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The Trap of the ‘Free Plan’

Haebom
Recently, I met with a startup CEO and discussed pricing policies and transitions.
Offering a free plan can be a strategy to attract users early on, but for long-term profitability and sustainability, you need to consider moving to a paid model. In fact, Notion really struggled in the beginning because they set up the wrong pricing plan.
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Improving profitability: It's very rare that free users are upsold to paid users. Because of the low conversion rate, it's inefficient for startups to maintain a free plan in terms of profitability.
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For instance, if 3% of free users upgrade to a $5 per month paid plan, you’re effectively making just $0.15 per user.
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In other words, if your goal is to generate around $3,000 in revenue per month, you’d need at least 20,000 new customers every month (assuming there’s no churn).
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In reality, the paid conversion rate is often even lower than 3%. In that case, you’ll obviously need even more customers.
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Better user feedback: Paid users expect a return on their investment, so they tend to provide more concrete and helpful feedback. That feedback contributes to a startup’s growth and improvement.
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Once people spend money, they tend to see it as their own, which makes them give much more proper feedback.
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Meanwhile, those who used the service for free tend to leave quietly if they're not satisfied.
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Sustainability: Free users don’t contribute to a company’s sustainability. After all, we’re all trying to make a living, aren’t we?
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If you’re not sure you can secure new customers or don't have a clear strategy to increase their conversion rate, rushing to set a pricing policy or releasing functions for free could end up backfiring.
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And anyway, who can guarantee those two conditions — getting new customers and high conversion rates? It’s meaningless.
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Personally, the Believer Plan by Roam Research recently came to mind. They offered a 5-year unlimited account in exchange for $500 up front. In a way, it’s an investment from customers that they don’t have to pay back.
Recently, I had a chance to talk with the CEO of Scrintal, a Danish startup, and I was really impressed by their growth strategy. They had a tiny team of 6 people, sold a lifetime plan to exactly 1,000 people at $239 each, and of course it sold out. Including people who were invited by these initial customers, they've now built a community of 3,800 people.
Scrintal isn’t taking on any more subscribers and is using this approach to secure initial operating funds while building a very close relationship with customers. (It’s quite a time difference, but they’re even the ones reaching out first to suggest a Zoom call...) In any case, this approach feels really meaningful. I think that these days, unless you’re running a platform business, the strategy of using a free plan just to grow your userbase isn’t very effective or fruitful.
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haebom@kakao.com
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