Brad Feld

Tag: freemium

I loved this quote by Tristan Harris in the New York Magazine article The Internet Apologizes …

“We cannot afford the advertising business model. The price of free is actually too high. It is literally destroying our society, because it incentivizes automated systems that have these inherent flaws. Cambridge Analytica is the easiest way of explaining why that’s true. Because that wasn’t an abuse by a bad actor — that was the inherent platform. The problem with Facebook is Facebook.”

The article ends with a parallel quote from Tim Berners-Lee, creator of the World Wide Web

“The web that many connected to years ago is not what new users will find today. The fact that power is concentrated among so few companies has made it possible to weaponize the web at scale.”

I just read the article and all of the attached long-form interviews. I think my favorite, only because it’s so provocative, is the one with Roger McNamee titled ‘You Have a Persuasion Engine Unlike Any Created in History’

There are a few mentions of Zynga (which we were investors in) in the various article chain which caused me to reflect even more on the 2007 – 2010 time period when free-to-consumer (supported by advertising) was suddenly conflated with freemium (or free trials for enterprise software). The later (freemium) became a foundational part of the B2B SaaS business model, while the former became an extremely complex dance between digital advertising and user data.

Tristan’s quote “the price of free is actually too high” is important to consider. What is going on here (“free services”) is nothing new. The entire television industry was created on it (broadcast TV was free, supported by advertising, dating back well before I was born.) Nielsen ratings started for radio in the 1940s and TV in the 1950s. The idea of advertisers targeting users of free services based on data is, well, not new.

Propaganda is not new either. The etymology of the word from Wikipedia is entertaining in its own right.

“Propaganda is a modern Latin word, the gerundive form of propagare, meaning to spread or to propagate, thus propaganda means that which is to be propagated.Originally this word derived from a new administrative body of the Catholic church (congregation) created in 1622, called the Congregatio de Propaganda Fide (Congregation for Propagating the Faith), or informally simply Propaganda. Its activity was aimed at “propagating” the Catholic faith in non-Catholic countries From the 1790s, the term began being used also to refer to propaganda in secular activities. The term began taking a pejorative or negative connotation in the mid-19th century, when it was used in the political sphere.”

So what? Why the fuss? A cynic would say something like “this is not what the hippy-techies of the 60s wanted.” True, that. But the arch of human society is littered with outcomes that diverge wildly from the intended actions. Just watch Game of Thrones or Homeland to get a feeling for that, unless you struggle with conflating fact and fiction, which seems less of a problem for many people every day based on the information we consume and regurgitate.

I think something more profound is going on here. We are getting a first taste of how difficult it is for a world in which humans and computers are intrinsically linked. Tristian’s punch line “The problem with Facebook is Facebook” hints at this. Is the problem the leadership of Facebook, the people of Facebook, the users of Facebook, the software of Facebook, the algorithms of Facebook, what people do with the data from Facebook, or something else. Just try to pull those apart and make sense of it.

I think this is a pivotal moment for humans. I’ve heard the cliche “the genie can’t be put back in the bottle” numerous times over the past few weeks. Any reader of Will and Ariel Durant know that the big transitions are hard to see when you are in them but easy to see with the benefit of decades of hindsight. This might be that moment of transition, where there is no going back to what was before.

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.