A couple of recent 37signals mentions at Entrepreneur Magazine re: charging for products…
Harness the Power of ‘Freemium’
As for when a web service should start charging, Fried’s answer is simple: immediately. Charging from the outset tells users that the product has a specific value, Fried says. Trying to charge for something that was previously free can undermine the product’s value, causing potential customers to ask why the service is suddenly worth more than it was in the past.
“My feeling is that you should begin charging right from the start…The longer something is free, the less it’s worth,” he says…
“The best advice I can give regarding pricing is this: Have a price. Don’t be afraid to charge for your work. And make it a number you’d pay yourself,” he says.
“You pay for everything in your life except some of the stuff on the internet,” Fried says. “That’s the built-in human behavior we’d like to mimic. The problem with this free thing is, if you’re going to hook people on free for four years, and all of a sudden start charging for things, that doesn’t work very well.”
Entrepreneurs are getting the wrong message from the Klondike buyout of YouTube and the “ridiculous” valuation of Facebook, [the founders of 37signals] say, pointing out both companies are still hemorrhaging cash and haven’t figured out a way to make money. Free is a bubble that will burst when investors run out of patience.
“I’ve been talking to startups, and people have this notion that all they need is eyeballs, all they need is a lot of users and then something magical will happen, and then they’re going to be a huge success,” says Heinemeier Hansson. “That’s going to lead to a lot of unavoidable failures.”…
“The answer,” Fried says, “is to be fair on prices, deliver great services that your competitor can’t and simply outlast free.”
Adam Fitzgerald
on 08 Oct 09Currently planning the pricing structure for our new product. Good timing!
MichaelNozbe
on 08 Oct 09Ditto guys.
When I first launched my app it was a “free beta” and lots of people signed up and although I was upfront that I WILL charge for Nozbe (and even gave a price very early), because it was free at the moment, I had lots of signups and I believed the same people would pay… but when after 4 months of “beta testing” when we finally launched the fully fledged version, not so many people converted to paying users and I had to work from ground up to get new paying users again.
In the end it was OK and I have thousands of paying customers, but the next product I’ll build, I’ll be selling right from the start, maybe with a 30 day trial, but it will be paid for right away.
“Beta” is overrated (especially public beta) – what you guys are doing is great – get the product out and start billing and keep iterating, don’t label product a “beta” – with web based software everything is beta, because everything is getting an upgrade quickly.
Still think the presentation at Startup School by David about this “magical price” is the best one I’ve ever seen/heard :-)
Anonymous Coward
on 08 Oct 09Weren’t most of the 37signals products free in the beginning? The free packages were eventually phased out, but they were there at one time.
Marty C.
on 08 Oct 09Totally OT, but Jason – I share your watch fetishism. What are you wearing in that photo? It looks great.
Andrew
on 08 Oct 09It’s noteworthy that Facebook is now cash-flow positive.
Michel Billard
on 08 Oct 09I really believe in having a free very limited account and possibly 30-days trial accounts for everything else.
Without those, people can’t try your products and find out that they’re going to be better with them than without them. It also lets small users love your products and promote them to potential paying customers.
Paul
on 08 Oct 09I thought Facebook had an operating profit now? Or was that a sort of accounting doublespeak that glosses over the real situation?
Michael, an interesting insight there.
I’m getting close to adding a paid account to Graphomatic, but anyone who has signed up during the current free period gets a totally unlimited account for life. I’m not expecting them to suddenly pay for it.
I see it as a thank you for helping to stress test things and point out problems that I might not have otherwise spotted. I’m doing this in my free time so progress hasn’t been fast, so I think that a “public beta” was the right choice in my case, especially as it currently cost me nothing to run (yay for Heroku).
I also think that your existing users can be your best sales people, so having a bunch of people already signed up and using it will help spread the word when the paid account launches. Combine that with a simple affiliate programme and I’m hoping that they will help me kick-start things.
