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TODAY’S STORY
20 May
,
2022

The problem with free(mium).

When was the last time you were

  • looking for a free software to get a job done
  • came across a software offering a free 7-day trial
  • signed up for the free trial
  • and converted to a paid user after 7 days?

If you’re like most of us, this rarely happens, if ever.

In most cases, if Google Search throws your product up as free software, and then I visit your website only to realise that it’s not actually free but just a 7-day free trial, that’s the fastest browser tab I’ve ever closed.

The common advice around freemium goes like this —

Freemium works best where:

  1. There are strong network effects designed into your product, i.e., the product’s value increases with scale
  2. The product structure is based on extensiveness of features: most users need the basic features which are free, and then you pay for the advanced features
  3. These feature differences between free and paid are easy to communicate
  4. The value provided by the free version isn’t so much that users are never incentivised to get a paid plan
  5. The people you are targeting will respond well to a freemium model
  6. As you’re not earning from your free users, the cost to acquire and serve them should be low, while maintaining impeccable product performance and service

All this is good advice, albeit very hard to get right all at once. Especially points 1, 4, and 6. Also, it has some glaring myths implicit into it.

Many founders think that freemium will allow them to onboard more users and learn from their behaviour to improve the product experience.

“Just imagine how much we will learn once we have 1,000 real, active users of the system!”

I’ll tell you what the problem is. Most of those freemium users are not like those who will actually give you money. And it is very often the case that the features that paying customers would want aren’t needed by free users.

99% of these freeloaders will not convert even to the cheapest paid tier of your product. If you suddenly started charging only ₹100/month for your service, most wouldn’t come aboard.

Why is that? Because the need, the interest level, and the value to the end-user isn’t pressing enough to cross that payment barrier, even if it is just 100 bucks a month. For them, it’s free or nothing. And they’re fine with having nothing.

But those who will pay ₹1000/month or ₹5,000/month do have strong needs, not just in terms of the scale they will use the product on, but also the depth of functionality they want.

In fact, your total conversion rate of web visitors to actual revenue is quite worse than other startups that only sell a paid product.

Why is this conversion rate important?

Because it means that it will need you to spend way more on marketing and advertising to achieve equivalent revenue.

Not only that, even if the marginal cost of scaling your product tends to zero because it’s software, the tech support and customer service you provide to free users isn’t. It’s expensive.

And if you wish to convert some of these users to paid users, you will need to make sure that there’s no compromise in the kind of service and support you provide to these free users.

It’s easy to say, “We won’t provide tech support for the free tier — they’ll understand since it’s free,” but if you ignore them, they’ll be less successful with your tool, which means they won’t convert or evangelize your product to friends and coworkers.

It’s easy to say, “We’ll provide a lesser grade of support for the free tier,” but even that gets quite complicated during execution. Exactly where and how do you draw the line when it comes to tech support? I’m not sure.

And lastly, consider the fact that we live in India — a country that is infamous for its users not being willing to pay for their software.

In summary, freemium is good if you want to say, “Join 10,000 other happy users.”

But ultimately, you will have to charge it to your marketing department. It’s all marketing in the end. It’s lead-gen, reducing barriers to conversion, and competitive advantage via not letting your users use a competitor’s product if they’re using yours.

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