I loved this article, but after thinking about it for a bit I realize that there is an argument for going free. Two pretty strong ones, in fact.
1) If you want to get acquired - and we're talking about a big acquisition here - it would do to go free so you manage to score a big-enough user base to get noticed. And so the bigger company is interested in acquiring you not only for your technology, but also for your users. (That said, acquisition may be a risky bet.)
2) Going free also makes sense if you want total market dominance. In which case, free is really the only way to go. The writer is speaking from the POV of a micropreneur, and it makes sense for him to retract his free plan (in fact, it makes sense for 37signals/the 37signals model to do so too).
But if you're in the position of being the next Facebook, going free and dominating the market is really the best thing to do. (Or Youtube, or Google, or Flickr).
You find lots of users, lock out the competition, and then you can figure out how to monetize.
Which only goes to show that there are all kinds of businesses out there, and the advice you read on the net really should be done through the context of your particular business and/or market.
Going free also makes sense if you want total market dominance. In which case, free is really the only way to go.
No it's not. The other way is to make the best damn product in the market. I hate to give cliched examples, but since we are talking market dominance, see Windows, Adsense and iPod.
Not always true, though. History is littered with examples of products that gained traction not because they were better, but because they were free. (See: BIND vs Jeeves, Stanford's Unix vs Berkeley's Unix, Minix vs Linux, Apache vs Microsoft/Netscape)
At one point in all these product's lives they were lousier and smaller as compared to their competitors. But they won out because the low barrier to adoption (read: free) drove usage, and from usage, more improvements.
Thanks for pointing those out, I hadn't thought of them and can perhaps be accused of survivorship bias. I don't know about the first two examples but isn't Linux actually better than Minix and Apache certainly better than Microsoft? In any case, this is a bit of an unfair comparison because these are examples of open source vs proprietary, not product quality primarily.
In the context of the OP's blog post, we are talking about winning in terms of building a profitable business, for which I believe building a good product and selling it is a better strategy than getting popular by giving away a crap product for free.
The gist of the matter is that you should be clear what you are selling:
* a product
* advertising space/lead generation (if you are free)
* yourself (acquisition)
I see most web startups are going for the second and third options, but it seems it is mostly out of fear and the status quo, not careful consideration of the pros and cons.
> I don't know about the first two examples but isn't Linux actually better than Minix and Apache certainly better than Microsoft?
When they first started out, both were lousier, scrappy, free products.
> In any case, this is a bit of an unfair comparison because these are examples of open source vs proprietary, not product quality primarily.
There is nothing unfair about this comparison. Releasing free products and making money on other things has always been a viable way to compete against bigger, more established players. See: http://www.joelonsoftware.com/articles/fog0000000056.html
Cheap(er) almost always beats better/best when the market is large. Walmart, fast food, webbrowsers. The main way a less cheap product wins a mass market is through massive advertising. Specialized and niche markets are different.
I'm not sure what your examples where suppose to illustrate. Both Windows and Adsence rule because of the (practical) monopoly positions of their creators. iPod's only one that may have dominated for being the better product but If google started giving away crappy media players they would quickly out dominate iPods.
I really think there is a missing piece of context here.
If you are creating the next social application charging for your application would be counterintuitive since you are banking on the number of users.
On the other hand if you have an application that actually makes money for someone or saves money (in other words translates to direct dollar amount) you might be better off charging as long as your user base perceives the value they get out of your application as more than what they pay for it.
I really think that me-too-free app mentality has to change. Startup founders (especially micro ISVs) need to understand the fact that coming up with a business model is the core of the business not an afterthought.
I can see iPod and Adsense, but Windows? Windows won for very, very different reasons. When Windows first appeared, it was far from the best product on the market. It won because it was already everywhere (because of DOS). Microsoft practically invented the "give it away to ensure market dominance" game (Ok, slight hyperbole there). It took the court system to slow them down.
What consumer OS on affordable computers (that leaves Macs out) was/is better than Windows?
It took the court system to slow them down.
That was not for their dominant desktop OS, it was for using their monopoly to push IE and server products.
You can call out Microsoft on dodgy anti-competitive behaviour in some respects, but you cannot take away credit for building the solid product that is Windows. Heck, even now after goofing up with Vista, they are back with Windows 7.
