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 It did not matter that the Red Cross was forced to charge for free coffee by the Government or that repealed the policy soon.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.