In a recent post, we discussed Dmitri Leonov‘s article on Freemium Pricing, and the conditions where it does or doesn’t work. Leonov concludes that “the reality is, the freemium model doesn’t work for the majority of companies who try it. ”
Still, there are compelling reasons consider the Freemium model, including the significant number of users that can be attracted. If even a small number of the non-paying customers upgrade, the Freemium model could be your best option.
Recently, On Startups ran two posts on how to make Freemium pricing work. In this post, we’ll talk about an article by Andy Singleton called “The Secrets of Freemium Pricing -Make the Cheapskates Pay“. The article is based on Andy’s experiences, or as he puts it “mistakes” in applying the Freemium model to his business Assembla, a cloud based repository and tools for software developers. In a future post, we’ll talk about another article, by Rishi Shah, Co-Founder of Digioh, is titled Freemium Pricing for SaaS: Optimizing Paid Conversion Upgrades, and takes us through Shah’s thought processes as he develops a freemium plan by looking at examples.
Let’s take a look at the Singleton article first, and grab some of the main points. (by the way, both articles are packed with information, and worth reading in their entirety)
Singleton advises us to be clear on our goals, and he thinks that there should be two main goals for your pricing strategy
- Maximize revenue
- Lower your cost of sales.
The reason for wanting to maximize revenue is pretty obvious. Revenue allows you to stay in business and provide your service. If you don’t have revenue, you can’t provide the free service either. His reason for wanting to lower cost of sales was more subtle. Basically, Singleton says that sales and marketing offers no value to your customer, so any money you spend there is a bad investment. Rather, he advocates that you make investments in ways that provide customer value, and find ways to keep your sales and marketing costs as low as possible.
And this is where he gets to what I think is the key point of his article. “Free” is not a business model, but it CAN be a powerful marketing tool if used properly. The trick is to get as much as you can out of both your paying and non-paying customers. While some small number of free customers will eventually convert, Singleton essentially discounts this, and says the most important thing that you get from your free customers are referrals.
Free can be a terrible idea, or a great idea, depending on how social your free users are, whether they have paying bosses, and how many potential paying users they introduce to your service.
After reading the article (and again, lots of good stuff there) I wanted to see how Singleton applied these principles to Assembla. The first thing I noticed is that the free plans are not mentioned at all on the home page. Instead, it is noted that you can get a free trial.
When you do go to the Plans and Pricing page, you will see free offerings, but they are clearly for separate offerings, not for the main product line. The goal is to prevent the free products from cannibalizing the paid offerings.
The other thing that Assembly does really well is to make use of the anchoring bias. Note that the highest price plan is on the left, where your eye goes first, and you anchor on that price. As you work across, the $49 plan seems much more reasonable.
There are lots of different ways that the freemium model can work, and lots of ways that it doesn’t. We will continue to explore some in future posts.