I won't pay for that! It used to be free!

September 16, 2009

In a few discussions recently people have suggested a potential problem that could arise with the freemium monetization model for web-based applications (for a discussion of “freemium” see here). To explore the problem, consider an example: we’ll pretend that you are running a web-based service that allows any doctor, anywhere in the world, to track and manage data about his or her patients. You don’t charge doctors to use your service at first, but you do charge for a few premium features like a calendar and patient appointment email notifications.

Now suppose the premium feature sales aren’t bringing in enough money to cover costs, so you decide to start charging a small subscription fee to use the service. This would be akin to GMail announcing a $10 monthly subscription fee to have an account. How would the doctors using your service feel, and how would it translate into subscription sales?

The argument I’ve heard recently is that the users (doctors in our example) would desert the service en masse in anger at seeing a charge for something that was once free. Some friends have suggested that users would be less likely to pay in this situation than if you had just charged the fee from the beginning.

I think this is ridiculous. There is no doubt that a lot of users would choose not to continue using the service in order to avoid the fee. And no doubt some users will happily stay (unless the price is excessive). What I want to argue is that the users who choose to leave would have never paid the fee in the first place.

What it comes down to in my mind is value assessment. You are offering a service to people, and each of those people will value the service differently. When you put a price on your service, you automatically exclude those people who value the service at less than your price. There’s nothing you can do about that. The question is whether providing something for free first and then putting a price on it will induce people to reduce the value they asses, and I think that’s crazy. To believe that you have to believe there is a group of your users who originally valued your service more highly than the price you put on it, but who decide that your service isn’t actually worth it after you start to charge that price.

I actually think the opposite is probably true. That is, charging for a service that used to be free might actually induce people to adjust upwards the value they place on it. You will probably have an easier time converting someone from a free account than converting a new customer when you consider things like lock-in. And considering how much easier it is to assess the value of something you’ve actually used rather than something you’ve only read and heard about this seems rather obvious.

I suppose there is a chance that your service appears really useful on paper so that people assess a high value for it, but once they start using it they realize it’s not as useful as they thought. In this case you’ll definitely want to charge people up front and get them locked in before they realize how crappy your product actually is. But that’s an extremely cynical way to make money, and I would hope most people want to build a service they believe in.

There will be users who are angry about having to pay if you start to charge for your service. But I think those users already valued your service at less than the price you’ve put on it, and they’d be even less likely to pay up front. I have no data on this, nor can I see a plausible way of collecting any. But if you have anecdotal evidence one way or the other I’d love to hear about it in the comments.

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