Alan Downie, co-founder and CEO of project management and collaboration tool BugHerd, has written about the need for startups (and by extension, all providers of web services) to think more carefully about giving away products and warping perception of value in the process.
In an article titled 'Customers won’t give you money unless you ask', Downie questioned the modern tendency to give away a product for free in order to grow the audience quickly. He said that, although this is sometimes a viable route to success, it’s more often sensible to start charging immediately, securing a smaller but more loyal user base.
Downie dismissed common notions that freemium models enable plenty of data collection (“… you may well be learning about the wrong users”) and the classic 'upsell' argument of ‘just’ converting one per cent of free users (“… this is a fool’s errand [unless] you’re running an extremely sticky app”).
.net spoke to Downie (AD) about charging for web services, and how paying users are more valuable than those hanging on for dear life to ‘free’.
.net: Has the web industry become too infatuated with building large user bases, regardless of long-term costs and stability? Is it better to grow more slowly with a solid revenue stream?
AD: It depends on the startup's goals and the market they're in. If you're doing a social web/mobile product, for example, you absolutely want to get a large user base quickly, often at the expense of up-front revenue. On the other hand, B2B products are often more about growing a reputable brand, demonstrating your value and trying to grow a profitable business.
The other major factor is what drives the founders. Founders interested in growing a big, stable business are more likely to be concerned about cash flow than those who are interested in seeing an early exit. But any business needs money to stay afloat. If you're not charging, you're either going to have to raise a lot of money to keep the doors open, or you going to be looking for an exit. In my opinion, too many startups do the latter.
.net: Your article seems to suggest upfront payment is a good way of filtering out users who'd never pay for anything anyway and who, in the long run, probably won't support your service …
AD: Getting upfront cash is quite simply the best way to know if your product has real value to someone. Plenty of people will say your app is the best thing they've ever seen, but quickly back-pedal when you ask them to enter credit card details. So it's not just about ensuring you're speaking to the right people, but also it’s about ensuring you're building the right product. If you want to grow a business, employ people and create happy customers, it is critical you understand how to make money in the process. There are far too many founders building products that nobody actually wants. Sadly they don't realise until it's too late.
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.net: Is there an argument that those who invest are also more willing to put more time in, whereas those who get something for free don't really care and may not use a service heavily?
AD: I'm not big on psychology, but, yes, this is called choice-supportive bias. This is basically where we convince ourselves that our past choices were good choices. With a free product or service, you're more likely to be glad you didn't pay. You'll complain more, be less likely to tell your friends about it and be less likely to even use it. On the other hand, if you make the decision to pay for something, you're far more likely to make full use of it, evangelise it and generally be more positive about it.
.net: Your article mentions how, with BugHerd, you did an A/B test that removed mention of the free plan at sign-up, which doubled conversions to paid plans. On perception of value and free tiers, is this a route you’d recommend to other services and startups? Are there any occasions where such a tactic would be a good or bad idea?
AD: Testing pricing is always difficult. The biggest risk is you could really piss some people off in the process, and that should be the main concern. When we made the decision to test removing the free plan, we made sure that it was still available to anyone who actually wanted it. We certainly didn't want anyone paying who didn't need to, we just wanted people to start their 30-day trial under the assumption that it was a paid product. What I wouldn't do is offer a five-user plan to ‘person A’ for free, and at the same time be offering it to ‘person B’ for $29. Eventually, person B will find out they got duped, and they're not going to be happy about it!
