A must read pricing book with ‘Free’ in its title

There are two books on pricing with free in their titles.

One is by Chris Anderson and has the subtitle of, “How Today’s Smart Businesses Profit By Giving Something For Nothing.  I wonder how these companies do that, must be the volume. This is of course the new title for the paperback edition, the original subtitle was “The Future of a Radical Price”. I guess the future is here.

Rest assured I am not recommending you read this book.

The other book with free in its title is by Saul J. Berman, “Not for Free: Revenue Strategies for a New World”.  By new world Saul refers to the current business world that drank the kool-aid of previous book or obsessed with monetization model innovations.

And I recommend this book.

Saul isn’t as popular or a household name as Chris Anderson is, although a WSJ reported asked me, “who is Chris Anderson?”, when she was interviewing me on my GigaOm freemium article. This book has just 4 reviews on Amazon (all 5 stars, likely his colleagues?) compared to Chris’ book that has 170 reviews.

But don’t let what is popular and accepted by your peers let you decide the book to read or your pricing strategy.

Chris Anderson’s book talked about the abundance of computing power, abundance of bandwidth etc and how these forces led to a marginal cost of $0 which naturally means $0 price. Saul starts with those same trends disrupting business models and comes to a different conclusion – how important it is to have a differentiated revenue strategy in order to not let these forces drive your business to dust.

The first step in Saul’s revenue strategy roadmap? Segmentation (chapter 1 in the book):

 traditional segmentation approaches are at best correlative—they take an identifiable characteristic and match it with a likely behavior. Why be so indirect? Why not look directly for the behaviors relevant to your industry? Doing so can reveal when consumers are well served with an existing business model and when consumers would be open to new ways of doing things, especially for incumbents.

In other words start with the customer needs or the jobs they are hiring a product for and not whether they are in 25-35 demographics.

This alone is worth the price of the book. What are you waiting for? Go get now – Not For Free

Moving from Free to Fee: Follow-up to End of Freemium

You gave away your product for free, betting on other ways of monetizing your users. Sooner or later you realize that the promise of other revenue streams do not materialize. Your free users remain freeloaders. The success stories reported in tech blogs turn out to be the lucky ones and even among those it is highly likely they succeeded despite freemium not because of freemium. Like I wrote in my last article in GigaOm you too recognize freemium has run its course.

You decide to charge for what you used to give away for free. How can your free product make the successful transition to fee, overcoming user backlash?

First let us look at categories of free. One, products that we have come to expect to be free and feel entitled to getting these free. Two, products that we used to pay for but became free or products we see as optional.

 Free as mom’s love: Entitlement Category

Probably entitlement is the wrong word to use given the political times but examples will make it clear. To see a classic example of this let us go back 70 years and revisit a service that was started during World War II.

During World War II, the Red Cross had comfort stations for soldiers overseas, with free coffee and free doughnuts. Then, in 1942, the Red Cross started charging for the doughnuts.

Charging for coffee and doughnuts touched a nerve in soldiers and made them hold a grudge against Red Cross that lasts even today (among veterans). It did not matter that the Red Cross was forced to charge for free coffee by the Government or that repealed the policy soon. The ill-will and grudge continued.

Present day examples in the entitlement category are email, twitter and facebook. Charging for these is very much like your mom charging you for Thanks Giving dinner. Placing a price tag on these will bring significant long-lasting backlash  as American Red Cross found by charging veterans for doughnuts. According to Uri Simonsohn, professor at Wharton School of business,

we expect this category of products to be free like mom’s love is.

In a recent GigaOm article, Mathew Ingram explored the question of for-pay version of twitter. What makes a for-pay twitter unthinkable and impractical is how the users have grown accustomed to see it as entitlement. Even enterprise customers who do not think twice to pay $15 per user for Chatter Plus, will not accept a for-pay twitter.

The best solution for getting out of entitlement trap is not to get into one in the first place. This requires constant reminder to your users about the dollar value of the product or service they get it for free. Perfect example of this avoidance is Amazon’s free shipping for orders worth $25 or more. Amazon by default selects the for-pay option making customers explicitly change to free shipping. In addition Amazon always adds the shipping charge then subtracts it from the total to show the dollar value of the service they deliver.

If your product is firmly stuck in the entitlement category you have only one option to move to for-pay model – target a different segment, preferably the one with budget to pay. For instance, secure, reliable email service for businesses vs. just plain old email for personal use.

Returning to Mathew’s for-pay twitter example, the service as it exists today, serving general population, does not have a path from free to fee.

