Originally Published on December 2, 2015 on LinkedIn. Updated: August 8, 2018
During the early days of a start-up, the focus is typically on user growth. I.e., getting more people using and enjoying their product or service. A lot of times, this is done by offering the product for free, or in some cases on a freemium model — where the initial experience is free and the customer has to pay to gain access to something of value to the user (e.g., more features).
Some companies are actually able to grow their free user-base to tens-of-millions before ever giving any thought to monetization. But that day of reckoning does eventually come. Eventually, money has to be made to keep the lights on. And so the trouble begins.
Free users are not Paid users
There are some key things to consider as you attempt to monetize a free user-base:
- The product-market-fit may not hold
Price is a piece of the product-market-fit. If you change the price of your product, you may destroy the fit. You may need to shore up on whatever the core value is for your product to counter any negative reactions to the price. Even if you don’t directly charge your customers and go the Ad-model route, you will endanger product-market fit. Many users hate ads (OK almost all of us hate ads). This is not to mention how you have to change your UX to accommodate enough ads to make enough money.
- Users will get angry
There is no way around it. If you start charging users for something that was once free — they will be angry. If you’re lucky, you’ll be a very early start-up and you can just acquire new users. If you are unlucky and you have a large user-base, be prepared to put out some fires and do a lot of out-reach and PR.
- The higher standards of paying customers
Once customers have to pay, or dare I say subscribe, to a product or service — their standards go up. Basically, when money changes hands, customers have an even stronger right to be satisfied for as long as they use your product — and many will demand satisfaction (some more vocally than others, of course). If they are not satisfied, they may lambaste you on social media or on review boards or to their friends directly. (This is particularly true in the mobile space.) Even worse, if you haven’t engineered steep switching costs into your product, and you are in a very competitive industry, customers will simply seek out another product that will satisfy them.
- You will probably guess incorrectly
I don’t often promise much, but I can promise you this. Your first guess of what or how you should monetize your product as you move away from free will be wrong. In the freemium space, the line drawn between what features are free and what are paid is never drawn at the right place initially. Consider this. If you give too much for free, users won’t have any compelling reason to pay. This is usually evidenced by a very low free-to-paid conversion rate. If you give away too little, you may hide core value from your customer that would otherwise convince him or her to pay. This is usually evidenced ultra-low retention. You should probably draw that line in pencil.
- Gaining more free users can decelerate your growth engine
Make no mistake, just because you have a free user base — doesn’t mean they don’t cost you anything. Support is typically the key resource drain here. Hosting costs play a large role. If you have a low free-to-paid conversion rate — as you get more free users, you will have more customers to interact with, more data to crunch and more services to pay for (e.g. analytics). All of this, especially for small teams, will decelerate your growth engine considerably (or not, if you don’t care about damaging your brand — but I’d strongly advise against that).
So how can you navigate the minefield of free-to-paid conversion?
The recipe is straight-forward. How you bring it to life is where you have to be clever.
- Do your research. If you are going to subscription/paid model, understand why some users converted while others didn’t. Do so by asking them directly via survey, or phone call, or over coffee. Don’t rely on web analytics alone. You want the why. Some users pay because they misunderstood the benefits of your paid offering. Ensure you are building on product value.
- Test MVPs on limited audiences. If at all possible, roll out slowly to a beta group. Collect, customer feedback. Do your best to gauge the impact ahead of any big-splash efforts. If you are going the ad-route, try house ads. Users are less angry when you are promoting your own services or sections of your platform — scale from there.
- Be patient. The early days of any transition is not the time to have any knee-jerk reactions. Let experiments run for a period of time. Most users don’t like change — give them time to adapt. I assure you the hate mail will taper off after a couple of weeks. Quantify and extrapolate the churn. Give your transition a fair shake. There is nothing more demoralizing for a team than giving up too quickly.
Or you can plan ahead
Typically, start-ups start with user growth, then transition to monetization, then finally drive for profitability. Unfortunately, this approach is very challenging for many businesses. Each of these phases, it could be argued, are vastly different business models. Different business models require different skills and focus. A long story short, these shifts can prove difficult from a culture perspective and you should never underestimate the stress that business shifts place on staff.
A way to avoid this shift is to have a strong vision and product principles. Have the tough conversations up front about what you will and won’t do to be profitable. Will you ever run ads on your platform? Will you ever sell your users’ data. You must align on what you are truly building up front. Of course, plans change. As Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.” But remember:
Minds and plans are easier to change than products and customers.