Windows won because DOS was already everywhere. It wasn't the best product. I would argue OS/2 and Macintosh were pretty significantly better. It's not a coincidence that it took this long (Windows 7) for MS to produce a decent operating system - they are now having to compete on quality. But you don't even have to buy the argument that Windows was sub-par. It doesn't matter, because that's not why MS won.
Just as MS used the omnipresent Windows platform to push Office, IE, and countless other products (with varying success) they used DOS to push Windows. That is why Windows won.
There's nothing dodgy about it - the point is there is more than one way to win the market, and being the best product is pretty far down on the list.
Windows won because DOS was already everywhere. It wasn't
the best product. I would argue OS/2 and Macintosh were
pretty significantly better.
No, they weren't.
The hardware requirements OS/2 were higher, Windows had better drivers support and provided better tools for developers. And the real battle was in '94 when IBM released OS/2 Warp. In '95 it was already game over.
People weren't using OS/2 for the same reasons they wouldn't go for Win NT 4. It was technically superior, but incompatible with what people wanted.
Win 95 had the same quality as Mac OS ... both were pieces of shit that got the job done, the difference being that you could get Win 95 for a better price and that it was future-proof (Win NT was already on sale for businesses).
IMHO, with Windows Microsoft only had 2 fuckups ... Windows ME and Vista. For all the other versions Microsoft just provided what consumers wanted.
It seems a lot of people forget just how crummy mac os was before x.
I used OS 7.x for a good while, and it was generally speaking not better than its contemporary, windows 95.
In fact it might have been even worse, at least as far as multitasking and stability go.
Windows 98 SE was actually a fairly good system as long as you didn't overtax its somewhat limited multi-tasking ability & ran it on high quality hardware (far less crash prone than Mac OS 8.x)
Of course, Microsoft used DOS to push Windows and perhaps OS/2 was better in some ways, but the Wikipedia article suggests OS/2 lost because Windows was better in some important ways.
The collaboration between IBM and Microsoft unraveled in 1990, between the releases of Windows 3.0 and OS/2 1.3. Initially, at least publicly, Microsoft continued to insist the future belonged to OS/2. Steve Ballmer of Microsoft even took to calling OS/2 "Windows Plus".[9] However, during this time, Windows 3.0 became a tremendous success, selling millions of copies in its first year.[10] Much of its success was because Windows 3.0 (along with MS-DOS) was bundled with most new computers.[11] OS/2, on the other hand, was only available as an expensive stand-alone software package. In addition, OS/2 lacked device drivers for many common devices such as printers, particularly non-IBM hardware.[12] Windows, on the other hand, supported a much larger variety of hardware.
The other question to consider is why another PC OS didn't come up to compete with DOS/Windows considering that Microsoft actually helped open up the hardware ecosystem. A dominant player with most of the "market share" need not stop a new better player (see web search). Maybe it's worth acknowledging that making a good OS is a hard problem which MS cracked better than the rest.
Actually previous poster made a good point with Vista problems - after a few years of bad press and Apple being a favorite, MS made a killing with Windows 7. Not for free.
OS/2 wasn't good enough, unfortunately. It was very expensive at the start -- and then there was OS/2 Warp which was ok, but not compelling. If the world were as web-enabled as it is now, it might have been fine -- the way it was -- you needed all of your software to work, and it didn't.
Even Windows 95 wasn't great (especially for programmers) -- it was Windows NT 4.0 that was good enough to use to get work done. It was a combination of being less crashy and having more native software available.
Agreed. From the point of view of the customer, Windows is free since it is bundled with their computer and cannot be unbundled. (There now are some chinks in that bundling armor, but not much.)
I agree. I think it would be almost impossible to introduce a new, non-free OS now since from day 1 it would have to be not only better than Linux and BSD, but significantly better.
Windows was free (preinstalled) for end users since at least 3.0 IIRC. Adsense is essentially free for publishers. Both it and Adsense have huge positive network effects. Not to say that they weren't best products on the market when they got traction, but still.
That's a strange way to look at it. Publishers are selling space to Google for a cut of the Adsense revenue. Google is selling contextual ads within those spaces to advertisers.