Free as in free lunch

Fortunately, the second category is the most common one for news sites and webapps we now get for free. If these products need not have been free but were made free due to various reasons (mainly the failure to understand customer segment, needs and the value add).

The challenge is the user backlash from being asked to pay for something they did not have to. We have seen such outcries when airlines decided to charge baggage fee, when Ning decided to move to for-pay model and when Times erected pay wall. The good news is this is not as insurmountable as the entitlement trap.

Four years ago I was knee-deep in unbundled pricing. I was looking for ways to unlock value by charging for extras and do so as a strategy without being seen as nickel and diming the customers. The answer I found then was what economists call as reference price.  It is the price we used to pay for a product regardless of the value we get. Any increase over reference price causes us pain and any decrease is seen as a gain.  The added challenge with free is the reference price of $0. Since the users did not pay even a token amount the move from $0 takes extra work.

As it turns out, reference price is not a fixed number etched in our minds. It is malleable and yields well to behavioral nudges. One such nudge is introducing a super-premium version at even higher price when you move from free to fee. Another nudge is using cost argument to justify the move.

If your startup is stuck in free and want to move to for-pay version, make sure the free was never seen as entitlement and start with moving the reference price. The best option is not to start with free at all if your product indeed adds compelling value to your customers.

How to offer free version – Google Fiber Pricing

 

Google is getting into ISP business with its Google fiber offering. There are several relevant questions about this attempt by a business whose core competence is in organizing world’s information.  There are questions about the pricing strategy, cost structure and whether they have the operational wherewithal to pull this off against others whose core competence is in running a network.

Here let us look at one specific topic – their Free version. Some will see this as significant evidence supporting freemium model. It is anything but a case for freemium. Let us take a closer look at this free version.

The service is available in one city that is likely not the one with hunger for high-speed internet. This in essence is a test market and what they offer here has nothing to do with what they will eventually offer in other markets.

The Free internet is technically not free. Customers either pay $300 upfront or pay $25 a month.

The $300 price is labeled as construction fee which is waived for other premium versions. That is a clever presentation for two reasons. First, the $300 is a high upfront cost for any customer and even more so for someone attracted to free. Right there it limits the most price sensitive customers from opting for this. Second, by explicitly waiving this cost for other two versions, those who choose Free are made to think they are losing out on this value.  Pain from this foregone value will push most to opt for the higher priced versions.

Free is also not free forever, customers who pay the upfront fee will get free service for 7 years. This limits the liability for Google and sets clear expectation among customers. It is likely that most customers who would choose this option do not stay in the same house for 7 years.  If they did stay, they are less likely to switch to another ISP because of sunk cost bias. In essence Google captured upfront value and locked away these customers for up to 7 years, making them unavailable to others.

There is indeed an option to pay-off the $300 fee over twelve months which will help reduce the barrier for some. Prospect theory suggests that paying $25 a month for twelve months will cause more pain than single payment of $300. So even fewer customers are likely to chose the installment option.

Netting it out, this free is not the run of the mill Chris Anderson school of free. There is a well defined segmentation strategy with  carefully crafted free used as a tactic to support it.

Essential Companion Guide to Freemium Article

In my recent article in Gigaom I make a case for returning to the first principles of marketing.I could cover only limited number of points there. Here is an essential companion guide to that article, a list of articles on pricing strategy and freemium that I have been writing over the past three years. Or you can read my entire blog filled with articles on Evidence Based Management and Pricing Strategy.

  1. Approximate Guide to Pricing Webapps - It starts with segmentation
  2. Freemium Customer Lifecycle – 5 questions to ask before you launch your venture
  3. Variations of the World Famous Hershey’s Experiment – Are you betting your venture on one experiment?
  4. What do you charge for a service you just made up? Product may be new but what job is the customer hiring it for?
  5. Pricing Always Comes First – That is your fair share of value you create for your customers
  6. Opportunity Cost of $0 Price - What are you giving up by not charging for your value-add?
  7. Pricing Digital Goods – Hint: Not Free
  8. Three components of Effective Price Management
  9. Can you answer the “why” questions with your segmentation strategy?
  10. Last but not the least - Cloudy with a chance of Free business model

Can you afford to set your pricing wrong?

“My only regret was how we introduced pricing in the beginning, because how did we introduce pricing? Thirty dollars and you get all you can eat,”

This is what ATT wireless CEO Mr. Randall Stephenson said about their iPhone history.

