Is 'free' a bad idea in business applications?

In the case of business SaaS, specifically in a market where this type of software is never free what are the arguments regarding launching your product for free?

More specifically the idea would be to launch as a free SaaS (in a very early alpha) in an attempt to gain at least some market share with the expectation to begin charging (or perhaps provide a freemium model) once the product reaches a certain level of maturity and functionality.

Do I risk alienating customers if suddenly my product goes from free to paid and more importantly do you risk destroying your ability to make money off your customers by providing your product for free (particularly when advertising is not really an option for my product)?

Great question. Free is what you make of it.

Positives given your situation.

• You can open the market up to smaller players who can't afford the big stuff yet.
• You can get a solid market share.
• You get to test your ideas and are more likely to get feedback, which at the outset is far more valuable.

• How are you going to pay for the development?
• Where are your users going to come from?
• If you can't do advertising then what sort of volumes can you get? Freeium models are good but you have to work on 90 to 96% of users being free (well if you listen to EverNote that is what they have). They just have millions of users which is more than they need.

And the answer is, many ways depending on your specific app and market segment.

• you can clip the ticket on transactions. If your system manages transactions for people you can make an easy 1% on every transaction.
• you can have a captive audience that is re-purposed. The Stack Exchange network we are on is free for all the people like us, but we are being sold in two key ways:
  
  • We are being advertised to with very targeted advertising (in the non-beta sites).
  • There is Jobs 2.0 that uses the reputations we gain on these sites as the draw card for employers to pay for job listings.
  • there will be others come out, have that many the opportunities present themselves.
• You can find your users more work... charging their clients for the connection, the transaction or the quality assurance.
• You can use your client base as a collective buying power, in the case of one company they had one discussion site which had 1000s of loyal fans but they couldn't make money out of them ... so they created a website to allow fans to collectively buy wine ... and made their margin. They recently got bought by one of Australasia largest online retailers.

There are lots more ways but I would have to know your business model a bit better to be able to pick it.

Businesses, unlike individuals, understand that things cost money and are willing to pay (they already charge customers and pay suppliers - they are used to pay for things).

When you give away business software for free you get several undesirable results:

1. You don't validate your product viability - getting free signups does not imply people are willing to pay for the product.
2. You tell your customers the product is worthless - after all you are giving it away for free and "you get what you pay for"
3. You get bad customers - successful business become successful by getting customers to pay, they will avoid using free services because they expect you business will not be successful without getting customers to pay - businesses that will use free services are the unsuccessful businesses and companies run by cheap idiots, you don't want those as your customers.
4. You don't have money for marketing and running your company - advertising costs money (lots of it), servers and bandwidth costs money, the accountant you need to help you with your taxes also wants to be paid - even without employees it costs quite a bit to run a business.

For consumer SaaS apps you have a real problems because people expect to get everything for free but businesses don't have that expectation.

I run a tiny one-man software company, I pay for many services - if it makes me money I gladly pay, if it doesn't I wouldn't use it for free.

I sell a business app and a consumer app (both paid apps):

The business app is selling nicely, people are paying and sending me thank you e-mails.

The consumer app isn't doing so well - but almost all paying customers are business owners - because businesses pay for stuff they use.

So - if your product is worth something charge for it, if it doesn't make something else - until you have paying customers you don't have a business just an expensive hobby.

This is my general approach when thinking about freemium models.

1. Will people pay for my service
2. Can I use freemium as a mechanism for growing my market.

If (1) turns out to be "no" - then (2) doesn't matter. So I would generally recommend that you start charging right from the start. That way you can prove to yourself that you have a product that people are willing to pay for. You also get the opportunity to learn from no-sales and improve the product before you take it to the masses.

There's no point trying to get thousands of users until you have a mechanism for turning those users into money. Until that point you're just adding the expenses of scaling your system and supporting those users with no benefit to your organisation. Especially if you start scaling with the wrong product offering because you've not validated it with sales yet.

About the only exception to that is if scaling is part of the money making strategy (e.g. advertising).

Free isn’t necessarily a bad idea, but you need to be very careful when you deploy it. I’ve always seen free accounts as a marketing strategy; it typically promotes word of mouth and creates brand loyalty. If you don’t deploy it, a competitor will and it will chip away at your market share.

At my startup, Compilr.com, we were getting very frustrated with our low conversion from free to paid accounts so we decided to go paid-only. On the surface the numbers looked better. Our conversion nearly doubled by going paid-only. However, our traffic growth went from nearly 15% (from the free version) down to about 5% on the paid-only version. On the surface our revenue was way up, but it didn’t scale as well as the free version.

In addition, by limiting our product to paid-only it became very hard for us to understand what features were helping retention and adding value to the product. Now, we can gather data on what features our top 10% use and create pay walls around them.

Our goal now is to create the best free product in the space, get our users really addicted to the service and convert them over time. Evernote says it typically takes them about 2 years to convert their users. I highly suggest watching Phil from Evernote’s talk:
http://vimeo.com/11932184

When using free, it needs to drive paid, so think about why free will drive more paid users.

For Google search, having their service free means more people use it, and the more people using Google search, the more valuable advertising with Google becomes. The free part increases the value of the paid part.

In a freemium online games, you either purchase items to make you more powerful or look cooler, or have more bragging rights, or whatever. Without sufficient other people, that becomes less attractive, less cool, so whether they're aware of it or not, the paid users are essentially paying for free users to play.

Free trials and limited versions are slightly different in that they don't inherently increase the value for paid users, but it breaks down natural human barrier to at least giving the product a try. This captures the part of the market that really like your product but wasn't sure that they would before trying. It's like Amazon's 1-click buy option. It reduces the number of opportunities/reasons for people to back out.

Free is a tool like any other, you need to determine if it's the right tool for you.

My company develops Customer Service software. It is paid service hosted on companies servers.
We had two problems.

• It is hard to re-write and keep it reliable as before.
• Competitors are lowering pricing.

We developed a new service using absolutely new code and launched it as free service.
We have 0-3 free signup per day for 2 month already.

Nobody uses it in production yet.

We will come with new features and paid plans in future.
Only thing we have is a mailing list of people who registered.

If you will come with free service then you should not expect it would be easy to get free users.

IF you would be able to target your users then you could sell ads.

e.g.
helpdesk click on google is up to $6 per click
"webhosting" clicks are expensive as well.

when you offer a service for FREE, you have to find other creative means of obtaining your profits. Some of these may be along the lines of:

• Additional pay-for services
• Advertising


• Information sharing (analytical data)
• Pay-for seminars/certifications on the product(s)

Figure out what other means of obtaining profits are available to you and go from there.