Should you offer a free plan? Freemium pros and woes.

Building HealerTree, I always wanted to have a free plan of some sort. But there are pros and cons – here is my research and analysis.

Pro Con
  • Free users can be great evangelists. Wider adoption means wider advertising. A la Vista print.
  • Free users can offer feedback, ideas. Wider adoption means more feedback. (But, is it the same segment as your paid?)
  • Free users can offer testimonials
  • Free users do sometimes convert after their business gets going, etc.
  • You can spam your free users with coupons, offers to convert, and partnership offers. Freemium expands your list (customer base).
  • Free users suck resources. Development time to offer enough features for both plans. Customer service. Bandwidth. Load. Huge database.
  • Free users are a different segment. Perhaps a crankier segment. Definitely a cheaper one.
  • Free plans are ripe for abuse. MailChimp had a huge increase in abuse-related issues after going freemium.

Summary: If you adopt a freemium business model, your marketing cost is the free users. Can you afford that?

Other Options

  • Free trial only; no free plan.
  • Full featured for 30 days, then drop to free plan.
  • Ad-hoc payments for certain features, rather than plans (use your own domain = $3/mo, newsletter module = $5/mo). Would need to offer yearly payment plans. Can add up to more than premium plan, or less. A different coding problem. Could be harder to market each feature individually than to market a better plan.
  • Ad supported free plan.
  • Offer something else free, like a WordPress plugin. That will get you some word of mouth/traffic.

More Advice

  • Don’t give away free what people will pay for. i.e. their own domain.
  • Try to have usage limits instead of restrict features. IE 1000 subscribers free, pay over that. Rather than, you can do X but not Y.
  • Free users are only as good as they convert, and bring in paid clients.
  • Eventually, offering a freemium plan reveals segments. Paying customers are a different segment than non-paying customers.
  • B2B is more likely to pay than B2C.
  • Ask freemium users to tweet about it.
  • Freemium has to have enough features that it is still useful for people, but without enough features that they will want to upgrade.
  • Educate your users as to why the premium features are worth it. Use your own domain – this is good because it’s more professional, easier to remember.
  • If you start out with free beta, do not take people’s features away or tell them to pay. Instead, offer new exciting features with launch to incentivize them to upgrade. And give them a discount.
  • Give people credit vouchers for giving good feedback?
  • Don’t require a credit card in advance. It’s annoying.
  • If you have a very small niche, the freemium benefits go away.
  • During the free trial, be sure to train/coax/nurture customers to help them convert.
  • With freemium, paid users are paying for the free users. Not so hot for them. Ethical question?
  • Freemium can be a way to educate the market if your offering is innovative.
  • It may boil down to the cost of upkeep of the free user.
  • Freemium works well for products where you naturally increase – like MailChimp, people naturally grow their subscriptions and then have to pay.
  • Studies find that the ratio of free:paid is 10:1. So does your paid plan cover 11 users?
  • 37signals founder says some free users convert, but most paying users started out as paying users.
  • Dropbox: “If you adopt a freemium business model your marketing cost is the free users.” (Although–I guess more in who they tell than in themselves?).
  • Being a social product helps you spread virally.
  • For some products, like Evernote, free users become inactive and drop off, and active users start paying. .5 go premium right away, 2 percent after a year.
  • Evernote: freemium works if you have a great long-term retention rate (so each customer is pretty valuable?), a product that increases in value over time, and variable costs (what does this mean?).
  • Offer flexibility and data export to eliminate buyers regret.
  • Only charge for things that are hard to do.
  • Just because one company had success or failure with a strategy doesn’t mean you will. Many successful companies are outliers, not good examples of typical scenarios.

Articles

On Startups: To Freemium or Not to Freemium

On Startups: Why Your Startup Shouldn’t Copy 37Signals or Fog Creek

MailChimp: One Year After Going Freemium
Thesis: Don’t go freemium until you are really big and can afford to. Then it will really help your growth. But it will cost you too much to do it at the beginning. At the beginning, only offer what gets paid for. Build the “1” before going for the “10”. Then you will also know the costs, have the numbers.

Rob: Why Free Plans Don’t Work
Thesis: It’s fine for giant companies, but micro-businesses need to focus on revenue. If you don’t have the ability to capitalize on word-of-mouth marketing, then your free users aren’t doing you any good anyway, and they suck resources that you may not be able to pay for.

Freemium in Pandora, Dropbox, Evernote, WordPress, and MailChimp
Case studies of big companies with freemium models.

Analysis

I decided to try to keep the benefits of the Freemium plan and reduce the potential risks.

Instead of Freemium-or-not, go for the smartest way of doing Freemium.

Maximize Benefits:

  • We want to have a directory. Directories don’t really have value once they get a lot of people in them, so it behooves us to have the listings be free.
  • By giving people a subdomain, they can put mysite.healertree.com on their business cards when they are starting out. A la VistaPrint.

Minimize Risk:

  • Any part of the website builder that would be very rife for abuse we should push to the paid plan. The free plan will let you make a basic website, but the content types will be limited. Reduce the attractiveness for sploggers.
  • Content in the website builder will also be used in the directory, so it will be visible. Have a “flag this listing” a la craigslist so visitors can help us weed out any spam.
  • Don’t offer email services (newsletters, mailboxes) on any free plan.

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