Certainly "free" - and by extension "freemium" - has become one of the most popular pricing models for web companies. Evernote, Pandora, and as of yesterday SlideShare are among the companies that offer customers some version of their product for free, with additional features and services for a premium fee.
But just because a freemium model works for one company doesn't mean that it's right for all. And in a recent blog post, the Foundry Group's Seth Levine offers some advice on pricing, including as the title of his blog post suggests, "why you may not be charging enough for your product."
1. Beware of too many pricing tiers. Err on the side of simplicity, suggests Levine, as more tiers mean more complication and more confusion.
2. Have a clear distinction between the tiers.. It can be a mistake, says Levin, to offer all features at a base level with just a little bit more of each feature at various prices. While there may be some features that can be priced incrementally, Levine says he is more apt to "favor opening up some number of completely new features with each pricing increment (say an analytics layer or workflow module, etc.). This has the side benefit of giving you lots of nice ways in your product itself to promote higher tiered features (think grayed out features - "click here to upgrade!"). It also makes the upper tier value propositions relatively straightforward - want X feature? You'll need to purchase the Silver package for that."
3. Be careful what you charge for. This is key. You need to understand what is driving your costs so you can ascertain what user behaviors cost you money. You also need to understand what is going to drive customer adoption and loyalty. "And with all that in mind," writes Levine, "be careful what you chose to put a tax on. There's no hard and fast rule here and this is a nuanced conversation that's hard to generalize and put into writing. But remember that your pricing will effect your customer's behavior around your product. And I've found that many companies make the mistake of charging for features that are the key lock-in points for customers in their early use of a product and in so doing actually limit their likelihood of getting enough value out of the product that results in their becoming a long term user."
4. Be aware of the long "free trial" period. Levine suggests that customers who are convinced to buy your product at the end of a 30 day period were probably convinced after a week or two, so there may be little point in extending the trial period. And the sooner subscription dollars come in
5. Are you really the right candidate for the freemium model? Levine lists a number of reasons why your startup might not be the right "fit" for freemium: "if your product offers value out of the gate, if your service is such that it doesn't necessarily benefit by having a large volume of users (and back-end data aggregation is probably not that benefit, which I point out since I often hear it used to justify fremium models for companies that in my mind shouldn't have them), if you are selling largely to enterprises (companies)."
6. Don't be afraid to charge. And don't set your price too low. Build a good product that people want, and people will pay for it. Make it a valuable product, and people will pay a meaningful sum. "You may lose a few people at the low end" with a higher price, but Levine argues that products often have a lower price elasticity than companies realize. And it is a lot easier to lower your prices than to raise them, whether your prices "inch" or "jump" upwards.
When you go to determine how much to make them pay, Levine recommends discussing pricing with early customers and with outside advisors so that you make sure you're matching price and value.