Denis Fadeev
on 08 Oct 09I may be wrong, but the subject strongly depends on the nature of the web service. Nobody will ever pay for an email or a social network account, obviously, because of Gmail and Twitter.
However, it is reasonable to charge for a superior product, especially, if it helps people to make money. Like Basecamp, for that matter.
Denis Fadeev
on 08 Oct 09BTW impressive photo.
Nate
on 08 Oct 09Denis,
Even those services you mention are or are likely going to be freemium. Google charges businesses to have email on their own domain names. They used to have a free version of that, but it’s gone. Many things point to Twitter going to some kind of paid account now. And I think you’d be surprised at what people would pay for. Sure you might have less volume :) But a million times zero is zero.
There’s still be charging for email out there and making money, like Hushmail. Again, they have free, but something to upgrade too. And I dunno, I’m sick of how flakey Twitter is, I’m would and do pay money to have more robust services that offered better privacy amongst my friends and family. These services maybe aren’t going to have lotto winning buyouts at 1 billion dollars. But these services are making profit for their owners.
Nate
on 08 Oct 09I can go on all day about this :) I agree that there is an oddly large number of people building web based software businesses that think eyeballs = money. But it’s also because payment stuff sucks.
I’ve seen people let discussions of pricing turn into an endless debate about how much and what are the feature limits.
Also, as DHH has pointed out before “There are only two hard things in Computer Science: cache invalidation and naming things” (Tim Bray quoting Phil Karlton)
I’ll add a third. Payment backends. Integration with payment backends are the suck. Merchant accounts are still a pretty laborious thing to get and integrating with them isn’t fun. Paypal is a huge pile of horse manure.
It’s awesome though that we are getting services now that are making integration with merchant accounts a lot less painful. One of them advertises on this blog now via the deck. And google checkout, amazon payments, and intuit are adding some competition to the field to get payment processing better.
It’s not an impossible task to ask people to pay for your software. It’s absolutely worth your investment of time to do so.
JF
on 08 Oct 09Weren’t most of the 37signals products free in the beginning? The free packages were eventually phased out, but they were there at one time.
We’ve always had free versions our products. We still do today. But we’ve also always had pay versions. If we sell something you can buy it on day 1, not day 100.
JF
on 08 Oct 09Marty, that’s the MIH Watch.
Don Schenck
on 08 Oct 09I’m ever-so-slowly developing my own web-based product, and will charge from the outset. I’ll also offer limited-size free accounts.
I do have questions regarding how to handle billing when someone upgrades, downgrades or cancels mid-month (assuming a monthly billing cycle). What works best? Pro-rating the charge???
Marty C.
on 08 Oct 09Thanks Jason – that’s a sharp timepiece.
Scott Brooks
on 08 Oct 09I think that this is sound advice and yet not a new piece of advice either. (getting real?) We started conceptshare back in 2006 and we charged from day one along side having a free offering of the product. Without charging for a product you really have no idea wether or not you are going to have a viable product. Our first client from the first day we launched is still a client, on a reoccurring model… golden. (36 months * $99 = $3564) why wouldn’t you start charging straight off? When people slap down that credit card and say bill me every month, that is when you start knowing you have a product.
Also clients make far better R&D then users… as they have committed to it.
There is also something disingenuous about turning around on a Monday morning and saying to your users we are starting on a journey to change to a paid model. ....but it was free …. they feel slighted and somewhat taken hostage, ...but my data is in your system …. they will either pay grudgingly or looks for the next free service …. but there will always be that notion in the back of their mind that they got snookered.
The last point and the greatest notion for an entrepreneur …. i really like talking about clients not users. Clients=$, users= free. When I talk to people and I can use the names they recognize and say … Big company x is a client … to them that means ” Big Company X has validated that idea with $.
Dballa
on 08 Oct 09This has always been a fun topic to discuss. At 37s, you are defined as an ISV for a reason. You are actually selling a product that results in a return for your client. It needs to be separated from the social and viral apps. Instead of maintaining customers with a residual subscription and the maintenance of user accounts, these social apps require none of that. You essentially charge for web-based software. That should be a pricing structure.
