There has been a lot of talk recently regarding the freemium business model. A recent article in Entrepreneur interviewed Jason Fried and I regarding our experience. While Jason and I seemed to have different views, the value of free is basically the same. If you have something of value, people will pay for it.
Where free succeeds
Where the “free” model plays an important role is not the fact that it is free, but the ability to prove your product. The “try before you buy” concept is not new. By offering a free plan, you give your potential customers a risk-free opportunity to try your product. This can go a very long way compared to “30 day trials” or a well designed marketing site.
The other area where free has value is word of mouth. The majority of our accounts are free, while this puts load on our system and support, it also creates a loyal base of people who rave about our product. We’ve seen many examples of freelance developers on free plans who then convince their clients to use Beanstalk on a paid plan.
Finally, the last point of value is about creating movement. When we started Beanstalk, our goal was to convince more people to use source control and improve their process. It amazed us how many people still did not have proper source control for their projects. By offering free plans, each account is a small triumph for our goal. The “greater good” value eventually brings back more value to the business as more people use source control.
Where free fails
With all that said, there are definitely cases where free does not work. I was doing a quick review of our stats and noticed something interesting. We get a nice number of visitors from stackoverflow.com. One post in particular sends the most traffic, which is titled Free Online Private SVN repositories. Here are some stats for a given period:
- Visitors: 2,617
- Free sign ups: 728
- Paid upgrades: 6
By breaking these numbers down into conversion rates we see some interesting results. First, the conversion rate from visitor to sign up is huge, almost 28%. The conversion from sign up to paid on the other hand is awful, only 0.8%.
What does this tell us? It’s pretty obvious, people who are looking for free will most likely not pay in the long run anyway. If we don’t offer enough resources at the free level, they will probably just go somewhere else. Knowing this, it helps focus attention on the people who are looking for value and willing to pay for it and service them as best as possible.
Learning from the numbers
We are just beginning to understand the details and still have a lot to learn. We’ll continue to review results and study conversions to help make our products more profitable. In the long run, this helps us grow our business and expand our offering for our customers. We’ll be sure to write the results here as well.
Do you run a web product? We’d love to hear your results as well. Please share in the comments.
6 Comments
If I may take my WBP SYSTEMS hat off and put on my behavioral economics hat on (which is what my education and research is in), the problem here is about using pricing for comparisons. Let’s talk about an example:
A few years ago the economist magazine ran a promotion (possible a misprint) where they provided three price points. One (the lowest) included the online edition of the magazine, one include just the paper edition and the final package included both the paper and online edition for the same price as just the paper edition. Dr. Ariely thought this was bizarre so he ran a study. He provided one sample with a renewal sheet including all three options and a second sample with just the first and third (because no person would rationally chose the second option).
So, as expected no one in first group chose the second option, but a dramatically higher percentage of people chose the third option than in the second group (where the second option was missing). Now, the prices are the same, no one chose the second option, so why would an option that no one chose change the purchasing behavior of the other two options? This is because of price comparisons. People often use the pricing options in front them to determine value. This is especially true when there isn’t perfect substitutes for the product/service to compare to.
How does this relate to free? It changes the value equation in an unfavorably way. Let’s say your product has A, B and C; but only C is only included in the paying plan. So without the free option the buyer will look at your price scale and determine the value based on A,B, and C . However, when you place a free plan in the options (even if C is critical), the buyer will use the free plan as a point of comparison. In their brain “C” costs the price the plan. A and B become valueless.
This is why WBP SYSTEMS has free trials for our products, but will never have a free plan. Providing a free option for a product where it is already difficult for the buyer to determine value is in my mind a huge mistake.
Ben Smith — September 21, 2009, 12:51 pm
Hi Ben,
Really nice feedback, and well supported.
I can only base our opinions or research on experience with our products. So far I have not tested with trials. While the free plan has limits, it also lacks SSL and Deployments, which are key value points.
I still see value in the free plan since most of our growth is word of mouth. We don’t advertise, so we rely on people to talk about our product. Also, most free trials come with the condition that you must give a credit card for the renewal. This could definitely convert more people to paid, but it just reduces the number of people who sign up.
Jason’s point was that most paid accounts started out that way. We’re doing some research now to see how that stacks up with Beanstalk and Newsberry. All products are different, so I am interested to see the results.
Chris Nagele — September 21, 2009, 1:15 pm
Hi Chris
I’m a happy subscriber of one of your paid plans.
My question is not on Freemium, but it has to do with the notion (or perception) of value. Early today a partner of mine called me saying that a prospect found my service too expensive, and would only close the deal if I gave him a 75% discount over list price! Yes, seventy five percent discount. Normally customers ask for 10-20% down on a deal, that’s expected and healthy, even because we can always negotiate something in return: more services, consultancy etc which increases our margin in the mid to long run. Now, 75% without even suggesting something in return is a pain in my pocket.
What do you think of all this? Have you faced a similar situation yourself?
Cheers
RA
Rodolpho — September 24, 2009, 7:22 pm
Hi Rodolpho,
Glad to hear that. We’ll work hard to keep you happy.
I think we’ll always have people who try to negotiate. We’ve had people tell us our free plan is too expensive :)
It all depends on your product. If you think the value is there, then it may be better to stick to the price. Once you lower the price, you also lower your own perceived value of the product. At the same time, pricing and plans are hard. It’s a tricky thing to serve many people with different needs while keeping the model simple enough to understand.
Chris Nagele — September 24, 2009, 7:31 pm
I think you have two interestingly different products as well. Offering a free version of Beanstalk has to be a choice that you will always support – once you have someone’s source code you can’t really take away their access. For individual developers, that may be all the value they need.
On the other hand, Newsberry can offer free credits to try out the service, but there is no free beyond that with any value. So while you have a decision to make when it comes to Beanstalk, it is based on the service you offer. No real decision has to be made on free for Beanstalk because the service becomes valueless without the ability to do the one thing it sells.
I suppose it’s a purchase vs. subscription model that makes the apps so different. Each time I send an email blast, I’m really purchasing your services one-time. Beanstalk however is a long-lasting relationship. Even if you stopped offering free accounts on Beanstalk, you would have a lot of trouble NOT grandfathering people in.
Dave Martorana — October 21, 2009, 8:37 pm
Dave, you are very right. The difference in billing between the two makes it a much different strategy. Also, with the nature of email, you can’t give too much away for free without lending a hand to spammers abusing the system.
We recently released monthly billing for Newsberry as well. This will help people who send multiple times per month. It also makes it much easier to predict growth and cash flow.
Chris
Chris Nagele — October 22, 2009, 12:05 pm
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