Market dominance goes to the best-executed whole product, not the best generic product in isolation of market dynamics. Making the best product is only half the equation. Startups also need a market strategy that works.
What I take from the article and from your comments is that Freemium is a great idea for any product that relies on network effects, either to create a more useful product or to provide a strong exit. But with any other type of product, it would make sense to put the Freemium aside. It's probably easier to try paid only (with or without trials) first, rather than starting with Freemium and dealing with the fallout of cutting off free users later on.
I wonder if Twitter would have had a chance at all if they required payment for participating (even as little as $5 a year would probably be too much for it to take off) ?
World of Warcraft has a couple of other things going for it though.
1) Network effects. If you've got friends who play WoW then that's a major reason for you to play it even if there is something better out there. Of course you could all move to the better thing but they won't because...
2) "Loyalty". Anything where people invest time which can not be transferred (for instance in levelling up characters) tends to incur loyalty, if only because they don't want to start over.
Agreed. Also, there is the value perception. When players have to sort through all these MMO games to play, the paid ones stand out over the free ones. (for those players with limited time to play, and can afford to pay)
WoW also offers a lot of free months to players. Sign up a friend, both of you get free months.
I almost said "and WoW isn't the best damn product," but that depends on your definition of 'best.' It almost mirrors the Mac/Windows thing. Connoisseurs tend to scoff their noses, yet they just keep on selling...
Maybe 'not innovative' would make more sense. WoW is a great game, and I have a ... long and very personal history with it. But it's a Blizzard game; their MO is to make the most average game possible, but make it incredibly polished. Many of my fondest memories are of Blizzard games, but (as of late) they're rarely innovative.
WoW is the gold standard of fantasy MMOs. It just doesn't do anything new or interesting; it only does a small set of things, but does them very, very well.
I was just thinking this about Evernote the other day. I really want to pay them. They make a great product that serves me very well. I do believe they deserve my money. The problem is, the payed plan would be a complete waste for me. I don't need it. The free thing fulfills my needs perfectly. If it would be a 30 days trial, I would be a happily paying customer by now.
The same thing is true for dropbox for me. After the first month I was actively looking for a "donate" button on their website. I love the product, it works perfect, I would pay for it without thinking a second, I just have no need for the paid plan.
I understand the free plans are for marketing purposes. In my case I had more than 10 different choices for a note taking application, or a online backups system. The factor that pushed me towards Evernote and Dropbox were the consistent great reviews. Free was the cherry on top, but not the reason why I choose those two apps.
I'm not touching Evernote again until they get exporting features. It's a really impressive, useful service, but despite their repeated claims of supporting open formats they've provided utterly squat in the past few years I've watched them.
Years. More than enough time to write exporters (not even .txt / .rtf!) if they value it at all.
I might actually go for it if that were the case. It'd have to be damn-good exporting, however - quite frankly, I don't trust them with my data, especially given their lack of export progress + claims. The company as a whole doesn't seem too trustworthy. I want a panic button.
I am very confused by this subthread. If you run the MacOS client, and you are a premium subscriber all your evernote data is locally available on your hard drive - it's unencrypted and easy to see and parse.
I absolutely agree. I tried to get the my data into other formats by creating a RSS feed for the non-critical information. But the RSS feed you get is a joke. I still like their service very much.
RE: Dropbox - just wait till you run out of space. I love their product, and I'm currently not paying. But trust me - when I finally run out of space (and I will!) I'll do it, no questions asked. They're giving me so much value already that I can't imagine living without them.
True - and the exact reason why I'm a paying customer. I got down to my last 200MB and then I became a paying customer. I didn't even think twice about it.
Re: wanting to pay but not needing the "pro" version -- I feel the same way about Jing. I use it almost every day and I think TechSmith deserves my money, but I really don't need any of the features of Jing Pro.
Why not buy the non-free plan for a week, then cancel? Or email them. They might use PayPal, perhaps you could transfer money in there if you know the right account.
I am not going out of my way to give them money. However I am perfectly willing to pay when they change their price structure. [For dropbox I found their prices per GB are almost double of cheaper competitors. They could charge much less per GB if they would get money from more customers]
Startups are too skiddish about charging. This shouldn't be novel or surprising, this is regular business 101.
