Image via CrunchBase

Yesterday, Zoli posted about Jott’s decision to do away with the free model. My philosophy is that it costs money on the infrastructure front to host web based services and it is OK to charge for the Web 2.0 or SaaS applications. However, Jott’s move from freemium to completely paid option brings the plight of users into focus. In this post, I will offer a counterpoint to my own and Zoli’s philosophy on this paid web application strategy.

A freemium model is one where the basic service if offered as free and advanced plans with more features are offered for a reasonable amount. Some of the freemium providers, like Zoho (disclaimer: Zoho is the sponsor of the blog but this is my independent personal opinion), don’t push ads on the free versions while others use ads to cover the costs associated with the free accounts. Jott belongs to the latter category.

Let us sit back and understand the dynamics between the app developers (or the company behind the apps) and the users. From the days of desktop computing, the normal practice for the developers is to release the beta version of the software for free so that users can check it out. Once the software is released, the users will have to shell out money from their pockets to continue using the software. Since users opt in to the beta test out of their own will, this model worked out well without any problems. This beta testing approach carried over to Web 2.0/SaaS based world seamlessly and worked well.

What changed in the Web 2.0/SaaS world is that some of the vendors started offering applications through the web adapted freemium models. After the beta period, users were offered free access to their applications with reduced functionality. Companies used this as a bait to lure users into paying for advanced service with more options. Usually, people sign up for the free plans and around 2% of them moved to higher paid plans (Note: Jott’s claim that 30% of their free users converted to paid option is a news to me and, from what I heard from various companies, the conversion factor is 2-5%). All the companies set up their terms and conditions in such a way that they keep the right to charge for the service any time and all the users willingly (well, I am assuming that they are reading the terms and conditions) agree to this. So, legally Jott hasn’t done anything wrong.

But, if we see this from the consumer perspective, the free users have invested their valuable time and, in some cases, money on these Web 2.0/SaaS services. If it is a social network, they have used their valuable time to build relationships on the social platform. If it is a storage service, they have spend time uploading their documents, music, pictures, videos, etc.. In the case of Jott, the users have uploaded their thoughts over time into their service. They spend considerable amount of time (in some cases, money too) putting their data into these services. Once they have their data into the service, they invite their friends to the service thereby adding value to their data and the service (by contributing to what is known as network effects, which plays a major role in the success of such services). The free users also contribute to the improvement of the service by submitting bug reports and also, in a way, help the company understand some of the aspects like scalability, security, etc.. In short, the app vendor is not doing a charity for their free users. They derive considerable value from these “freeloaders”.

I am a strong believer in the true form of capitalism. In my opinion, the true form of capitalism should protect the rights of all the players and not just the select few. When a company, like Jott, moves from a freemium model to a completely paid model, we usually see from the company’s business perspective and justify its move. Often, we ignore the time (and money in some cases) invested by these free users in putting their data into the service and, also, the value they add to the service by using it. I think this is a case of taking advantage of users which goes against the principles of capitalism. A company, which relies on the ad money to keep their service running, should have thought about bad times in advance. They should have taken care of it as a part of their initial pricing strategy. They should not take advantage of the helplessness of the users (well, if a company changes track after the users invest their time putting data inside their service, the users are, indeed, helpless) to protect their bases from the fallout of their own mistakes. Such actions on the part of Web 2.0/SaaS companies will discourage users from putting their data on the clouds. Irresponsibility of few companies has the potential to completely damage whatever little trust users have on the Cloud based computing. It is time for all the entrepreneurs, venture capitalists, evangelists and others in the Cloud Computing community to think deeply about the business strategies and pricing models so that we don’t break the trust users keep on us while putting their data away in far away datacenters.