Robbie’s Rules of Thumb: When Free Makes Sense

B2C Marketing, Consumer, Freemium, Lead Generation, Pricing

If the milk is free, why buy the cow?  But many online subscription businesses
make the mistake of giving away tremendous value, without figuring out how this
generosity will pay off for shareholders. 
While a free subscription can be the entry-level means of connecting
with prospects, it can also be the bad opening move of a
chess match that results in checkmate.  

How should a company decide whether to offer a “free”
subscription?  When are you
cannibalizing your existing (paid) business, and when is there an opportunity
to grow your overall business? Or, put another way, when is free strategic, and
when is it just silly?

Here are Robbie’s Rules of Thumb about when free makes
sense.

  1. If the
    free subscribers are likely to convert to paid in a predictable way.      This is probably the most often
    identified rationale for offering a free subscription.  It’s an extension of the “free trial”
    rationale—that is, if I give you enough time with the product, you will want
    more and be willing to pay for it. 
    Before you go down this path, make sure that you have a compelling reason to trade up:

    • Limited time
      offer.  Free for a limited period
      has a natural trigger point for upgrades. 
    • Limited depth
      of offer (storage space, users, files, etc.).  
    • Limited scope.
      Sometimes people upgrade for a particular feature that is not available on the
      stripped down version
  2. If the
    free subscribers are advocates, experts or connectors who will attract new paid
    subscribers.      Sometimes free
    subscriptions are given out because they will lead to more subscribers. There
    are a few flavors:

    • Free subscriber is an “expert” who advises others.  For example, if you have music content, you may give a music critic or artist a free account, in the hopes that they will talk up your service
    • Service is naturally networked, or viral.  Some examples include email, secure file delivery services, or instant messaging.  The key here is that just by using the service, the user is spreading the service to potential users.Free subscriber has natural incentive to recruit new participants
  3. If you need critical mass of users.  When you are launching a new service, and the service is networked—you can’t charge the first few users.  It might make sense to build a community on the free version, and then add a premium version to leverage the network for a fee.
  4. If you are trying to change behavior and usage.  If you have a new type of service and your users aren’t familiar with.  For example, in the early days of LinkedIn and Webex, all services were free.  Today they have well-established revenue streams for premium services.  The challenge with launching a service for free as a means of gaining trial is that those people will expect to always be served for free.  You could set expectations that the free service expires after a year or so, but there is a chance that the market will require that you grandfather the early adopters. So think carefully before you launch your service for free.
  1.  

Too many companies offer something for free because they know
that the “free” will attract new customers, but don’t have a business model
that monetizes these “freesters”.  Gathering
eyeballs and building relationships with prospects can be a key part of a successful business model, but only if it
leads directly to revenue.