Strategy for unveiling a social network?

I have identified a niche community, for which I want to build a social network.
From compete.com, I see that the TAM is at least 10K unique active users. Their web activites revolve around an archaic static site.

I believe this niche wants a social network, and will pay for it. (They spend a lot of money on this niche.) I believe I can attract 1000 paying users, say $10/mo.

However, I do not want to invest money in software development yet before I test the market.
I have found some open source social network software, which has basic functionality. It does not support different account levels, or payment, or more advanced features. But I think it is enough to attract the customers.

Here is my current strategy:

1. Launch the social network, and make it free.
2. Draw 1000 users, at least 100 of whom are very active.
3. Email a fraction of the users, saying that we are going to switch to a paying model with more features, and they should sign up with the special offer. Give a variety of price points to different users, to see what has highest conversion*rate.
4. Tell all users that we are going to switch to a paying model with more features, and offer the best pricepoint.
5. Hire a web developer to implement the extra features and the different account levels.
6. Downgrade unpaid users to read-only access.

What are people's thoughts on this strategy?

I know that it is preferable to get people to pay from day one, and that downgrading someone's privileges is not as good as making them pay but giving them a one-month back guarantee. However, I don't want to invest much money upfront until I have proven that I can draw the market. I also believe that once the users try the site, they will eagerly spend money because they appreciate the social aspect so much more than the archaic static site.

I was with you up until the last step. You downgrade me I will immediately leave, and let people know to avoid that site.

Word of mouth to get visitors is helpful, but people are more likely to share negative comments/feelings with people, not only friends, but over Twitter, for example.

If you believe the niche market is going to be successful, your best bet is to start working on a better solution with new features, to see how you can go about doing it, as, if you have to write your own software completely then that will be more time. You need to understand what you can use or buy and what you must build to get an idea as to how feasible it is.

You may create a problem if you start with one open-source solution and people get used to it, then you change their experience, that will make people unhappy, and, probably less likely to use it.

The fact that you don't want to start work on it upfront tells me that you are worried that it may not be as good an idea as you think.

You may want to draw out carefully how you plan on keeping the user experience the same, as you want to save all the data that is accumulated during your initial test, but that means that migration is an issue.

Your idea can work, as there are other sites that have done something similar, but you need to be very careful in how you design it, how you approach this idea.

UPDATE: My response to a comment got too long, so I thought I would just do an update.

On a social site, if my needs were met, but then, it was pay or suffer, then I would leave, as, if that is the attitude of the site, who knows what else I will deal with later. Will they again come up with another fee or face a downgrade? It isn't worth it.

There is so many options now, and so many open-source programs tend to be better than many for-profit ones, so expectations have evolved.

I expect it is getting harder to get people to pay for sites when someone else will just find a different way to make money by offering access for free.

Once you start to offer new features, what is to stop someone from offering those features for free, on an ad-based site, if it seems successful.

Plan to pay that web developer to implement extra features, but don't remove any features from your free service. You may find that the percentage of users willing to overcome the "free" hurdle is smaller than you think.

Also, why prevent the unpaid users from adding content to your site? Content can be as valuable as subscription fees, if you know how to use it.

Finally, consider having the web developer build one or more alternative monetization channels for you (advertising, lead generation, data collection, ...) Perhaps this article will provide some inspiration:

Free! Why $0.00 Is the Future of Business

To be honest I hate the idea of trying to suck in contributors with a free model and then switching to a pay model. You're putting people that have help make the site successful in the position to pay or leave the investment they have made. Seems like a bait and switch model to me.

Could you instead figure out a way to generate revenue from the community without charging using sponsors, targeted ads or just charging for extra features you add (without taking anything away from the free experience).

Imagine if Twitter with all it's success went to users and said "we're switching to a pay model and you'll have to pay $0.02/tweet from now on." Even with their success there is a good chance it would kill them.

I more or less agree with James' answer, at least in the context of social networking. Members are contributing some value by joining the site, inviting their friends, contributing content, etc. The other obstacle is that the "anchor" (conventional) price for social networking sites is free (at least for average users).

I think it would definitely be a shock to downgrade existing users - i.e. "pay or suffer" as James more eloquently put in his answer.

For example, I got a friendly message from Flickr this week saying they'll start to hide my older photos, once I upload more than 200 photos. This isn't quite as severe as making my whole account read only, but I was still a little shocked ... nonetheless, I'm still planning to upgrade to their "Pro" account. I've grown to appreciate the value Flickr provides, and the Pro account is still very affordable. As another example, LinkedIn offers a free account, but paid accounts have features targeting recruiters and other power users; they've never threatened to make my free account read only, but I'd be pretty upset & shocked if they did.

John, I know this is not an answer and is a question within question but thought you might be able to help. I was wondering if would share names of some of the open source softwares you have found. Thanks in advance.

I don't think there's anything wrong with charging users for premium features on an otherwise free site.

It's also hard to start charging customers for service when you're still acquiring customers. So I understand where John's coming from.