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My partner Seth Levine has an outstanding post up today about the freemium model. It’s titled Pricing models, the freemium myth and why you may not be charging enough for your product and is worth going and reading right now.
He covers a bunch of stuff, nicely divided into the following topics:
- Beware of too many pricing tiers.
- Have a clear delineation between product tiers.
- How about overlay features that you charge by the drink for?
- Be careful what you put a tariff on.
- The freemium myth.
- Don’t be afraid to charge for your product.
- Beware the long “trial period”.
Seth has become “the pricing model guy” at Foundry Group – we’ve been dragging him into every pricing conversation whenever they come up.
I have one counterintuitive thing to add – it’s often easier to raise prices early on than lower them. While many pricing curves assume a decay curve toward lower prices over time, early in the life of your business you should consider gradually raising prices until you hit a natural price ceiling. Grandfather your early customers into the old pricing for a period of time (three months to a year) – they’ll feel like they’ve gotten a great deal for being an early adopter. Don’t forget to thank your early customers for their support.
Interestingly, this is the opposite of some very popular (and successful) pricing strategies, such as Apple’s for the iPod and the iPhone. High early prices for premium demand followed by steady price reductions over time as new products are introduced. If you are an established premium provider of a high demand product, especially for a physical good (e.g. a phone) vs. a digital good (e.g. software), this approach makes sense, both from a manufacturing supply perspective as well as a volume manufacturing perspective. But, if you are a digital good, you have a lot more variable manufacturing capacity (as long as you know how to quickly scale) and more margin to play with (ahem – usually 99.9%.)
Seth makes an important balancing point that you shouldn’t start out with too low a price point. This is especially true if you aren’t willing to raise prices to their natural ceiling over time. But, if you have no idea where to start, and have the courage to increase price quickly as you find early demand, consider a relatively low price point “guess” and then move it up until you find a ceiling.
A few weeks ago I was on two panels at Google I/O 2010. The video from one of them – Making Freemium work – converting free users to paying customers is up. Don Dodge from Google is the moderator and my fellow panelists are Dave McClure, Jeff Clavier, Matt Holleran, and Joe Kraus. It’s 60 minutes long, but we covered a lot of ground.