When 'free' doesn't pay off
Offering a product too cheaply can devalue it for customers. Here's how to zoom in on the right price point.
Emil G., Santa Monica
Is making a service free more counterproductive then selling the same service at a low cost? We recently put together a highly defined service in which we analyze the conversion rates of Web sites and make strategic suggestions – which we were already doing, it just wasn't separated out into its own service like it is now. Our plan was to begin offering it for free initially while we worked out the kinks, but since dropping the price to zero, it seems we've stripped the value in our clients' eyes. I expected the opposite. Any suggestions?
By Kathleen Ryan O’Connor, CNNMoney.com contributing writer
The concept of "no free lunch" is so ingrained in the business culture, you can’t really blame customers for looking askance at a free service. After all, if it’s so great, why aren’t you charging for it?
“Pricing is a part art and part science, and how you price a service will have a massive influence over what people perceive the value of your service to be,” says Mike McDerment, CEO and founder of FreshBooks, an online invoicing service that uses a “freemium” business model. FreshBooks' basic products are offered for free, but customers are charged for advanced or premium features.
“From the start, you need to set your clients’ expectations that the service is in fact worth paying for,” McDerment says. “If they have used it for free or with limited capabilities, then they should understand the value of the service and therefore be willing to pay. If they are not willing to pay after trying the service, then they never would have paid.”
He suggests that your first step going forward should be to tell your clients that you will soon start charging for the service. You can set expectations: Tell them the new rates will take effect in 30 or 60 days, or will kick in after they cross a designated usage threshold. “Step two, start charging them," McDerment says.
The pricing issue isn’t unique to the Web, says Mary Wolfinbarger, a professor of marketing at California State University Long Beach.
“When consumers don’t know how to value a product, price becomes a signal for the value of the product,” she says. “Digital products are in a class of products that consumers may find difficult to determine the value for.”
Haroon Mokhtarzada, CEO of the social media and Web hosting company Webs.com, has firsthand experience with the value of perceived premiums. Like FreshBooks, Webs.com uses a "freemium" model, but it recently changed its name from Freewebs.
For your service, conversion-rate analysis could be part of what you offer for free, but given its importance these days, you should make the service's value clear by holding back some of your insights. For instance, you could offer just one or two suggestions from a battery of 10, and let customers try out your tips to see the results, Mokhtarzada suggests.
“The whole game on the Internet is to improve those flows and that’s what every company is looking to do,” he says.
So is any damage permanent?
Nope, our experts say. Peter Boritz, president of Real Data Management, a New York City technology and consulting firm, recommends recasting your free offering as a limited beta test, open to clients you trust to help you incubate your ideas.
“Consider them to be part of a pilot,” he says. “Get feedback and testimonials.”
“Most of their potential clients haven’t heard of them yet," Mokhtarzada says. "That’s the great advantage of the Internet. You have a new release, a new push. With the Internet, you just change it the next day and it’s different.”
Give us your advice: Check out recent “Ask & Answer” questions.
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From Jessica Routier, IAC-EZ Buffalo, South Dakota Great article!
Every service and software has different pricing and different pricing scales. I believe a viable business will set their pricing based on their business model and long term goals. I also believe that you get what you pay for!
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Emil, your dilemna is an interesting one. We launched a new PR tool this year (www.PitchRate.com) and it's amazing how many people question its value simply because it's free. For many companies (like us), providing a free product or service is just another way to give back to the community we are a part of. We have a full-service PR firm that "wins the bread". The free service is just a way to provide value to small businesses that can't afford a PR firm, potential clients, or those that have completed their campaigns with us.