Businesses charge money for useful products. People are used to paying for useful products.
The only difference is that the variable costs associated with hosting more users are tiny. How much does each user cost you? Basically nothing in the scheme of things. The problem is that the fixed costs are high - development, overhead, etc. Just becuase the variable costs are low doesn't mean you can't charge your users for the fixed costs.
Other businesses do this all the time. Startups should not be afraid of charging their fixed costs on to their customers. Advertising is fine if you are a media website and are trying to be an online newspaper or a website with no real function at all, but if you are a full fledged web app with useful features, CHARGE!
The freemium model pertinence depends indeed on the free user cost. A service for which the cost in minimal (i.e. no support, low bandwidth or storage needs,...) for free users, could benefit from it as a marketing tool.
The perceived added value for paying users should be significant, obvious and justify the fee.
Looks like "the web changes everything" is coming around full circle. To see the future one need only look in the past. What are retailers doing today? They've been at this for, what? Thousands of years, right?
In other words: some things are going to be expected to simply be provided (e.g. free wifi at starbucks). Some things people are just not going to pay much for, not even as much as you did (e.g. loss leaders like Milk). Some things you can mark way up.
Instead of saying that "free" plans don't work outright, I argue that they work for some type of products and don't work for other products.
He provided examples of niche products that so far, serve small markets. LessAccounting, Crazy Egg, - what is their user base numbers? One example he gives has a user base of 5,000 users. If you are a niche product, I don't think the free plan is ideal since you are serving a small market and need to build a user base before it makes sense.
Conversely, if you have an app that is going to get a really large user base, and I'm talking 'millions', then it probably will work (i.e. google, twitter, facebook, ect.). The example of those are far and few.
The other comment I would make is, maybe you aren't creating a compelling enough product to get a user demand that supports a 'freemium' biz model.
maybe you aren't creating a compelling enough product to get a user demand that supports a 'freemium' biz model.
That sounds backwards to me. It seems that most web startups are not creating a compelling enough product to get people to pay for it. So instead, they are trying to get famous by giving it away for free and try to run the business on measly conversion rates until they can sell the money-sink to a big company.
Conversely, if you have an app that is going to get a really large user base, and I'm talking 'millions', then it probably will work (i.e. google, twitter, facebook, ect.)
Actually, not. None of those are using a "freemium" model; they are all ad-based products. If your business model is dependent upon giving advertisers eyeballs, "free" is a great way to go-- but that has nothing to do with the topic at hand.
"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base."
From Fred Wilson's mouth (he coined the term "Freemium")
First of all, people who don't pay are users, not customers. Secondly, how are conversion rates of less than 2% considered efficient?
In the freemium model, even if cost of customer acquisition (COCA) for a free "customer" can be considered to be zero, Life Time Value (LTV) is increasingly negative.
Yes, but would those companies have become popular if there hadn't been a free version in the beginning? Would as many invest in an unknown product in the beginning to eventually make it known?
This only works if the user base also evangelizes. Your model wouldn't work well if they say "Use BidSketch, its free and awesome!" and then they went there and it wasn't free, they wouldn't sign up for a paid account because their initial impression was they didn't need their wallet.
There are free/paid products that have been around for a fistful of years that people still accidentally stumble on.
Because we spend so much time on the web we think others watch whats happening all the time and catch our moves. From a marketing perspective, you have to tell the same story for 12-18 months before it becomes "common knowledge" and you need the right PR connections.
You could change your App's name and logo 10 times in 6 months and no one would really notice except for your users.
More simply put: most people don't know if a product is "known" or "unknown" - they simply decide if it does what they are looking for and make their decision based on that. You are not your user, something we developers tend to forget from time to time.
Yes, but would those companies have become popular
You hit the nail on the head there. Web startups have become a popularity contest. Instead of building really good products and selling them for a price, people are trying to get as many users as possible and then tinker with all sorts of metrics to get "conversions". I can see the reason for doing this if you have big investors and want to sell to a big company one day. But, it seems like a really poor strategy if you want to build a profitable business.
That was basically what I took away from the article. Start by offering free accounts until you gain some sort of traction and people become aware of your product, but once you start getting significant traffic stop with the free.
