Questions For Startups Killing Free Membership And Going Pay Only
Lately I’ve been noticing a trend: startups that have offered free membership to their sites are now going pay-only. Even sites that have been built on the "freemium" model (free membership with feature limitations or pay memberships with unlimited use) are ditching the "free" part of their offering. While these startups are blaming the free service termination on the economy and declining ad rates, the question remains: is it a good strategy to dismiss a large pool of potential converts?
Two of the most recent examples:
1. Jott- The voice-to-text service added a premium version back in August, and just announced they’re killing the free version entirely on February 2. From their blog:
If you’re reading this, you’ve probably heard that we’re ending Jott’s free services (Jott Basic and Jott Notepad for the iPhone). Unfortunately, it’s true, beginning on February 2nd. Plans for current paying customers are not changing.
Whether you are a paid or a free customer, we thank you for all of the support you’ve given us over the past couple of years, and the support you’ll hopefully give us in the future.
Why is Jott ending its free services?
As we’ve said many times, one of our goals was to always offer a high quality, free version of Jott. But as with many businesses right now, the economic environment is forcing a change in plans. When we started, we made quality our top priority, and we will always be committed to this. As you know, we use a combination of automated speech recognition and human quality assurance to deliver this, and it costs real money to do it well.While we’ve made remarkable progress at innovating costs out of the system, the current climate is forcing us to focus 100% of our energy on getting to profitability. The great news is that with this change we are within sight of that goal.
2. Sprout Builder- The platform that allowed users to build multimedia web content without being flash developers launched at DEMO 08 has gone fee-only.
From their email:
Over the last year Sprout has provided you with a free solution for creating interactive Flash content and widgets. Like many technology companies, we offered our service for free while we worked on our products, spoke with customers and developed our go-to-market strategy. Now that we have developed a solution worthy of creative professionals at the best agencies in the world, it is time for us to monetize. Starting in early February, we will begin charging for our service. We hope that you have found value from Sprout Builder and will continue to use our services.
Which brings me to a couple of questions. If you’re from a startup that has gone the freemium to pay-only route, I’d love to hear your thoughts. Here they are:
1. What percentage of free users convert to paid users?
Looking at a TechCrunch article that covered Jott, they say:
In August voice-to-text service Jott moved out of beta and added a premium feature for $4/month. Since then, the company says, about 30% of Jott’s active users have opted for the premium, no-ads version of the service.
30% seems really, really high to me, but I could be way off. But even if 30% of the free users upgraded, that leaves 70% that are gone completely. That’s 70% of the people that have heard about you, come to your site, and actually signed up to use your service.
2. What is the cost of keeping free members?
Like I mentioned above, most startups would kill to keep their users, especially when they have a premium version to offer. With such a captive audience already using the product, there are great opportunities to plug the full version in every communication.
3. Are there competitors ready to take your free users?
When you get rid of your free users (especially if they are frequent users of your service), they’re likely to look for another service to replace you. What if there are other services that would welcome your subscribers?
4. How will startups attract new users without a free version?
Without a free version to hook new users, how do you sell users on paying for the service? A 30 or 60 day trial? If that’s the case, what’s the point of getting rid of the free users? Is it solely the ability to charge them after 30 or 60 days? Is it the simple shift from
a) users that are freely using the service without offering up their credit cards
to
b) users that are using the service, but have their credit card on file, so if they forget to cancel, or think the service is ok, you can charge them
I’m not knocking the strategy. It certainly has a higher probability of making some cash, but free trial vs. freemium upgrade certainly feel like very different animals. One motivates me to check it out and bail immediately, looking for flaws and reasons to stop payment. The other makes me actually try something out at no cost, and if I feel that the service is useful, I’ll pay for it by making the choice myself.
5. Will the cost of your service be enough to be profitable?
Finally, the big question: even with a high conversion rate, is the charge enough to make sufficient profit?
Like many of my posts, this one is more of a curiosity than anything, and I’d really love to hear some feedback. What do you think of the disappearance of the "free version" of online services? What does it take to actually make you upgrade to the premium version?
Filed under: marketing, social media, startups
A few things I think you are overlooking in your analysis. Lots of people sign up for freemium services and walk away. So there may be tons of registered users, but a lot less users regularly partaking of the service. That may impact the 70/30 calculation you have above.
Second, it is obvious the freemium model wasn’t working for these companies and probably for a lot of others as well. I believe a lot of startups are coming to realize that revenue has to come from somewhere and it probably isn’t going to be the ubiquitous Google AdSense.
Finally, if a user is unwilling to pay anything for a service, they clearly don’t value it very highly. Companies that focus on creating things that customers value will be able to charge for their services.
None of this means that freemium is dead as a business model. It just means that too many companies have focused too much effort on signing up massive numbers of users without actually creating the type of value proposition that will ultimately compel enough people to pony up cash to be successful.
Chip,
Thanks for the comment and the perspective. The only thing I have to disagree with here is that you thought I had any form of analysis on my post!!
To me, the trend of shuttering the free version and going pay-only really just brought up a lot of questions in my mind. Questions that I definitely don’t know the answers to, and because of that, I’m really interested in hearing the answers from the companies that have made the switch.
1) You’re absolutely right about driveby users. I’m one of the most habitual offenders of that. I’ll sign up for anything, try it once, and bail, but my account stays open. I’m wondering then, what is the cost of keeping the free accounts open? Let’s say, like some services I’ve noticed, they have an activity limit. If you haven’t logged in for 30 days, you get an email saying “we see you haven’t logged in. If you’d like to keep your account, please do so. If not, we’ll delete your account.” That way, you can get rid of the people that aren’t using the service, yet keep the ones who are actively using the service, and thus, are candidates for the upgrade.
2) I agree that the AdSense model is dust for most services. It just doesn’t cover it. But I just don’t see how a pay-only model would work for a service where the freemium model failed. It’s hard for me to believe I’d pay for something that I haven’t had the ability to try out in the first place. Now, if they’re just replacing the freemium model with a 30 day trial with billing after the trial has ended, that could work, but isn’t that basically the same as freemium (a set of users, using the service for free up to a time/activity limit with the option to pay)? I mean, sure, there’s always the ability to game the system and have multiple accounts in the freemium world, but couldn’t you do the same with multiple trials?
You’re right. Revenue absolutely has to come from somewhere, and that’s the core issue with any of these services. I’m just not sure that this is enough of a change to actually make a difference.
3) You’re right again- if users are unwilling to pay anything for a service, there’s not much you can do- freemium, paid, or any other model. That’s where the adsense model comes in. It’s like saying “people use this thing, they won’t pay for it, but maybe we can get a couple of bucks when they click on something to go away!” That’s always been the strangest thing for me….the idea that a service bases its entire revenue stream on the idea that users want to click to go somewhere else.
4) I agree that freemium isn’t dead, and that too many companies just went after massive user adoption without a compelling enough value prop. My favorite example is flickr. The service is great, but if you really like it, you’ll soon run into a storage limit, and I am happy to pay for the PRO version. I’m guessing a lot of others are in the same boat.
Thanks again for your comments! Excellent stuff.