Why you’re destroying startups with your “Freemium” attitude

Users may revolt when asked to pay for things they are accustomed to getting free

Vineet Kumar in the Harvard Business Review

One of the things that has really been getting me going lately is the attitude people have toward business services online.

As a disclaimer, in this article I’m mostly referring to business-to-business (or government) services, not consumer-facing ones (although it’s getting harder to tell one from another). My experience is in the B2B/B2G space so I don’t think I can confidently talk about B2C as much.

I’m writing this because I’m getting a bit sick of this question/comment:

I really love your service, but it’s not free. Why isn’t it free?

{Other service that is similar but different/less fully featured} is…

Which really annoys the s%^t out of me.

Why should it be free? Do you work for free? Because I don’t…free doesn’t even pay for cat food, and a cat is a necessity for any serious online-working person.

The cause of the freemium disaster

I point the finger at the cause of all this on the attitude that startups are perpetuating, and their enablers the media, government and their customers.

What’s this attitude? It’s simple.

Launch a product, get lots of users, then get venture capital. Then worry about the business model.

As a result, we have a whole lot of startups dependent or expectant on venture capital to become ‘successful’, whether it’s ‘angel’, ‘early stage’, ‘Series A’ or whatever.

This causes two problems: one, entrepreneurs blame failure on the lack of VC funding (in Australia, ‘they just didn’t understand our potential’, whatever reason); and two, people think that to launch a successful startup you need VC funding, which is just wrong and raises the barrier for people wanting to launch something.

This is heavily perpetuated in the media, who frequently celebrate the latest funding round a company has closed, even if it’s losing tons of money every day. Cash raised as a lifeline to try and bail out a business until it pivots successfully enough to have an actual revenue model is not something to celebrate.

Now don’t get me wrong, there is a place for VC funding. And it’s usually in business growth or expansion into other markets. But (IMHO) nobody should be funding B2B models that don’t have a revenue model that will at a minimum break even within 6 months. The best VC funding is that which allows the business to make short-term purchases (whether product, development time, advertising, etc) in order to scale up revenue. If your cost of acquisition is greater than one or two months of customer revenue and you’re an early stage startup, you have problems.

What happens when you refuse to pay

Startups should make people’s lives easier, and this should easily and directly translate into savings for a B2B startup’s customers.

But when that customer refuses to pay because ‘it should be free’, you’re essentially saying that someone else should do the work to improve your efficiency and bottom line, and you shouldn’t compensate them for it.

The simple answer is it costs money to build stuff. That startup you’re essentially squeezing for extra dollars that you’re actually saving from your bottom line feels the pain. They’re a startup…and unless they’re VC funded (see above), they don’t have piles of cash to sit on and wait until you reach the stage you’re willing to part with some cash.

This leads to a few things:

  1. The startup goes belly up.
    Bad for everyone, because your tool is now gone (here comes the cost of re-training staff, switching tools etc) and of course the startup has failed, rightfully or wrongfully. This is also a risk of using open-source software, which is a conversation for another time.
  2. The startup has to iterate into a business model, which annoys the customer.
    Look at (for example) Facebook. They have raise the ire of many by providing a free platform, and then slowly (or more recently, not-so-slowly) forcing business users to ‘pay to play’ to get the same results. It’s not good for anyone.
  3. You become the product.
    The old ‘no such thing as a free lunch’ argument. I could easily run a free service that lets you look at your Facebook Insights, then turn around and sell all your insights to your competitor. And if you’re not paying, good luck claiming that the terms of service (which would probably say we can do whatever we want with your data, but you didn’t read them because who does) have been violated by someone you aren’t paying….it’s likely to lead back to (1) anyway.

As a real-life example, and the cause of this post is our service Schedugram which lets businesses upload and schedule content to one or more Instagram accounts. Most of our customers are agencies or small businesses who use our service to save time.