Something else to take away: don't require people to give away their billing information upfront when signing up for a trial; simply downgrade their account if the trial period ends and they haven't paid yet.
I wonder how well offering free accounts, getting rid of them and then grandfathering the free account users would work. How would the free users who have exclusive free accounts behave? Will they be more likely to promote your product (aka bragging) or would they be inclined to try to sell their account to someone?
I didn't see that being advised anywhere in the article. I think the author is implicitly recommending limited free trials, which make perfect business sense.
Perhaps a good balance is, instead of free, charge a small one time setup fee. pinboard.in for example does this and it seems to work really well. They offer a premium version with a monthly fee and a "free" version, which cost something like $5 or $6 to set up.
To me, the difference between free and a one time $5 fee was minimal, but to the people running the site difference in revenue is probably pretty huge.
That's worse IMO. Maybe the $6 is minimal for you, but it's not in the average case. Studies have shown that there is an enormous difference between "free" and "cheap" in people's minds. The difference between free and $1 is bigger than the difference between $1 and $10 in terms of customer resistance. The point of a free product is to eliminate barriers to entry. Most people are not that dedicated, and even the smallest snag in the conversion process can shoot them out of the funnel. Charging a small setup fee combines the worst aspect of pay (much harder to gain users) with the worst aspect of free (anemic revenue).
I feel this really should have been titled "Why My Free Plan Didn’t Work." Since free plans have and will continue to work for some people.
I don't know about you but I doubt GitHub would have taken off had it been exclusively pay-ware. Even if it did gain some traction someone would have made a free with upgrade option version of it.
The main thing with GitHub that makes it a great example of freemium is that they have two separate audiences for free and paid accounts. The free accounts are for open source projects and random hackers who write code for fun. By doing this, they attract talent and popularity to their service that convinces a different audience (businesses) to pay.
GitHub probably still has many more free than paid users, but the upfront cost was probably well worth it in the end.
I would guess that there are a decent number of paid users who aren't "businesses", but just people.
I myself have a paid account because:
1. I want private repositories for school work and cba to set them up on my own server.
2. I run my website off of github, and only paid accounts get CNAME support.
3. I think they're awesome guys, and I want the service to stay around. This is the most important one.
I would argue that in order for a free account to work you will have to meet the following criteria:
- The free account is only useful while you're starting to use it - so a real constraint has to be in place for you to want to upgrade.
- Your product has to be useful enough on it's own.
- Your product is not too niche. If the percentage of people on planet earth that can benefit from your product is low, then there will be less chance that a user finds somebody else to recommend the product to.
I haven't looked at Bidsketch, but if people are signing up for free and the free plan has enough constraints in place but people are still not upgrading, that could be a sign that people don't like the product enough or don't get enough value out of it.
Also, the article doesn't state what features the free plan had, but if the free plan used to be what is now "basic plan", maybe the free plan was too good ?
You would also have to measure and account for over how much time the free users convert to paid users. If it happens over two years, you have to take that into account.
As the gigaom article mentions:
The thing is, over time inactive users drop off, and active users start paying. Once Evernote finally figured that dynamic out and started talking about it, term sheets and partnerships requests started flowing in, Libin said.
A free plan is often a replacement for advertising spending. It gets you users who wouldn't otherwise consider using your product, and you hope that they would tell their friends about it, and some of those friends would eventually pay.
Here is an extreme example: If I remember it correctly, MySQL's conversion rate was quoted as about 1 in 1000. If they didn't distribute the entire product for free, they would have much less market penetration, but certainly earned much more. Had they chosen that route, they wouldn't be able to sell the company for a cool billion.
Nothing in life is free. If you want a lot of users, and don't have the advertising budget for it, you give some or all of your product away for free.
I recently wrote a post tracking evolution of pricing plan of a company (Clicktale) over last 4 years. Even though they still have the free plan, the prices of individual plans increased 10x in four years: http://visualwebsiteoptimizer.com/split-testing-blog/how-pri...
My site uses a freemium model, and in some ways it kind of has to. The site is a social-network type site where writers critique each other's work. Members can join for free, but their accounts have lots of limitations that are lifted by paying a monthly fee.
