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 It did not matter that the Red Cross was forced to charge for free coffee by the Government or that repealed the policy soon.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

One right price is better than three wrong prices: SurveyGizmo Simplifies Pricing

This post is my interview with CEO of SurveyGizmo, Christian Vanek on their pricing strategy.

A few weeks back I wrote about the continuing changes to SurveyGizmo pricing. It turned out they have been A/B testing their pricing for a while and I had slipped through the crack, finding both the offers. Last week I sat down (over phone) with SurveyGizmo CEO, Christian Vanek and their web marketing lead Kipp Chambers for a conversation on their new pricing.  Christian happily shared with me  the genesis and details of this simplified pricing.

The details are sure to add new dimension to the thinking of most startups that see pricing as simple freemium model or do it as tactical afterthought. Their analytical process, understanding of customer mix and their willingness to go against the conventional wisdom are exceptional traits that need to be commended.

Pricing is lot more than an eye-candy pricing page!

What was their pricing before the change?

Take a look at their previous pricing page. Their pricing options and the pricing page design look not much different from numerous other webapps out there. In fact there are wordpress templates available to show this classic three column design with the “suggested version” highlighted.

One glaring difference is, while most webapps include their free version as one of the three presented, SurveyGizmo showed their free version as a footnote.
Otherwise this is nothing more than a  instance of what Hal Varian described as Goldilocks pricing.

What is the change?

Gone are the multiple editions and the pricing page eye candy to nudge customers to a specific edition. There is just one edition with all the features including the advanced features that used to be available only in the higher priced versions. Most importantly, they used to limit the number of responses per month and now they eliminated that limit as well.

In the past they had a cheaper $19 plan even though it was not prominently featured in the pricing page. Now that is gone along with the $159 Enterprise Plan that was prominently featured and highlighted in the middle of the pricing page.

After this pruning, all is left is just one version – no name  for it (like the new iPad)- offered at $50 for the first user and a flat fee of $20 per additional user.
Another point to note is there is no non-linear pricing built into the price list. Whether it is 100 additional user of 1 additional user, the price is the same, $20 per additional user.

To discuss this change, the drivers behind it and how they arrived at it, I talked to SurveyGizmo’s Christian Vanek, their CEO, and Kipp Chambers. Here is what they had to say.

Why are you open to sharing this information? Isn’t pricing strategy meant to add to your competitive advantage?

“We have a company policy of no secrets”, said Vanek. He stayed true to this policy even when I later asked him about SurveyGizmo’s future product roadmap.  “Regarding SurveyGizmo’s pricing there is nothing really to be protective about. As soon as  the pricing page went up our competitors likely saw it. Or they will know when your article goes up. Even before this, people were copying the pricing plans and the pricing page down to the name of our plans and their feature set. Once they had comparable plans they were competing on price”. Vanek adds he could either spend all his energy protecting ideas or spend his energy on better execution and coming up with newer ideas. The choice is clear to him.

What are the drivers for this major pricing change?

We had our $19 plan, the $49 plan and the $159 plan. We found several key things from our analysis of our customers.

  1. Very people were opting for the $19 plan. Some of those who chose it for price realized they did not have all the features they needed and were calling us about that. In most cases we ended up enabling the additional features for them. We are not going to tell our customer, ‘you need to pay additional just for that feature’. Some upgraded to higher priced plan just for a brief period to use the advanced features and downgraded right away when their job was done.
  2. Those who picked the $159 plan were using only 10% of all possible features they get with it. We were taking lot more money from our customers who were not taking full advantage of what they were paying for.
  3. What if a customer wants only one of the feature offered in higher priced version and that is the only one they want? Why should they pay more just for that? We tried for a time some kind of a la carte pricing but it was not the best of experience for our customers.
  4. Surprisingly, customer satisfaction was low among those who chose the lowest priced plan and high among those who chose the higher priced plans. You could argue this is because their purchasing decision itself may have something to do with satisfaction rating.

Considering all these we thought, there is really only plan that served customer needs and presenting three options is likely aggravating customer choice by adding to their cognitive costs. So we decided to test this hypothesis.

This is so different from what every other webapp startup is doing.

Presenting  three plans, any three plans, at different price points and hoping customer will pick the one they want is shotgun approach to customer segmentation. It came apparent to us to retire the shotgun and get sniper”. (Vanek calls this his Call of Duty metaphor, “almost any business lesson can be learned from Call of Duty”, and adds The Lord of The Rings after my prompting*. )

“I think we are seeing now the end of the freemium model, signing up for free and then trying to up-sell. Our value is in providing both a great product and great service to go with it to customers who need and value our product”.

So you are giving up those customers who are willing to pay $20?

These customers were never ours to begin with. Customers who want free survey or want to pay $10 or $20 a month have always been SurveyMonkey’s customers. We are okay with that. If a customer is happy with a competitor we are okay with that. These were the customers who anyway ended up getting the features from higher priced plan because we did not want to say to them, that is extra.

What about profits lost by eliminating $159 plan?

“This was our fear as well and we discussed this internally. It would seem silly to give up on the higher priced plan. In essence you have to bring in 3 new customers at $50 level for every $159 customer we are giving up by eliminating this plan. We asked internally, can we do this? Happy to say we are doing very well after we moved to single price plan.”

“When we discuss our features with customers showing them how we compare feature for feature with competitors and then show them the price, they ask, ‘okay, why such a low price? What is the catch?’. There is no catch. We don’t have to overcharge for the product.”

About the change process?

“We did lots of A/B testing. We found that customer decision was easier with just one pricing option. In fact when we presented the simplified plan in split testing  that charged $50 for first user and  $20 for each additional user we found customers were signing up more than one user than they did with three pricing options.  We are serving marketing research field, we should be doing our homework before such change. Only after a lengthy testing process and data analysis we decided to go with this change.”

It is acceptable for a pricing geek like myself to say cognitive cost, how is that you are thinking about it?

For this Vanek seems to believe this is common sense. A customer who has to weigh multiple plans, the features it has and the price points suffers significant cognitive cost. “We work with lots of researchers who work on cognitive research and we understand the cost to customer from choice.”

Final words?

By eliminating the three plans and going to a single plan we have narrowed the field. We are targeting only those customers who want and value the advanced features.

*Talking of The Lord of The Rings, Vanek says his super power is he has the voice of Saruman.