Freemium is a Money Burning Business Model, Cheapium is Better

I want to talk about freemium for a moment. The freemium business model, for those not familiar, works by offering basic features for free while charging a premium for access to advanced features. It creates a low barrier to entry, offering free sign ups, so that users have no reason to not create an account. The logic is that some of those non-paying users will eventually want the advanced features and pay up. Skype, GitHub, and Flickr employ the freemium model. Chris Anderson wrote a fantastic book about the model titled, "Free". Freemium is the most popular business model among web startups and it's broken. Freemium is a money burning business model, cheapium is better. Introducing cheapium Cheapium works by offering basic features for a nominal cost, usually a dollar or less, while charging a premium for advanced features. This can be in the form of a one-time or recurring fee. Cheapium creates a low, but not trivial, barrier to entry. All users in the system are paying. It might sound like a small difference but this has several advantages over freemium. Paying the overhead costs Three prominent startups, GetExceptional, Ning, and Instapaper, recently modified their business models to move away from or lessen their reliance on freemium. GetExceptional is an exception handling service. They offered a free plan that was great for my small startup, Talentopoly. My site doesn't throw a lot of exceptions but for the few times it did I would get an email with the exception that occurred. They featured my startup in their customer spotlight. It was great. That is until it stopped being free. They upped their rate to $9/mo. My site doesn't throw a lot of exceptions, certainly not $9/mo. worth, so I found another service that only costs $2/mo. Ning is a community building platform. I had played around with the platform a few years ago and created a small community. They too offered a free plan to get users started and then tried to up-sell them on premium features such as removing the Google ad from each page. They too had to remove their free plan and tell users to convert to paying plans or take a hike. I decided to close my community. Instapaper is still technically a freemium model. It lets users save articles to read later. Up until a few months ago iOS users could download a free app that would download and store the 10 most recent articles in their account. I had been using the service more and more but was still getting by with the free iPhone app. To my surprise Marco Amrent, the service's cofounder removed the free app from the App Store in recent weeks. He wrote a piece on his blog about why he removed it. I highly recommend you give it a read. In the end I agreed with a lot of what he said and as cheap as I am I bought the full app for $4.99. All three of these services have overhead costs that they need to pay. You wouldn't expect a restaurant to seat you, serve you a free soda, and cross their fingers that you're going to order a meal. So why do web startups act this way? A web startups overhead costs may be less than that of a restaurant but there are still overhead costs per user. The freemium model focuses on growth for the sake of growth while the cheapium model focuses on sustainable growth. It's growth you can afford. It's simply not economical to support a user base of which the majority of users aren't paying anything. Don't give users a reason not to pay The freemium model gives users a reason not to pay. I found this out the hard way when I started selling iPhone apps a few years ago. I offered a photography app in the App Store for $0.99 called QuickShot. Sales were low in the beginning so I stripped out a bunch of features out of it, called it QuickShot Lite, and gave it away. I even bought some Google and Facebook ads to help promote QuickShot. I would talk to my customers whenever I could to get feedback. What surprised me was how many customers had seen the ad on Facebook, went to the QuickShot purchase page, liked the app, but suspected there was a free version and searched it out instead. My free app wasn't driving sales to the pay app. It was working the other way around. I was giving users a reason not to pay for my app. Instead of being a powerful sales tactic freemium weakens your stance. What if car salesmen had to compete with their dealerships giving away free cars? Freemium is a crazy business model. Cheapium doesn't give users a reason not to pay. Price as a signal There is a phrase in economics called price as a signal. The price you set for a product or service sends a signal to potential customers. It can indicate the quality, rarity, etc. All of which, hopefully, translate into desirability. Apple, Coach, and other high-end designers know this well. If you build a quality product with unique features you should charge well for it. TweetBot is a recent example of this model working. Freemium devalues the product to zero. This sends the wrong signal to consumers. Cheapium on the other hand sets a low entry price but still tells people this is something worth paying for. Cheapium is essentially the model that most of the successful apps in the App Store use. The wrong type of user The freermium model attracts lots of low quality users. A user who isn't willing to pay $1/mo is unlikely to convert, ever. The cheapiummodel filters these users out at the front door. Sandbox instead of free plan Chargify is a recurring billing service. They don't offer a free plan. What they do offer is a test account. This is great because it lets you build their service into your startup at no cost but when you are ready to start using it you have to pay. Instead of offering free accounts use a cheapium model and offer sandboxes or test accounts. The difference here is that a sandbox is shared with everyone but can give would be users a chance to peak behind the curtain. Chartbeat does this. If your service is something developers need to integrate with then a very limited test account might be appropriate. Lowering the cost for everyone By charging everyone you can more easily cover your overhead costs. This can decrease the gap between price plans. Instead of offering a free plan and a $9/mo. plan you can offer a $1/mo. and a $6/mo. plan. This means that your $1/mo. users are more likely to upgrade their plan to the next level. Now you're covering your costs and up-selling. Better customer support Often times the free users are the ones who aren't taking the time to learn the site before firing off support tickets. These users make up the vast majority of your users. You spend most of your time supporting them. This stretches your resources thin and lowers the quality of your customer support. You run the risk of losing paying users. With cheapium you can focus your attention on supporting paying customers. Switching from freemium to cheapium If you're launching a startup now is the best time to make the switch to cheapium. Do it now before you have to make the hard choice down the road and risk alienating users. Transitioning a startup to cheapium is difficult. But if you're overwhelmed by the support and overhead costs of freemium and need to make the switch here are some key points to follow to make the transition easier. Make sure you communicate the reasons you are making the switch with your customers. Openly discuss the numbers behind the decision. Start focusing on your paying customers and telling them that things are going to get better. Don't increase rates, at least in the near term. Offer a low monthly plan for free users who upgrade now. But most of all keep focusing on your product and making it best in class.