For my site, the most important part is having active members, whether they're paying or not. If nobody is active on the site to critique writing, then new writers won't join. Having a pay barrier to joining a community like this one would very quickly strangle it.
Like most freemium plans, only a small percentage convert to a paid plan, but enough do to keep making it worthwhile. I even doubled the price of the paid plan at one point to see if it would affect conversions, and it didn't, so people are finding the model useful.
So freemium works for a model like mine; but for many web apps, especially ones where the customer sets-and-forgets it, it might not make as much sense.
But how many free users came in in the mean time? Maybe the raw number was doubling but the paid user percentage wasn't. And even it was he found a way to get an 800% increase.
The article makes excellent points all around. The #1 goal of any business is to gain positive cash flow (revenues greater than expenses). Anything else sinks your business. It's high time start-ups learned that lesson.
Sure, starting out you need to gain traction. You do that by:
1) having a superior product
2) gaining a superior rep
The only way to have a superior product is to identify your target market. Nothing in life is "free". If you want to offer a service to your clients that cost them nothing out of pocket you better be pulling in revenue in other ways (advertising or info selling). Since many are averse (privacy issues and ad-block) to those other options you must charge your user base.
Your product doesn't have to be the one with the most features, just the one whose features are the best executed.
Your product has to meet the client's needs. If you don't know who your target client is (Everybody is not an appropriate answer) then you need to refine your pitch. Part of client needs eventually comes down to support and interaction. If you spend all your resources (time, server, bandwidth, development opportunities) supporting a vast number of free clients at the expense of revenue generating clients you will quickly gain no to poor reputation.
Note: I tried to figure out what Evernote is doing. Their free service does meet the vast majority of user's needs (including mine). The amazing thing is that their service is so simple and straight forward that perhaps they don't need to spend so many resources on support and with the API (Trunk) and partnerships their development/expansion costs are now being taken on by so many other parties. I'm sure they bled cash brutally at the beginning but their product was so novel and amazing that VC money came to the rescue. Fact is that there are few start-ups in such a position. There are also few products out there so novel that users talk about not "needing to" but "wanting to" contribute to their success. Twitter? Ha! But Evernote is different. People want to pay them for their service even if they don't need to upgrade. They just love it so much. That is a truly rare and beautiful thing.
This is also an important consideration when trying to evaluate (and iterate on) user feedback.
The type and quality of feedback that you get from paying customers is often completely different than what you get from non-paying users. Paying customers bring higher, and more importantly, more precise expectations of how your product should work for them. If you listen carefully, they'll tell you what your product needs to be. You'll have fewer users, but you'll actually have a product, rather than a service that tries to be everything to everyone.
If you get someone in the door, you can upsell them _eventually_. You have a long time to go. I don't know if the relationship between company and user is the same in the current mobile app marketplace.
Also, many freemium companies are actually enterprise companies in disguise, where the pricing plans really work best for larger organizations over individuals. Free users are a loss leader to enterprise sales.
Generally, I wouldn't paint with such broad brush strokes. Free can work. Free might crater for you. Look hard at your product and market when designing your pricing.
I am on the mailchimp free plan. One reason I think it works for them is that it's impossible to stay on the free plan if you are successful. It's nice to not have to pay while I'm building my list and don't get much value out of it yet. But every day, as my list grows, I know I'm going to have to pay -- at that point it would be silly to cancel.
Another reason it works for them, is that many of their customers probably start with a list -- in that case, it's not free (if you have over 500 subscribers)
He did get a lot of exposure from the free plan, so at least at the beginning, a free plan is a great way to start a user base.
It is true that after that you will need to balance things out so that you don't get too many free users when compared to paying users.
But like the guy says, it's also about looking at your business and making a decision about whether this sort of free-plan offer is sustainable for your situation. For some companies it is and is part of the business plan, whereas for others it doesn't really help.
This was the same conclusion that Homestead reached. They initially launched with a fremium model but after being deluged in freebie support costs switched to credit-card-required.
Although their overall signups plummeted, their paying signups went up by multiples.
It would be interesting to see if being freemium for a limited period at the very start is a profitable way to promote the company. Has anyone ever done a "get a free account now - available only for the next 30 days" experiment during launch?
I expect in the near future we'll see more Trial Membership Plans ala Netflix and others and the Free Plan will be removed in favor of a demo example or a "nearly free" plan.
