Questions For Startups Killing Free Membership And Going Pay Only

by Nathan W. Burke on January 22, 2009

Lately I’ve been noticing a trend: startups that have offered free membership to their sites are now going pay-only. Even sites that have been built on the “freemium” model (free membership with feature limitations or pay memberships with unlimited use) are ditching the “free” part of their offering. While these startups are blaming the free service termination on the economy and declining ad rates, the question remains: is it a good strategy to dismiss a large pool of potential converts?

Two of the most recent examples:


1. Jott– The voice-to-text service added a premium version back in August, and just announced they’re killing the free version entirely on February 2. From their blog:

If you’re reading this, you’ve probably heard that we’re ending Jott’s free services (Jott Basic and Jott Notepad for the iPhone). Unfortunately, it’s true, beginning on February 2nd. Plans for current paying customers are not changing.

Whether you are a paid or a free customer, we thank you for all of the support you’ve given us over the past couple of years, and the support you’ll hopefully give us in the future.

Why is Jott ending its free services?
As we’ve said many times, one of our goals was to always offer a high quality, free version of Jott. But as with many businesses right now, the economic environment is forcing a change in plans. When we started, we made quality our top priority, and we will always be committed to this. As you know, we use a combination of automated speech recognition and human quality assurance to deliver this, and it costs real money to do it well.While we’ve made remarkable progress at innovating costs out of the system, the current climate is forcing us to focus 100% of our energy on getting to profitability. The great news is that with this change we are within sight of that goal.

2. Sprout Builder– The platform that allowed users to build multimedia web content without being flash developers launched at DEMO 08 has gone fee-only.

From their email:

Over the last year Sprout has provided you with a free solution for creating interactive Flash content and widgets. Like many technology companies, we offered our service for free while we worked on our products, spoke with customers and developed our go-to-market strategy. Now that we have developed a solution worthy of creative professionals at the best agencies in the world, it is time for us to monetize. Starting in early February, we will begin charging for our service. We hope that you have found value from Sprout Builder and will continue to use our services.

Which brings me to a couple of questions. If you’re from a startup that has gone the freemium to pay-only route, I’d love to hear your thoughts. Here they are:

1. What percentage of free users convert to paid users?
Looking at a TechCrunch article that covered Jott, they say:

In August voice-to-text service Jott moved out of beta and added a premium feature for $4/month. Since then, the company says, about 30% of Jott’s active users have opted for the premium, no-ads version of the service.

30% seems really, really high to me, but I could be way off. But even if 30% of the free users upgraded, that leaves 70% that are gone completely. That’s 70% of the people that have heard about you, come to your site, and actually signed up to use your service.

2. What is the cost of keeping free members?
Like I mentioned above, most startups would kill to keep their users, especially when they have a premium version to offer. With such a captive audience already using the product, there are great opportunities to plug the full version in every communication.

3. Are there competitors ready to take your free users?
When you get rid of your free users (especially if they are frequent users of your service), they’re likely to look for another service to replace you. What if there are other services that would welcome your subscribers?

4. How will startups attract new users without a free version?
Without a free version to hook new users, how do you sell users on paying for the service? A 30 or 60 day trial? If that’s the case, what’s the point of getting rid of the free users? Is it solely the ability to charge them after 30 or 60 days? Is it the simple shift from
a) users that are freely using the service without offering up their credit cards

to

b) users that are using the service, but have their credit card on file, so if they forget to cancel, or think the service is ok, you can charge them

I’m not knocking the strategy. It certainly has a higher probability of making some cash, but free trial vs. freemium upgrade certainly feel like very different animals. One motivates me to check it out and bail immediately, looking for flaws and reasons to stop payment. The other makes me actually try something out at no cost, and if I feel that the service is useful, I’ll pay for it by making the choice myself.

5. Will the cost of your service be enough to be profitable?
Finally, the big question: even with a high conversion rate, is the charge enough to make sufficient profit?

Like many of my posts, this one is more of a curiosity than anything, and I’d really love to hear some feedback. What do you think of the disappearance of the “free version” of online services? What does it take to actually make you upgrade to the premium version?

  • JD

    I think we’ll see sub $1 transactions (some call them micro) start to gain popularity. In the internet gaming (as in fun, not gambling) industry this is all the rage. It’s a good cross between freemium and premium. It doesn’t cost hardly anything for the user to do something interesting and revenues are secured.

  • What about the hybrid model of a 30 day free ‘trial’ without first asking for a credit card #? This way there are fewer roadblocks.

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  • I believe what mailchimp is doing is great, giving a 30 day trial version and letting its users judge for themselves whether the service is useful or bane – nothing but only a great product deserves to go on a pay model.

    I believe, if you got a kickass service/software it iwll not harm you to go paid. The minute the users see value, they are not going to mind paying a few bucks to have that service.

    We are planning on a SaaS based model in India, but are not too convinced looking at the market size.

  • I think users upgrade because of the value that the online service provides. And sometimes, the value is realized only after using it for some time. Additionally, the free user community forms a very important part of your feedback loop that will eventually help your online service grow with new features. A lot of our free users have seen the growth of our service (DeskAway) and have eventually upgraded to the paid version even after 4-6 months. We have now built a very strong relationship with them over time. Personally, keep your ‘cost to retain a free user’ low and it should work out fine over the long run.

    Hope this helps!

    Regards,
    Sahil Parikh
    Founder & CEO, DeskAway.com

  • Another service that successfully navigated the Free-to-Pay-Only transition was Meetup.com, and they seem to be knocking it out of the park.

    At the time, I thought it was a terrible move, and I still haven’t forked over my credit card to them, but I’m active with several meetup groups, and am happy to contribute.

    Kudos to them for nailing it.

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