About a year and a half ago, Layered Thoughts published a fascinating piece on the differences between different kinds of free. The author goes into the psychological impact of offering a free plan (popular in “freemium” offerings) vs offering a free sample or trial. This article is recommended reading for anyone designing pricing plans, especially for online services.
At heart, the issue here is managing the psychology of your potential customer. If your customer can understand and accept paying for value, without negatively affecting your market adoption, then offering a free plan reduces their perception of value for your product. You devalue your offering in their mind, making it much harder to capture value.
When does freemium make sense? When two key conditions occur:
- Massive market: Conversion rates from free plan to paid plan are almost always in the low single digit percentages in the best case. You need a massive market to generate sufficient revenue from the payers.
- Rapid adoption: A crucial part of your strategy involves driving rapid and massive adoption, in a situation of high price sensitivity, particularly where network effects occur.
Both of these situations occur in social networks like Facebook or Twitter, or services like Dropbox. On the other hand, they do not occur in most business-to-business services.
Anyone who has read Dan Ariely’s studies of behavioural economics should not be surprised. In one study, they offered Hershey’s Kisses for $0.01 each, and Lindt Truffles for $0.26 each. 40% of the people chose the Kisses, and 40% the Truffles, based on their perception of value. About 40% concluded that Truffles are “worth” $0.25 more than Kisses. When they reduced prices to $0.00 (free) and $0.25, i.e. the same $0.25 spread, we expect the same percentage to choose each.
Yet, they do not. Despite the same $0.25 price gap, a whopping 90% chose the Kisses!
Offering a free trial is an excellent way to allow customers to sample your wares, without affecting their perception of its value. Yet offering a free version will, whether you like it or not, affect their perception of the value and their willingness to pay for the premium product. As Ariely’s research shows, it will even take customers away from your premium product! Customers who willingly paid for a Truffle over a Kiss will no longer do so, if the Kiss is free!
Before offering a free version, be absolutely sure you understand the value of your service to your customers, and whether the free plan will hurt your premium offering.