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Seriously, Startups Shouldn’t Give it Away for Free

startups freeSummary: It makes little sense for startups to give away their products for free. If a product has value, people should for pay for it.

I was talking with a client recently about whether they should introduce a free version of their product to drive more users into the sales funnel. After throwing around some ideas, we decided it wasn’t a good or viable option, mostly because we didn’t think enough free users would migrate to the premium service.

It was an intriguing conversation given free is used so often by startups looking to attract users. Many of these startups don’t even have paid services, which makes them more projects (and please, please won’t someone, anyone acquire us!) than businesses.

To be honest, I’m not a big fan of startups using free.

Fundamentally, I believe that if you a product is any good and offers some value, consumers should pay for it – whether it’s a one-time shot or a monthly subscription. When a startup embraces free, it suggests they’re afraid their product doesn’t have enough value or their product isn’t good enough compared with the competition.

And freemium isn’t much better. Aside from companies such as Freshbooks and Dropbox, freemium is like dipping your toe in the water as opposed to jumping in with both feet.

Earlier this week, Josh Cohen had an excellent post looking at the “foibles of freemium”, and how it can be an expensive marketing proposition. Here’s how his thesis kicks off:

“[Freemium] can work wonderfully of course, but usually it crushes and destroys companies, not only because it costs more than anticipated but because the founders didn’t realize the business model itself caused them to make incorrect decisions.”

In many respects, freemium (and free) give startups false hope.

By offering people a free option, startups believe a wave of consumers will magically materialize, and that many of these freeloaders (5%, 10%, 15%??) will eventually be compelled to upgrade to the paid version. Of course, this is a dream given the low conversion rates – usually 1% to 2%.

Instead, startups should sell their products. If they want to offer a 14 or 30-day free trial, that’s great but, at some point, consumers need to pay or stop using the service.

tempo iphone startupAnother reason I’ve been thinking about free recently has to do with Tempo, a smart calendar app for the iPhone. Simply put, I love using Tempo. It’s an intuitive, useful calendar that comes with features that make sense.

But here’s the thing: Tempo is free but I’d happily pay for it. Whether it was $5 for a download or $2/month, Tempo has more than enough value for me to cough up some of my hard-earned dollars.

I’m not sure about Tempo’s business plan or revenue model but it’s a perfect example of a startup that shouldn’t be afraid to charge. Yes, I know free is prevalent within the iOS world but not everyone has to give it away for nothing.

Given my approach toward free, it shouldn’t be surprising that I have started to buy more online products.

It’s not because I’m feeling particularly generous or feel that supporting startups financially is the right thing to do. It has more to do with the belief that good products are worth something and, as a result, paying for them should feel right because it’s a win-win proposition.

It could be that free and freemium are permanent parts of the digital landscape because consumer behaviour has been hard-coded. But it should not stop startups from embracing a pay-to-play approach.

If you charge for your product, what’s the worse that can happen? Not enough people may not buy it, which suggests your product isn’t valuable or good enough. If that’s the case, you can give it away for free or decide that maybe you’d be better off doing something else.

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  • http://www.markevans.ca/ Mark Evans

    All good points. I see too many startups embracing free as their key marketing and sales tool when, in fact, they could get people to pay because the product has value. Thanks for the insight.

  • http://twitter.com/allenlau Allen Lau @ Wattpad

    I would feel more comfortable if the title is “Startups Shouldn’t Give It Away For Free Lightly”. As Mark M said, freemium can be great. Free can be great too (YouTube is a profitable billion dollar business). But just giving away the product or service for free without thinking the implication can also be shooting yourself in the foot.

    I also think this blog post is more applicable to SaaS or prosumer products. For most consumer web / mobile apps, free is almost the only option (just imagine Facebook is charging $0.01 per month). Some of the business models for consumer web / mobile apps may not be apparent until the product has massive scale (say 100M+ users). In the case of Instagram, all it takes is finding one customer called Mark Zuckerberg :-)

  • cwcarder

    Hi Mark, enjoyed the article and have always loved to play first and foremost in the world where people actually pay for what our startups bring to life. One area where I think free can be strategically used with great impact is in the enterprise world… smart, targeted free pilots with contracts that roll-over into paid engagements with pre-set contract terms can make a huge impact. We have one startup that goes to cash flow positive and in control of its financial destiny the minute 2 of its “free three month pilots” roll over into their enterprise contracts. As long as the product delivers on its promise, the financial terms are set. We are creating those scenarios here every day with our B2B plays at Kinetic Cafe. Thanks again for always starting great conversations.

  • http://wmougayar.com/ William Mougayar

    It really depends on the product/service and the market ie. b2b/b2c.

    Freemium has that certain magic that only the few that have experienced operating it really understand. Either it works or it doesn’t.

    Indeed, many products should be sold instead, and others might work well with freemium, but it’s not all that easy.

  • Garnet Waldron

    Great point Mark. I agree that with low conversion rates like that, there is little accomplished by offering it up for free. Like Mark MacLeod says, if you have a huge market it offers good exposure, and with a low price point like you mention regarding Tempo, who would not buy. Better to have hundreds of thousands of coustomers at a low price point than a few at a high price as the residule will be more reliable. Also the unlimited potential of the base is not hindered by a high price entry point.