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A difficult leap for online service providers going from free to paid services
10th March 2011

Slowly and steadily the freebies on the net are being withdrawn and paid services introduced in their stead. And this is with good reason.

 The inital heady days of the web where dotcoms traded free services for headcounts is not longer sustainable. With the world economy in doldrums and rising costs of infrastructure and manpower, even the most generous service provider with deep pockets have to turn to a viable revenue model - paid services.

The transition can be very difficult and painful for many and even the decision to go paid can be agonizingly difficult to make. But the earlier you bite the bullet the better.

Here are some factors to consider to ease the transition and create the right strategy.

Switching to Paid in a Phased Manner

Switching completely to paid cold turkey might be difficult for many sites. The drop in traffic and signups could be demoralizing. So the intermediate path is to slowly transition to paid services. Keeping the base service free with limited features and charging for more advanced services is a good strategy. This keeps the traffic due to free service up and also allows some dedicated free users to convert.

Conventional wisdom says that it will take less effort to convert a free user to paid but i don't buy into that argument. I shall explain my logic in the next few points.

What you have to keep an eye on is the conversion ratio from free to paid versus new paid users.  

Free Users & Paid Users are  never the same bunch - there is very little overlap

Although many would argue with this point and suggest that its easier to convert a free user to a paid user I feel thats not true. According to my experience people who are looking at free services are a completely different group from the paying customers.

Although demographics between free and paying users might be simliar the most important factor will always be how  seriously he/she takes your service or if he is going to use that service for a professional cause.

I feel it would be better use of the marketing effort if it was directed to finding a completely new constituency of paid users rather than  trying to convert existing free users.  

 Keep Realistic Expectation - The drop will be steep and the climb difficult.

 Whenever I speak to website owners who are about to convert fully or partly their free services to paid, I get a sense of over optimism. Although I don't recommend a negative outlook I do advocate a more realistic approach especially when they are calculating projected sales. Sometime the drop in traffic and low sales completely shocks and demoralizes website owners.

A very very small percent of free users will convert to paid. Most free users will leave looking for an alternate free service provider. The website owner must be prepared for this.

But the good news is that as the marketing team gets more efficient at selling the paid service sales will always raise slowly and steadily.

It takes much much more energy and resources to sell a paid service then a free service.

Website owners regularly underestimate the energy and resources it will take to sell paid services. Most lulled into a sense of complacency by the success of the free service do not bother to plan for the additional resources need to sell and run a paid service.

The additional resoures needed to sell a paid service would include:

  • aggressive advertising costs (both online and offline),
  • customer support,  voice, chat  and email
  • improved infrastructure to ensure higher quality of service
  • billing and accounts department for smooth billing of  customers
  • tax and legal issues
  • research and development costs as paying customer demand more features
  • and many many other which are not as obvious

 Free customers do not have a voice but Paid customers can scream!!

The tone of complaint of a free customer is completely different from that of a paid customer. You would be surprised at the authority that comes to a customer when a little money exchanges hands. Customers become aggresive, demanding, completely intolerant of any mistakes and always ready to blast you for any dip in service. Conversely praise for good service is rare and most times goes unnoticed.

Going from free to paid - you better be prepared to take a lot of crap from customers.

Your service quality must be impeccable or you will get massacred.

Be very flexible and keep an eye out for unexpected opportunities and insights.

Sometimes a free service which is doing well might not pick up as a paid service, instead some other marginal paid service might get more orders. You have to be prepared to switch gears and throw your resources into a new direction or service.

Your experieces with free services will not help. Tactics and strategy for paid services will always be more fluid and unstable.

Some key ideas for making sure you are nimble to respond to new opportunities:

  • Measure everything. Some obscure parameter might just give you a new idea  or an opportunity to expand an existing service.
  • Listen aggressively to customers. This include not only verbal feedback but also how they are using the service. Customers will always find the most effecient way to use your service and that can give you insights for future improvments and features.
  • Keep introducing new services regularly and prunes ones which are not working. Keep looking for that next blockbuster.
  • Don't concentrate all your resources on  a few or just one  service. Keep resources in reserve for new opportunities.

Conclusion - Although the transition can be difficult and painful, it can also be very rewarding once you accomplish it.

Ultimately Free means you dont get anything and that is not a recipe for becoming wealthy. Sooner or later everyone has to go paid or risk losing their shirt. The sooner you do it the better and more time you get to adapt and improve.

Cheers,
Ron

We  enable many companies to offer their  paid services online - check them out athttps://www.miracleworx.com

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