In the early days of email, users could choose between miniscule storage limits or hefty annual fees. But in 2004, Gmail’s beta upended the market by offering a gigabyte of storage—for free.
What may have initially seemed like a sacrifice of revenue was actually a strategic tradeoff. Since its public release in 2009, Gmail needed just three years to become the world’s most popular email service. And with Gmail’s extensive user base, targeted advertising helped Google bring in $16.86 billion in the last quarter of 2013 alone.
For cash-strapped entrepreneurs, the prospect of releasing a free product might sound counterintuitive. After all, a lack of cash flow will sink a startup—the idea of not charging customers doesn’t seem like the best survival strategy.
Yet some of the most profitable companies have built empires around free technology. The reason is simple: When you charge nothing, you attract more users.
And with a bigger user base, you get:
More word-of-mouth marketing. The more people talk about you early in the product lifecycle, the bigger increase in long-term brand awareness you'll have.
Critical feedback. Non-paying users are often harsher than paying ones, but their criticism is vital for product development.
More revenue. You were going to charge $2 for your product; instead, you release it for free and get 20 times more users. Now, you simply need to earn 1/20th of $2, or 10 cents, from the average user.
A competitive advantage. Especially if yours is the only free product in your market, free pricing can allow you to steal market share, even from established players.
To Charge or Not to Charge?
When it comes to pricing strategies, there are no absolutes. In some markets, releasing a free app can propel you to success; in others, the same approach can be detrimental to your brand.
If customers are paying for a product, they’re going to demand a nearly flawless experience. For example, without charging a membership fee, Netflix couldn’t cover the immense costs of data storage and royalties, and the customer would suffer. Similarly, for end users of enterprise software, price takes a back seat to reliability and functionality.
Your audience is just one factor in your pricing strategy. The following questions are equally crucial:
What is the conversion ratio from free to paid users? Would you get more paid users if you only offered a paid product, or would you make more by offering it for free, and therefore increasing the number of downloads you received?
What is the competition doing? If all your competition is offering a free product, you might want to rethink charging for a similar product. For example, the simple fact that Facebook and Twitter are free should deter you from launching a paid social network.
The Decision to Go ‘Freemium’
Earlier this year, we opened our keyboard app to iOS developers who wanted to integrate our technology into their own apps. This was a bold move, but we weren’t sure how to monetize it. The market was completely new.
Our first idea was to charge developers, but this wasn’t feasible. If successful, we’d be invoicing up to a million clients, and as a lean startup, customer processing alone would drain all our resources.
We quickly ruled against charging our clients, too. The more people we got on board, the better. Limiting our user base by charging would restrict mainstream adoption.
To fulfill our vision, we’d have to provide the technology free to developers and users. But how could we do this and still turn a profit?
That’s when inspiration struck: We’d release the software for free to everyone and give users the option to purchase additional features.
We did some focused research and then used our projected conversion ratios to calculate feasibility. Even if the majority of users were non-paying, a huge customer base would bring in more profit than a paid product could. Going “freemium” was our best option, and we’re excited to see where it takes us.
If your customers want a free product, consider fulfilling this demand. Making millions of people happy could be your best business strategy.
He is also a member of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world's most promising young entrepreneurs.
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