Now I definitely bootstrapped the startup — we had (/have) no venture capital funding, so it was self-funded to a minimum viable product and then funded from revenue from there. After 1-2 months of mucking around trying to find a solution, we then did the build for version 1.0 between mid-December and mid-January. Luckily for us, it’s actually a simple product to build on the user’s end, but the ‘posting end’ is far more complex. So we launched mid-January with some beta testers (people I knew) on free accounts, then started to collect revenue from February.

Now in February, we were still really a beta product. So yes, things went wrong. Things broke (rather frequently unfortunately) and we had to learn and iterate. Some customers hated this, and fair enough. Others were okay with it (and thank you guys 🙂 ) and understood that new platforms take time to perfect. Without those customers, Schedugram wouldn’t have made it to the (99.99% working) product it is today.

But even now we have people commenting about how ‘horribly expensive’ it is, or asking for indefinite free trial accounts. We have a 7 day trial. It’s to let you work out if the service will work for you — in terms of workflow, our feature set etc.

Our pricing starts at $13 a month, but then becomes rapidly more expensive as you add more Instagram accounts. This is because our costs scale with Instagram accounts more than ‘users’ – we have to buy more tablets, support more tickets and monitor more systems.

$13 a month is a lot more than equivalent products like Hootsuite who offer a freemium of 3 accounts for free, ~$10 for 50 accounts, and then a heck of a lot more for enterprise customers who have some more features as well as better workflow etc. But Hootsuite a) has venture capital (totalling $190 million) which lets them run a ‘loss leader’, and b) has far lower ongoing costs, because APIs are cheap to interact with compared to physical tablets which are ~$400 a pop.

But $13 a month per account is actually cheap as hell. Let me show you how we got there.

We know that on average our service saves the average customer 1-2 hours per week, per Instagram account they manage. Some people manage just one, others manage five, others fifty (yes, fifty).

So let’s say you spend 6 hours a month manually posting stuff to Instagram. With us, you can now spend 4. Time for a cost-benefit analysis!

Cost: $13 /mth

Benefit: 4 hours of time /mth

Cost equivalence: $3.25 per hour

OK so essentially, it works out in your favour if you value your time at more than $3.25 an hour. We could just as easily set that at $10 per hour and still reasonably (in my opinion) charge $40 a month, and you’d still be ahead. You can have that time back to spend on other activities, which hopefully will earn you more revenue (or alternatively more time to relax, whereby it becomes a ‘how much do you value having time off’ question but still just as valid).

Even if we only saved you one hour of time a month, that’s still $13 an hour and probably still less than you are paid (or less than you charge your customer).

So when you come and say that it’s really expensive, you can quite frankly go stuff yourself. If it’s not saving you time, you shouldn’t be using it…and we shouldn’t be charging you for it, or even offering it as a service. Post manually to Instagram by hand – that’s ‘free’.

Of course, conversely we do offer a reducing ‘per account’ price as you move to larger accounts. Our instaBoss account costs $5 per account per month, so there is definitely some economies of scale, which I’m not even certain we should be offering. Why? Our larger customers are typically agencies who are already charging their customers 1-3 hours a week to manage Instagram. I sincerely doubt (for many reasons, including ‘I probably wouldn’t if I were them anyway’) that they’re passing the full cost saving (or any) onto their customers, so we’re enabling a big chunk of new revenue for them, which I’m fine with – but don’t come and complain that your newly-found-time-and-revenue should be more revenue, because Hootsuite is cheaper/free.

The solution for everyone

In short, as a customer, pay for the services you use. Pay for them proportionally to the amount of money (time = money) you save by using them. Not paying them will cause you problems in the long term.

As a service, charge based on the amount of money/time you save (aka ‘Value based Pricing). And if customers complain about this, then either a) you have estimated the savings incorrectly [after all, it can change over time] or b) the customer shouldn’t be a customer. And don’t run your service at a loss — all you’re doing is teaching customers that they can get things of business value for free, which is going to be a problem for you in the future (next rant: why ‘content marketing’ shouldn’t be free).

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