Today I’m continuing a mini-series started 3 weeks ago with the intro: How Software Can Be Resilient to Recession which I wrote before the bottom fell out of all markets in the world, and recession-doom-talk became popular. Since one of the key conclusions in the first piece was for software startups to turn towards business, offer value and charge for it, it only made sense to follow up yesterday by a more detailed post on How to Sell to Enterprises in a Recession.
Yesterday in a corporate context I used Rod Boothby’s Taxi Fare metaphor, i.e. flying in below the radar screen, at prices that are expensable, not approvable as the recipe for ongoing enterprise sales in a recession. But today we’ll look at revenue-generation on the consumer market, where the taxi-fare is too expensive… we better find a new metaphor. How about lunch-money? Nothing fancy, just cheap fast food.
But wait, you can’t charge consumers, web 2.0 is about getting it all for free, isn’t it? While I never particularly liked it, let’s face it, the free, ad-supported model worked for a while – but it’s about to come crashing down fast. That leaves us with the fundamental rule in business: deliver value, get paid.
The genius in the Freemium model is that it allows new services to gain traction, essentially using us, free users as the marketing vehicle, then is we get hooked, we’re likely upgrade to enhanced services for a fee. This is neither “free” nor “bait-and-switch” – a completely acceptable, normal business model. In fact I think – especially in bad times like now – a switch by a popular service after their beta period to a fully paid model is also reasonable, albeit not easy.
Josh Kopelman @ Redeye VC laid the difficulty out in his excellent post, the Penny Gap, arguing that that assuming consistent price elasticity is a trap: going from $1 to $5 or $5 to $20 is easier than getting the customer to pay anything at all:
The biggest gap in any venture is that between a service that is free and one that costs a penny.
Perhaps. Or not. The case he cites, that of the pay-per-download music sites of the late 90s vs. Napster or Kaza certainly proves him right, but I believe business or productivity-focused applications are different. Different, because we need them every day. If I am hooked enough on a good service that I really don’t want to lose, there must be a price point low enough to entice me, and another one where paying for it becomes a no-brainer. For mass appeal, it should not be a “business decision”. Do you think twice before grabbing a coffee at Starbucks, or grab a quick sandwich for lunch?
Would you spend lunch-money (or just the price of a coffee) on a service you “can’t live without”?
Random examples:
- I started blogging on free BlogSpot, but a week later switched to a paid platform, and never looked back.
- I’m finding Zemanta tremendously helpful (OK, it’s great with finding relevant textual content, not-so-good with images). If tomorrow I had to pick between losing them or paying $3, I would not even blink. (I’d probably pay $10, but that may be too high for a bigger crowd)
- Twitter’s lack of business model has been discussed a lot: if tomorrow you’d have to make a call, would you really not cough up a dollar or two to keep it?
- Last year while helping select participants for the Under the Radar Office 2.0 event, I previewed Timebridge and a few similar services – all heavily VC-backed. To my greatest surprise I discovered Timetomeet, a tiny bootstrapped competitor, that was good enough for my needs, and the Pro version sold for less than a buck/ month. I signed up for 6 month for $5 without thinking.
- Jott was a very popular free service for two years before they introduced paid services. After the initial revolt they are quite happy with the conversion rate.
The list could go on, and I’m sure most of us has a shortlist of 5 (10?) services we just “can’t live without” and would rather pay than lose them.
Now let’s consider this from the Web startup’s point of view:
- Traction: you still need the viral spread, and for that nothing beats free. I don’t believe charging out of the gate is an option. You need traction and an established brand first.
- The no-brainer price: is it $30… $10… $5? For any one service $10 may be reasonable, but since we likely have a few favorites, those dollars add up.. which is why I think the $3 and lower range (coffee price) works best. Of course to make a living on that, you need a large user base (see previous point)
- Convenience: make it really, really easy to pay. The combination of convenience and some incentive works wonders: I picked the $5/6mo plan @Timetomeet, rather then the monthly one, and Jott’s CEO was surprised at how many users picked the annual prepaid plan…
- Measure: Jott did a fair amount of data analysis which allowed them to create price packages matching the usage patterns they observed. All Web 2.0 services can do this – a key benefit of the SaaS model
- Communicate: Introducing prices may very well represent a change. A change from your original business plan, a change from user expectations. Tough. Everything changed overnight, and you / we have to adapt. Discuss the plans openly, solicit user feedback, make your users feel they create your pricing plan together with you.
So, if you are a user of Web 2.0 services (and who isn’t?), would you spend your coffee change to save your favorite ones?
Update (10/30): Here we go now, just as predicted:
