Start with Premium Before Freemium

Don't defer testing one of the riskiest assumptions in your business model

The thinking goes that when launching a new product, it’s often a good idea to lower friction by giving away your product for free so you can

1️⃣ Learn from users
2️⃣ Get them to try before they buy
3️⃣ Set pricing based on what users would be willing to pay

On the surface, Freemium seems like the best of both worlds: Get users to try your service without worrying about the price, then upsell them into the right premium plan later.

But the reality is quite different.

In this issue, I will detail several pitfalls of starting too early on freemium and make a case for what to do instead.


The Problems with Starting With Freemium

At the outset of a new product launch, you don’t know what you don’t know, often resulting in a poorly performing product.

Let’s walk through these problems and outline why they happen.

1. Low or no conversions.

Many founders make the mistake of giving away too much under their free plan, which leads to low or no conversions. This happens because they don’t have usage data to correctly define the FREE plan so that users naturally outgrow it at some predictable time.

2. Lack of focus.

When you have a lot of free users, it’s hard to focus your attention on the right feedback. With average freemium conversion rates of 0.5%-3%, most of your free users will never become customers. However, when given the opportunity, everyone can be a critic. Who do you pay attention to?

3. Delays learning about your riskiest assumption.

Pricing is one of the riskiest assumptions that can make or break your business model and should be tested as early as possible. Freemium delays this learning. Time is the most valuable resource for a startup, and you can’t afford such long learning cycles on something as critical as price.

4. Free Users aren’t really “free.”

Even though the operational costs of carrying a free user may seem low, they aren’t zero. Other than server bandwidth/hosting costs, there are support, feature, and learning costs (like the ones described above) that need to be considered. Unless free users add participatory value (in a multi-sided model), they are a marketing expense.

How to Approach Freemium

The first step is recognizing that freemium is a marketing tactic, not a business model.

There is no business in free.

You need to first build a working business model, then back into free, if appropriate for your product, when you have more data on your side.

Mailchimp is frequently cited as one of the Freemium model success stories, but too often, people fail to recognize that Mailchimp didn’t start with a free plan. They spent years building a powerful, affordable (but not free), profitable product first, with years of pricing experimentation, before backing into a free plan.

Here are the steps in more detail.

1. Start with the premium part of Freemium first.

Once you recognize Freemium as a marketing tactic and consciously decide to shorten the validation cycle, it makes sense to start with the premium part of Freemium first.

In other words, first validate your value proposition with paying customers, then back into a free plan. Once you have learned how your customers are using your product, you can always offer a Free plan if you want to. You would have collected valuable usage data along the way, which puts you in the best position to design multiple upstream and downstream plans.

You don’t need a lot of users to learn. Just a few good customers.

2. Start with a single pricing plan.

Starting with multiple plans that cover everyone under the sun is a form of waste. I’ve seen startups launch with plan options targeting 1-person startups to 1000+ person enterprises.

Not only does supporting multiple plans require more work to support plan/feature segmentation, but the return on learning is diluted when you attempt to target multiple customer segments simultaneously.

The more significant point here, though, is that when you’re starting, you don’t yet have enough information to know how to price or segment the feature set into multiple plans correctly.

Charge your customers from Day One.

3. Focus on a single primary early adopter segment.

Pick features and a plan based on what your early adopters will pay for today and sign them as your first customers. Not only is this more straightforward to build, but it’s also simpler to measure.

Early adopters aren’t price-sensitive but value-seeking

4. Use a “Free Trial” plan.

Time-based trials versus unbounded free plans help time-box your pricing experiments so you can force a conversion decision, which allows you to learn and iterate faster.

Trials are a great forcing function for keeping you accountable.

5. Offer a “Free plan” when you are ready

A good Free plan should ideally behave similarly to a Free Trial. The difference is that while a Free Trial is time-based, Freemium is usage-based.

If you understand the usage pattern of your product, you should be able to design the Free plan so that a user naturally outgrows it at some point X in the future that you can reasonably predict.

At that point, the difference between Freemium and Free Trial is the perception of offering something FREE, which is a big enough difference (because of the irrationality of providing something for free) to warrant using Freemium for certain types of products.

FREE is powerful when weilded correctly.

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