However, I believe every time you talk about “start-ups not charging for their products”, you must consider the market/their demographic/function of their app. Take a look at Twitter, Facebook, Myspace, almost all search providers (Google, Yahoo, Bing, etc.). They all have one thing in common: Advertisers.
It’s quite simple. Just like cable television. Yes, they do make money on business accounts and/or contract services; however, they make money for advertiser drooling over their page rankings and click rates. If you can make it to the top 1K sites in the USA (heck, top 50K), you’ll have ad agencies knocking on your (email/phone) door. Drawing in a million users and not charging them does result in $0, but not when an advertiser is paying $50k a month to manage their ads on your site (And that’s just 1 advertiser.
Next time you discuss this topic, think about separating the two. The ad industry is very, very lucrative, if your site is busy, AND free.
BTW, Facebook is profitable. Check out their press releases and the companies they work with to generate growth. That’s all “paid advertising”.
You guys rock. Keep doing what you’re doing :)
Sarah H
on 08 Oct 09Aaaaaaaaaah, you two are matching :)
Eric
on 08 Oct 09It guess it helps drive home the image that you are rebels and against the norm (which is insane because you preach simple economics), but damn you look like smug superjerks in that picture.
Mark
on 08 Oct 09How should they have had the picture taken? How does looking at the camera (more than likely with the photog’s direction) make them smug?
Mark
on 08 Oct 09Forgot to a add that a trial period is different from an indefinite free period. 37s makes good use of the trial period concept (try it, like it, come to depend on it), but then lets you know that after 30 days you will have to pay to continue enjoying/benefiting from the service. This shows confidence by allowing prospects to sample a value-based service, which is different from giving away the shop and then later expecting customers to see some wholly different model. 37s then couples this pay model with a smaller, less robust free account level for most (all?) of their offerings, which is a great way to snag many tire kickers who may later come to appreciate the value and upgrade to the full/more robust versions (if I use the word robust one more time I’ll shove a kitchen knife through my own head for the reader). This plan has worked spectacularly for 37s, and is all very different from the free-across-the-board style model. After all, what are you working for if not to create value? And why would you want to give the impression that your offering has no true value or worth?
Eric
on 08 Oct 09Mark, you don’t see smug? The arms crossed with the “that’s just how it is” pose on David? The hand stiffly in pocket with the “what the f* idiotic thing did you just say” eyebrow crunch look on Jason? I’m sure it was the photographer’s direction and was probably a good job considering the “against the grain” point they are trying to make. All that said, I can’t stand the picture.
Sean Upton
on 08 Oct 09Why is it that the popular press wants to construe the one-correct-model myth—as all-free or all-pay? Some businesses (like general-audience news media) should continue to explore and grow advertiser-supported free (Jeff Jarvis makes good arguments as to why and how). SaaS businesses, on the other hand, should charge fair costs for fair value. These truths are not mutually exclusive.
Steven Cox
on 08 Oct 09Great post. We started charging for our service right out of the gate, and we’ve been charging ever since. It’s helped us spend within our means, fund ourselves, and limit our reliance on outside investment.
Facebook and YouTube are the anomoly. Their level of scale happens in less than 1% of the cases, thus it is my opinion that you should think twice before building a business model around that.
Daddy needs a new pair of shoes, and they can’t be bought with ‘free’.
Chris Olsen
on 08 Oct 091. Nothing is Free, someone is always paying. 2. “Free” (Ad Supported) content doesn’t scale well because past a certain point, audience scale and CPM seem to be inversely correlated. 3. Today, providing Free content can work; all that’s needed is great ad sales, a lot of capital AND either a high value audience (mint), a best-in-class idea (youtube), development cross-subsidized by another channel (hulu), domination of a highly popular platform (facebook), or divine providence (TBD). 4. In the future, sponsored content could work for many types of sites, but first we need more creative and more effective ad models/sponsorships that stretch beyond the tired print/tv paradigms of today’s internet…
David S
on 08 Oct 09As a customer, I usually feel much better with a product that actually costs something. Yes, a free version (limited features, capabilities, etc.) is nice…but even then, it gives me confidence when a person or company has for-pay versions and products. It says, “we believe in our product, and we think you will too.” And I also think that charging puts those doing the charging in a position of having to “come through” for their customers and in more cases than not probably results in higher quality products and services because it gets the best out of the businesspeople involved due to the “pressure” of being in some degree accountable to their cutomers.