It is likely that the price and the unlimited data plan made sense in 2007 when 95% of the people consumed far less mobile content. ATT was fighting for subscribers in a market that was close to saturation. Only way to show growth was by causing churn away from competitors. They chose a price such that it brought in large number of customers with only a small percentage of them being outliers in consumption.

All you can eat was not all bad when there was not much to eat, everyone eats differently, and the amount one can eat had an upper-bound. But all that changed when the very device (iPhone) they were after resulted in explosion of content to consume and rate of consumption.

ATT was forced to rethink pricing to better align price with value delivered. But the initial low price and offering set a strong reference price that was hard to overcome.

Hats off to Mr. Stephenson for seeing their initial folly and admitting it. He sees the importance of getting initial pricing right.

What about your free webapp? How difficult is it going to be to move from free to fee?
ATT has the resources to recover from its pricing mistakes. Can you afford to make mistakes?

 

If you are selling Enterprise Apps you don’t start with freemium

I thought the word freemium went the way of singing fish and MySpace and hoped I never have to write yet another article with this portmanteau in the title. Unfortunately wrong ideas  and false beliefs don’t die easily. They are not replaced by some profound truth because the believers suddenly achieve self-realization. As Kathryn Schulz wrote in her book, Being Wrong, bad ideas die hard because they can only be replaced by another equally bad idea. Until another such bad idea comes around we are stuck with freemium.

This time we are presented with some profound advice on go to market strategy for Enterprise Apps by Scott Irwin from Rembrandt Venture Partners. In his article for GigaOm , Mr. Irwin recommends freemium as the first option for go to market strategy for Enterprise apps before inside sales and before enterprise sales.

Those who are already sold on the idea of freemium will see this as further evidence supporting their case.  Those who are new to the idea will likely see the popularity of the post as evidence for its veracity. Those like me are not going to be convinced as usual. The problem this time is the flagrant errors in the case Mr. Irwin makes by recommending freemium for enterprise apps.

If you stopped reading here, think about it – Enterprises have a budget and have wherewithal to pay. Why shouldn’t you charge for your value-add?

Now to the flaws in Mr. Irwin’s argument.

  1. Ignoring Customer Needs: There is absolutely no mention of the customer segmentation and their needs. Why are customers hiring the Enterprise 2.0 Apps for? If you do not understand your target segment and their needs you cannot deliver them an effective product. And if there is an urgent your product fulfills why should you not charge for it? These are enterprise customers and they have a budget to pay for these apps that add value.
  2. Ignoring Customer-Channel Alignment: Mr.Irwin starts out by making a case with Salesforce.com, a company I admire for its disruption of the enterprise software landscape and its marketing. But it should be noted that they very carefully chose their initial go to market strategy that aligned with how enterprises buy software – building an highly effective enterprise sales team backed by phenomenal marketing. It was not freemium that helped Salesforce.com grow to $3 billion a year company. Sure their product was easy to setup and use but they were not just fighting against customer apathy, they were competing against strong players with significant sales prowess. Do not for a second think freemium would help compete against entrenched players or serve as free marketing.
  3. Choosing Irrelevant Examples: If the topic is about go to marketing for Enterprise Apps the examples used should at the very least use such companies. Not Evernote, a consumer based webapp. When it comes to freemium examples, for the past two years, there have been no other examples than Dropbox and Evernote. Such a model of try the free version and upgrade to premium may work in consumer segment (barely, only 3% upgrade to paid version) but the competition is not going to let that happen for enterprise segment.  In addition any such popular example also suffers from biases.
  4. Choosing Selective Evidence:  Mr. Irwin makes a case using SurveyMonkey, specifically goading us to make app fun so users will use it. First, why should making the app fun be mutually exclusive to charging for it? What about many other applications that are fun to use and but not free. If we want to stick with the same application family as SurveyMonkey, we have SurveyGizmo which you know decided against freemium model to target enterprise customers. There are many other examples of applications that are fun to use and not free. By using selective evidence Mr. Irwin not only succumbs to biases but leads his readers down the wrong path.
  5. Anything but Charging For Value: Rest of his article is presented as a recipe for freemium. If you did not have your segmentation right, you do not have your product strategy or go to marketing strategy right. Any other revenue model, however innovative it is, is not effective. Yes Atlassian and others adopted pay to charity, pay what you want, pay with WOM etc models. Likely these models were relevant for them because they started with right customer segmentation. But all those do not apply to your business.

Why are management gurus, entrepreneurs, startup gurus and now venture capitalists  dead set against getting fair share of the value they create for their customers?