategies above.

There are a lot of social media people today who are trying to figure out a freemium model for their product or service. We’re already seeing models that combine a perpetually free offering with a paid upgrade option work pretty well in the free-to-play gaming space (you can see my earlier post on virtual goods in the United States as a reference). As a basic rule, I think freemium can work really well for products in which the free and paying users can peacefully coexist or where having more people engaged using the service actually makes it more useful for paying and free users. It’s still worth noting that the “free trial” approach in gaming still generates a lot of money (see World of Warcraft or any other successful subscription MMO).

There are a few things about the perpetually free with a paid upgrade approach that I think are worth considering before heading down this path:

It is very difficult to properly segment users and features such that you provide enough value to both paid and free audiences. For example, an email service that provided a 10 MB of storage for free and 1 GB for the paid version would have a hard time surviving – the basic offering isn’t sufficiently compelling to get people in the door. Conversely, a service that offered 2 GB for free and 10 GB for the premium service might be giving away too much value in the free product to expect a large audience of people to upgrade. And that’s just one product dimension. Adding more dimensions just makes it that much more difficult to figure out the features for which users would be willing to pay.

Going with a free trial can be much simpler. You offer one product that users can fully consume for some period of time before they have to decide whether or not they want to pay for the product. It’s more important to figure out how much time a user needs to experience your product before he / she is ready to make a purchase decision rather than which features should be exposed to paying users vs free users.

Offering a perpetually-free product is a framing event for your customers. Offering a product free with no prospect of a paid offering can be a sticky decision. Customers begin to think of your offering as free and attempts to introduce paid offerings can rile the community. It doesn’t match with what customers thought they were getting into when they signed up for the service.

Introducing any kind of monetization can generate backlash within a community. But the longer the ethos of free is allowed to become an expectation within your customers, the more difficult that conversation can be. I think it’s a much easier conversation to have with customers when you’re explicit up front with the fact that at some point they will have to make a decision as to whether or not the product is sufficiently valuable to warrant payment.

Price is a signal and there is value in sorting between customers who you can afford to keep and those who you cannot.For customers for whom your service is not sufficiently compelling at the price point you’ve offered, you have an opportunity to tweak the offering. If people aren’t biting at the price you’re charging, that’s a meaningful market signal. And that’s information that’s better learned sooner rather than later.

Under the free trial model, it seems to me that testing alternative hypotheses is easier. You have the features you have and all users get to use them. You can increase the length of the trial, decrease the price, or do both. But what you don’t have to do is to go back through your segmentation of features and figure out if you sorted properly.

At the end of the day, I think it’s good to figure out whether the business model you have in mind works. The sooner you find it out, the smaller the stakes and the more time you have to fix it.