Questions For Startups Killing Free Membership And Going Pay Only (opens in new tab)

I've noticed some startups that are killing their free versions and going pay-only (notably jott and sprout builder lately). I had a couple of questions about that, and for anyone that would rather talk here than on my post itself, here are the q's:

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 subscription charge enough to make sufficient profit without some ad component?

I'm debating some of these questions myself. I'm getting ready to launch a software as a service product to add language checking tools to CMSs (i.e. Wordpress). I'd like to offer some sort of free version but the processing I do is very CPU intensive not to mention the R&D effort to create this product. Writing improvement isn't a trivial problem :) http://www.hick.org/~raffi/afterthedeadline.jpg is my SS.

Some days I think of charging for usage (similar to other SaaS models), having a monthly per user flat rate, or just making the whole thing free initially until I have enough users and figure out how to monetize then (with more features, ability to add new rules, etc.)

It's amazing to see how quickly the transformation from free only to paid membership is taking place. In this economy, with the chances of buyouts being close to nil at the moment (let alone IPOs), it just makes sense. And for very small startups, founders should ask themselves why they would dedicate so much energy to something they can't expect to get paid for until they've built up a huge audience.

Conversely, and this is especially true for small startups, if you can build something for which a thousand or two people are willing to pay $20-40 / month, then that's a pretty attractive income. This could easily help you ride out the economy and be around when potential acquirers have more budget to spend, if that's your goal.

One other nice thing about this trend is it pushes focus away from marketing to the new-app-crack-babies that love to try every new thing for 5 minutes. They will give you some nice early feedback but don't really represent your target market, either in terms of demographics or loyalty.

I used to work at Pogo, EA's web games site. When I started it was all free, but we added a subscription tier with more features, more games, etc. When I left two years ago Pogo had about 15 million monthly uniques and 1.5 million paid subscribers (at $40/year, a great business). So our ratio was 10% - that was way above our expectations. Pogo has a very die-hard community - I'd plan on getting more like 5% if you execute it well.

If at all possible I would not charge for the existing free product, but instead think of new features that will be worth a premium to your top users.