For the launch of my next site I am going to do a limited number of free accounts a day(starting at different times in the day). Then you won't get overrun with free users, but allow people to give you their email to let them know when more free accounts are available. Not sure if this will help but worth a shot. Might force people to try it paid if they don't want to wait.
The conclusion that "Free plans don't work" has been overly extended from data that doesn't suggest anything of the sort.
What the data does suggest is that his free plan is meeting a majority of his user's needs, and hence the "extras" that people get for upgrading are not selling.
What he needs to do is reduce the free plan so that more users' needs are addressed in one of the paid plans.
I think you should use a free plan if actively using the 'free' plan will eventually force the user to go to a paid plan. e.g. dropbox.
If you just give your core product away for free then users will only switch if they need the extra features of the paid plan. You can still use 'free' for marketing, because total conversion rates with a free plan will probably be higher, just don't expect these 'free' customers to switch if they don't have to.
I'll admit I'm a free-dropboxer, but that's almost exclusively because their plans are all too large and too expensive. I'm one of the multitude calling for a 10gb / 20gb plan. I've got photos elsewhere, but my main set of stuff I'd store is only about 5gb, and duplicating that (much less the 50gb of their smallest paid plan) to every computer is a waste - I'm using it for temporary storage and backup, across two (eventually 3) operating systems, none of which are more than 50% happy with each others formats without freaking out the next application I use.
In the meantime, though, my main Google account has 20gb for $5/year, and for the equivalent-lowest of 50gb/$100 I can get 400gb, which will also store my emails and photos. I can back up any email account on my machine by dragging the messages to a gmail folder, and waiting a little while. Docs now allows 1gb any-kind file uploads. I can send my photos to Picasa (the reason I have the extra space).
I'm a massive word-of-mouth spreader of Dropbox though, especially as I'm the Geek of a few families + their neighbors. I've probably gotten them more business than what I cost to host.
That's what we decided to do with historious [1] (bookmarking with full-text search in the content of the pages, and cached pages). You get 1000 bookmarks free, and you have to pay to get more.
This way, people who don't bookmark very much can live with 1000, and people who eventually will use more than 1000 need to subscribe...
I think it's a very good plan if your product is structured in a way that a user will eventually hit the limit, but I think Dropbox was not a very good example. If I hit the limit, I'll just delete a few files I don't need. I see your point, though, and I think you're mostly right.
Exactly. That's why I think mailchimp works better than most. It's great to use the free plan to build your list, but once it's built, you will end up in a paid plan.
The problem with dropbox is that they don't have a client for automating backups. That means everything I store there has been manually dragged into the dropbox folder (see NB). It would take me a long time before the number of files I needed to share online exceeded their free limit.
NB: Truth be told, I run batch files via task scheduler for backing up certain folder to dropbox, but I doubt the typical consumer does.
I'm only using Dropbox because it's free, all the paid accounts are overpriced IMO. For 3$/mo + S3 costs (~0.5$/mo) I have a JD account that includes auto-backup, multiple online disks in EU/US and multiple online drives.
Dropbox is using my money to subsidize the free users, I'm not getting 10$ of value out of it.
Free plans work if they are inadequate for customers who can afford to pay, but adequate for a taste. Less Accounting does a great job of this. The only reason not to offer such a plan would be the resources it requires to support free customers, and perhaps that it has a negative price anchoring effect.
1) If you want to get acquired - and we're talking about a big acquisition here - it would do to go free so you manage to score a big-enough user base to get noticed. And so the bigger company is interested in acquiring you not only for your technology, but also for your users. (That said, acquisition may be a risky bet.)
2) Going free also makes sense if you want total market dominance. In which case, free is really the only way to go. The writer is speaking from the POV of a micropreneur, and it makes sense for him to retract his free plan (in fact, it makes sense for 37signals/the 37signals model to do so too).
But if you're in the position of being the next Facebook, going free and dominating the market is really the best thing to do. (Or Youtube, or Google, or Flickr).
You find lots of users, lock out the competition, and then you can figure out how to monetize.
Which only goes to show that there are all kinds of businesses out there, and the advice you read on the net really should be done through the context of your particular business and/or market.