Of course, if someone offers a product just because it’s a belief that it should be available free…and it’s not necessarily a business…that’s fine. (For example, I use FileZilla, a great FREE FTP app; in this case the fact it’s free doesn’t give me less confidence in the product, due to its circumstances as a certain type of open-source project.)
Sometimes I just have to smile, because it seems like a self-evident business practice that you are supposed to make money doing “business” - that’s what business is - free, freemium, etc. seems so insubstantial somehow, and getting outside “funding” is really just playing with monopoly money.
It’s always struck me as comical that 37signals is seen as “leading edge” simply by preaching and practicing good old-fashioned business. (I mean that as a compliment, btw.)
Kudos to 37signals, because (imho) doing your kind of business is also more honest, as well as more profitable.
Justin Jackson
on 08 Oct 09I can’t focus on the discussion here; that magazine photo is just too sexy. ;)
Scott
on 09 Oct 09A limited “taster”of the service on a no cost basis with a time constraint is the way to go. But bugger free, wheres the cash in that :)
Build something great and people will see the value in it and pay accordingly. there aint much out that is truly free and truly good…..is there? there is always a catch.
Dave
on 09 Oct 09I love the ad just to the right of this article – “MailChimp is the only email marketing service that’s completely free. Try it today.”
Sweet sweet irony.
Andy
on 09 Oct 09I’m certainly of the belief that large-use free systems are generally not going to last.
I personally think the Flickr model works really well – everyone can have limited free access but to use it anything more than casually you pay an annual subscription.
Scott
on 09 Oct 09@ Andy – how would you translate that model into your line of business? or a better question “would you?”. It seems that online businesses often come up with quite innovative engagement models. But what about more traditional organisations? Anyone have any comments on that?
Martijn
on 09 Oct 09Thank you, you’ve confirmed my post on the ridiculous valuation of Twitter
slowturtle
on 09 Oct 09YO, FaceBook has a way of generating revenue!!! Didn’t you guys know that they sell your account data and habits on FaceBook to companies???!? That is where they get their $$$ from!!!
Anyway, I love what 37Signals is saying because in the 90s during the dotcom boom NOBODY was giving $hit away for free. Now in the “new” dotcom boom (2.0), people think that they are supposed to give $hit away for free. PULEEASE!!!! I don’t care what anyone says, THEY ARE IN BUSINESS TO MAKE MONEY!!! Which you cannot do if you do not charge someone $$ for using your service.
So, all you “freebies”, quit fakin’ the funk and get your scrilla up and charge for your services, just be fair about it!!!!
Helmut
on 10 Oct 09You know, this hysterical defensiveness in favor of “charge for your product” that 37signals guys keep nervously throwing at us is starting to sound like they’re hitting the frenzy of full blown panic. Like, why would they care so much if someone wants to give something away for free? Out of goodness of their hearts? Come on!
Methink that they have seen the future, and it worries them. Basically, anything that the businesses plan to offer online is destined to eventually become available for free. As Cory Doctorow says, the internet is a giant copy machine, and it is impossible to prevent people to copy and share digitized information.
Businesses today are caught between a rock and a hard place: they cannot afford to keep their products and services offline, and yet the moment they offer them online, they lose a competitive advantage by losing any convincing argument in trying to pursue people to pay for digitized info. Just look at the terrible death print media is going through right now. The same ugly destiny awaits other businesses, such as 37signals.
Time to grow up…
J
on 10 Oct 09“Just look at the terrible death print media is going through right now.”
