The Freemium Model – What to Expect

Discussion in 'Articles & Tutorials' started by CynthiaK, Nov 8, 2012.

  1. CynthiaK

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    Sep 27, 2012
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    Whenever you set a pricing model, it silently speaks to your customer. It tells your customer something about your company and who is your ideal customer. Most pricing schemes are solely based on cost, but should strive to be based upon value. In today’s complex world, pricing is more complicated certain than offering a product for price. All sorts of options are attached to the price. Your pricing models are a language that communicates with your customer and in ways, many people don’t consider when choosing one.

    What does FREE really say to a customer?

    In Silicon Valley, it is simply expected that hi-tech start-ups will offer their first versions of their products for free. It is simply assumed that the start-up is investor-backed and building a customer base is more important than revenue. Where does that leave those who are bootstrapped or self-funded? These start-ups can’t do business easily in Silicon Valley because they need sales to pay for their operating expenses.

    The Freemium pricing scheme implies investor-backed. Free versions still needed to be supported, they still need to be upgraded, and that’s labor costs. It takes a lot of premium users to pay for the free users.
    As a user or customer, it can be risky to use something free in your business. If you are using a free or low cost SaaS-based software located in the cloud from a start-up, it sounds good right now. If it holds information or a process that’s critical to your business and the start-up goes out of business, it could cause great harm to your business. When I see ‘free’ being offered customer’s thoughts are: will the company be in business a year from now and can my company quickly recover from the loss of the product.
    Free can imply “new and risky” or worse “low quality, little value”.

    What does a “lock-in” say?

    Start-ups with business models based on failure often have a lock-in scheme. The business of failure may seem like an odd concept, but there are many types of business where only a small percentage of their customers meet their goals. Fitness clubs are an example. The typical patron only uses the club for 90 days and is never seen again, but their business model hinges upon patrons signing long term contracts where the patron agrees to pay a monthly fee for 12 months or 3 years.
    A couple of years ago, a child talent development company tried to sell a program to make my daughter a star – they wanted a $5,000 signing fee for the 5-year program and a guarantee she’d pay for additional training classes every month. They weren’t going to get her any jobs. It was the parent’s role to find the auditions and make the contacts. What did this say to me? While they had testimonials from parents of child stars, I’d bet these shining examples were less than 5% of their client base. My guess is once parents figured out how hard it was to market their children into this business and land those jobs, most would give up in less than six months. But they’d still be obligated to pay. If they had a high success rate with their kids, they would have offered an alternative monthly, pay-as-you-go, drop out any time, and no obligation plan.
    A lock-in may imply low probability of success with the product, or more unhappy customers than satisfied ones.

    What does the padded bill say?

    The other week my back was hurting, not a lot but enough to see a doctor. I got some recommendations. I had an exam and tests were taken. When I went back for the results, the doctor presented me with a huge bill for thousands of dollars and a one-year program. When I probed into the details, I was told my back issues could be corrected in 1 to 2 weeks and the other 50 weeks were wellness care, which included a class to show me how to do strengthening exercises for my back that would take less than 30 minutes and the opportunity to participate in a weekly stretching class with other patients. Also, included was monthly x-rays and tests to ensure my back was staying its best. My questioning prompted the doctor to say he didn’t do pay-as-you-go, he wanted patients with real commitment. Come on … he was padding the bill … my problem could be fixed in 2 weeks plus some instructions on daily stretching … the commitment he wanted wasn’t for my health benefit. When I was blunt about what I thought, he countered with the money back guarantee and then when I still didn’t sign up, he offered a 10 week minimal program for a few hundred dollars.
    If you are bundling items together and you can’t justify the value in including those items, it speaks to your customer.

    What does no risk say?

    Money-back guarantees are another such instrument that speaks to customers. These are usually associated with high priced items. Instead of putting the obligation of performance on the service or product provider, it put the obligation of non-performance on the customer. Companies know people hate to ask for their money back, and most people will take a loss to avoid the unpleasantness or hassle of asking for a refund. Is it really feasible to get the money back? Sometimes the restrictions are such that it’s nigh impossible to ever receive a refund.
    If your business offers a menu of pricing options such as the gold-silver-bronze packages, a long-term discount option along with a monthly try-it plan, a free product, a single pricing option, a short-term versus long-term option, bundled pricing, guarantees, restrictions, all-inclusive versus a-la-carte, or only pay if you like the results – all of these send signals to your customers about the confidence you have in meeting their needs or solving their problems.

    Money talks and your company’s pricing schemes talk to your customers too.

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