5 Simple Tactics To Make Freemium Users Pay

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A version of this article previously appeared in the Wall Street Journal.

Freemium business models are popular because they allow startups to quickly drive user adoption. Unfortunately, many of these companies fail to properly monetize such non-paying users.

Let's face it. It's frankly easier to accelerate your startup's growth and show faux traction if you omit the pesky step of asking users to pull out their credit cards.

The freemium approach offers users access to online solutions at no charge. Yet too often, entrepreneurs embrace giving away their products and services for the wrong reason - they are simply reticent to ask for payment.

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During the height of the Dotcom craziness, Expertcity (creator of GoToMeeting, acquired by Citrix) released a free service called BuddyHelp.

In the spirit of the “land grab” mentality of the day, we encouraged usage of our screen sharing technology with no thought applied to how we would convert such users into paying customers. Thus, the initial launch of BuddyHelp did not restrict commercial usage. Anyone, including well-healed, large companies, could offer state-of-the-art technical support for free.

Wonderful… except we were stuck paying the bandwidth charges, purchasing servers to handle the growing load of users (in those pre-Cloud days) and fielding support questions – all from a group of users that generated not a single dime of revenue.

With the release of GoToMyPC in 2001, we finally drove a stake through BuddyHelp. Not surprisingly, we received a litany of hate email from freeloaders admonishing us for taking away their free service. Shame on us for allowing people to believe BuddyHelp was an entitlement we were obligated to provide for free and in perpetuity.

Ways To Make Freemium Users Pay

Below are tactics you can deploy to maximize the revenue, as well as the veracity of the data, derived from your freemium users.

Communicate Clearly – Avoid changing the rules in the middle of the game. Freemium users will have a higher propensity to pay when they feel that the rules defining "commercial use" are clear and consistent.

Upsell Logically – Craft a seamless path to charge users after a trial period or in exchange for other benefits, such as removal of advertisements or access to additional features. Ideally, users should be approached to pay at the moment they reach the end of the free threshold guidelines and payment should be painless. An efficient way to facilitate payment is to capture credit card information when granting access to your free service.

Limit Utility – An effective way to encourage freemium users to pay is to denude the value prop of your gratis service. This is a risky, as many of your users will be initially introduced to your company via your free offering. As such, proper balance is required to avoid reducing your solution's utility so much that it besmirches your brand. A worthless / worth-little free product will make it more difficult, not easier, to generate paying customers.

The three most common ways to safely reduce the utility of a free service are:

  • Limited Usage - Effectively deployed by numerous SaaS companies in which their users consumer more of the company's services over time, including: file sharing (Dropbox, Box), photo sites (PhotoBucket, flikr) and online storage (ElephantDrive, Mozy).
  • Limited Utility - Works when clear feature differentiation exists between the free and paid versions (Hightail, RightScale).
  • Individuals vs. Teams - Individuals have free access to standalone seats, but organizations must pay for multiple, connected seats. Most effective when the solutions  have inherent collaboration features for which companies will pay. (GitHub, Divshot).

Note: I am an investor in ElephantDrive and Divshot via Rincon Venture Partners and RightScale as an Angel).

Temporarily Free – The most common method of transforming free users into paying customers is to offer a limited time, free trial.

If you take this path, resign yourself to the reality that some users will cheat, by signing up to successive, multiple free trials. As the music industry painfully learned a decade ago, it isn't worthwhile to erect barriers to impede committed cheaters because such constraints cause unwarranted friction for honest users. Hold your nose and make it difficult, but not impossible, for nefarious users to freeload.

Demand Feedback - Unfortunately, data derived from freeloaders is often misleading and seldom includes pointed criticisms that inform your product / market fit. Such skewed feedback hampers a startup's ability to properly inform its product roadmap. Thus, establish a social contract with your free users that they will provide you with timely and thoughtful product feedback, in exchange for pro bono usage.

No Help From BuddyHelp

Properly launched, BuddyHelp could have been an effective Freemium lead generation source for Citrix. However, we angered and frustrated most of the BuddyHelp community with our inconsistent messaging and lack of a thoughtful plan. Despite our repeated blundering, BuddyHelp did generate some substantial commercial customers. However, a proactive coordinated approach would certainly have led to fewer frustrated customers, more qualified leads and less internal discord.

Irrespective of how elect to monetize your free users, the only way to accurately gauge customer demand is to charge a reasonable price for your solution. Customers who pay for your solutions will value it more, while providing you with actionable feedback.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about killer burritos. You can also check out my hands-on startup advice blog HERE.

Image: Pixabay

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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