Umm, your argument doesn’t make sense. Print is dying BECAUSE it doesn’t charge enough for its products to cover its expenses and the advertising dollar is drying up. That’s why print is dying. And you’re advocating more companies should be giving their stuff away for free and making money how exactly? On advertising?
Time for YOU to grow up. The future is the same as the past: It’s one where a company makes something, a consumer wants something, and they make a trade… money for product, product for money.
pwb
on 10 Oct 09I disagree. It’s very easy to start free and charge down the road (if your service gets traction). Billing can be hard and creates different expectations which you may not want to deal with on Day 1.
I also disagree that charging implies increased product/service value. The value of a product is drive by…the value of the product.
David S
on 10 Oct 09@pwb:
I indicated in my previous comment that I feel better with a paid product. While charging may not actually increase value…I believe it has the power to increase the perceived value. Human beings haven’t suddenly changed—perception, in many cases, is still reality.
Your point that the value of a product is “the value of the product” may be correct in many circumstances, especially in cases where the customer already has seen/used/heard about/etc. the service or product in question.
However, for the first time customer (the one who’s checking out a service or product to see if it does what he needs), that “value of the product” may be hard to judge quickly enough. Many times you only understand the value of a service or product sometime - days, months, years - later down the road. (and the value doesn’t always go in the positive direction, either)
For some would-be customers, an actual price tag right up front speeds up that process of understanding the full “value,” even if it is only a matter of perception.
The point is, even if it is just a matter of perception, charging may bring in more long-term customers due to (1) improved service/product image due to price and (2) improved perceived image due to having paid and, therefore, being more invested in the service/product. (We humans tend to want to believe in what we have paid for, and that means repeat or ongoing business.)
Anonymous Coward
on 10 Oct 09I disagree. It’s very easy to start free and charge down the road (if your service gets traction).
Very easy examples please. Give me 10.
anne holland
on 10 Oct 09Are you as tired of debate over free-vs-paid as I am? If you’re interested in real honest-to-god data, I’m busy researching and gathering it right now. (In fact writing this comment is a nice break from spreadsheeting stats.) I’m publishing research alerts at http://www.subscriptionsiteinsider.com and at twitter @subsiteinsider from now on.
Michael Troy
on 11 Oct 09There seems to be a lot of confusion as to the definition of what ‘free’ actually means. Free can mean many things in a multitude if contexts.
- Free as in a limited time trial. - Free as in a limited free (basic) account. - Free as in the user is exposed to advertising. - Free as in the user is expected to contribute.
My understanding of free conforms to any/all of the above. 37signals does participate in the ‘freemium’ economy whether they choose to believe they do or not.
Having a paid version of a product does not, by default, exclude a business from taking advantage or be a participant of the freemium model.
As far as I am concerned there is always an exchange of some kind. Nothing is free.
Katherine Warman Kern
on 11 Oct 09Let’s start a club.
Katherine Warman Kern @comradity
thl
on 12 Oct 09anne h: Actually, there are some totally free things. Picassa comes to mind – no ads, nothing to buy, download (for free) and away you go.
What amazes me is that the whole free vs. paid debate is still fervently fought. Folks – you gotta charge. Period. Otherwise your whole enterprise is some VC outfit’s hobby or charity. If you never charge, you can never become sustaining on your own.
And there’s another thing – I can give shit away all day if I so choose. Coming up with something compelling enough that people will actually pay for it is the real trick – it shows you actually know a little something about this whole puzzle we call “bidness”.
Jimmy White
on 12 Oct 09Basecamp is mostly used by companies and groups who have different pricing expectations (ie: have payed for project management tools before and will happily pay for a better one). Individuals (and users who are used to similar services being free) behave differently. All those free Google services have really lost Google a lot of money, they’d better knock that on the head straight away.
Basically it suites some products and not others.
Andy
on 12 Oct 09Ruby is free
james povolotski
on 15 Oct 09thanks matt for sharing information with us.also check my website for 3d,graphic design jobs,models,portfolio and more.
This discussion is closed.