Startups often head towards mediocrity, low growth and less success because they set out to build a free product and the value matches the price. I’m proposing we reverse the way we look at the ‘freemium’ model and by doing so, build better businesses.
A video taken at Barcamp Sydney 5 of me talking about my thoughts on Freemium
Free + Premium = Freemium. It basically means that you offer your product for free to begin with, get users hooked and then charge a small % of your audience a premium fee for premium features down the track. This lowers friction in acquiring customers; you’re not limiting growth by adding a payment system or even hinting that people might have to pay at some point. Free means people can check you out, kick your tyres, grow to love you and never leave. Or that’s the idea.
Free as in: not free at all
But is it really free anyway? It certainly costs in terms of time, and we know that Internet consumers move fast, scan around, try and find gold, move on. They don’t have time, so you’d better be worth checking out. There is also the mental cost of working out what you are, how you are going to help me, how I use you and why you are better than the million other options I have. Plus there is switching costs. These are always underestimated. “But I have an import tool!” It doesn’t matter. It’s the mental and risk parts of switching which are the biggest costs. Even if they are not doing anything right now, to a customer it always feels big and bothersome. So there already is a cost, and it’s bigger than you think.
Slightly better than nothing at all
The next big problem with creating a free product is that you tend to think that because it is free, it only has to be pretty good. I know we’re all proud of our products, and they work great and look good, but we almost subconsciously create free products to be worth cents each year to customers. We make them better than existing products (like email, IM, wikis, self publishing, documents) but only marginally so.
Here is a good test to see if you’ve created a ‘just better’ product. Send an email out to all users with a bill/invoice for $50 for lifetime usage. How many would pay it? What about $20? $10? Would 90% of your users not even pay $5 to keep using your product? Then they musn’t value it very highly. Josh Kopelman said it well in his tweet “Too many freemium models have too much free and not enough mium”.
What if you decided to charge money first, and then offer it for free later? If your end goal was a million customers, with 10,000 paying and the rest free, you could start by finding 100 people who were willing to pay you. Then get to 1,000. Then let in the freebies, with some cobbling of features, and grow to your 10,000 paying. I highly recommend setting out to start charging people from day one. It can really change your business.
Why go premium first?
- It changes the way you think about your product. If you are going to charge someone even $10 for it, then they have to think it’s worth about $100 to them in value to make it worth the $10. So you set out to create something worth $100 instead of $2 CPM, probably about the amount needed to get them to shift.
- It validates your business. You know straight away that someone will pay for it and if you’re created enough value.
- It brings in revenue, very handy if you want to pay bills (even if it’s not much).
- It makes you ‘post-revenue’ which in investor speak means you’ve earned a dollar and are now much, much more attractive. You may even make so much money that you don’t even need investment.
- You only have to worry about a small customer base. It’s easier to spoil 100 paying customers with great service and awesome customer support than it is to juggle 10,000 users who don’t even love you that much. Paul Graham just supported this in point 5 here.
Does building a premium product mean that you can’t be focused? Must you add lots and lots of features? Sacré bleu! Definitely not. Quite the contrary. It means that you have to be even more focused. You have to pick a starting segment that is so absolutely crying out for your product that they are willing to fork over money for a beta. They need to really need it. This is good. Go to your best customers first. They need it. And they are more likely to help you build it into something they want than someone who only wants to use it for free. These people are the lieutenants of your community. Nurture them, foster them, love them. Focus on them. Then go to the next segment.
The reality check on this is that in the very early stages, your product is so full of bugs and holes that not even your mother would pay for it. That’s ok. Find a few beta testers, preferably close to your first premium target market. Talk to them in person. You don’t need thousands. But tell them all from day one that you want to charge $10 for it. If they are laughing, then you’re in trouble. If they are pulling out their wallets, FTW! Also, subscription doesn’t mean that you can’t give people a low-risk way to try your product. You can offer limited-time trials, demo accounts, money-back guarantees or get more creative.
Premiree isn’t for everyone, but you should at least be asking yourself the question ‘Why not charge? I’m worth it, dammit!’