'Free' Versus 'Paid' Model for New Services

Newsite

Hey guys,

Quick one on charging for a service up front versus making it completely free for a while before introducing a fee. I am planning on launching a site where two groups of people will be able to interact and obtain a product or service. Let’s say hypothetically that it’s a site where people can sell used and hard-to-find books to people with an interest in purchasing them. Here are the two possible scenarios I am considering:

1) Make it completely free for sellers to register and post a ‘book for sale’ ad, and completely free for buyers to contact them through the site. Then, once the site has registered lots of new members, is getting good press and has gained critical mass – look to introduce a modest fee to contact book sellers.

2) Implement a payment model from the start. If a buyer wishes to contact a seller to bid for a book or express interest in it, he has to sign up as a subscribed member at a very modest fee. One additional advantage to this model is that you are more likely to have more committed buyers with a genuine interest in purchasing (i.e. fewer timewasters!) than if the site were completely free. You also start to generate revenue from launch.

As I see it here at the pros and cons of each method:

‘Free at the start’ model:

Pros:

1. Zero barrier to entry. Everyone and anyone can join, and everyone loves to use something for free (especially these days). No need to get out your credit card, join PayPal etc.
2. Demonstrate value at no-risk: In other words, users of the site get to try out the site at no risk. If it works for them, they will be less bothered by the introduction of a modest fee as they feel they are already getting good value.
3. The fact that it is free means that it should get great press as it’s win-win for everyone. Even if I don’t sell my books (seller) or don’t get to purchase the book I wanted (buyer), I have lost nothing really.

Cons:

1. The main disadvantage I see is that people may be reluctant to pay for a service that was previously free, even if it is only a nominal charge.

‘Paid from the start’ model:

Pros:

1. You set the bar at the start. Sure, if you’re target market is 100,000 people and only 1,000 join as opposed to the 10,000 who would have joined if it were free, you will still get a reasonable number of members, who are all paying a fee which is generating revenue (I would expect my service to attract quite a reasonably high number of members, especially given the nominal fee).

2. You get a ‘higher quality’ membership profile. Sure, the numbers very likely won’t be as high as if the service were completely free, but you get a more committed member – who may also be more likely to use the service and continue to let their membership renew as a result.

Cons:

1. Here is the biggest one I feel, and the reason why I feel it’s best to perhaps go with the free model: If people see they have to pay, you don’t get the numbers you need to achieve critical mass and get a head-start on any would-be competitors. This means that anyone could see your idea and go ‘I’ll make it free, get lots more members than that guy, and THEN I can introduce paid membership and maybe even advertising, etc – as I have the numbers'!

2. In line with the one above – paid membership means fewer members...fewer members means less press/publicity/praise – which means less exposure and less of a chance to test the concept to see what’s going to work for you and what the potential is.

So...there you go! Let me know your thoughts as I’d love to hear them. As I said, I feel the safer option and the one I’m more comfortable with is the free model. Having a site that gets to be a real hit is and secures loads of members and activity is more important to me than making lots of money (although that is important too!). I guess this is the Facebook/Twitter approach – build the product, gain critical mass and tonnes of users – then look to monetise in good time.

My only concern would be that people don’t pay the fee after a time...prob not something to be too concerned about given it will be very small...

Newsite

Any tips guys?

Got a bit carried away but you only need to scan over it to get the gist!

Gambler

What about a limited free service with added features to paying customers? Some SAS sites for example use a first 5 users\employees free but it costs to go over that level.

In the format you are taking about maybe a service where you can sign up and make a limited amount of contact for free but to make full use of the service you have to pay a nominal fee?

Enough that once or twice off customers can use it for free and tell others how good the site\service was but for customers that are making heavy use of the site (in your example maybe a book dealer who deals exclusively in rare books) are paying a fee for the service..

TheCostumeShop.ie: Ronan

In your example hypothesis, neither business model works. People won't pay to join a site few or no other users use; and people won't pay for a site in the long term that's success and what attracted user to the site was the fact that it was free.

If you give something away for free then you are placing a value on it for your customers.

I think you need to re-address different business models that could work. For example some of the below models would be more suitable:

1. Pay a transaction fee on purchases (E-bay model)
2. Support site with ads and monetarise the eyeballs (Google's Model)
3. Premium listings for reliable suppliers (Alibaba model)
4. Free to view, pay to initiate contact (Dating Sites Model)

This list goes on and on...

Newsite

Hey Ronan,

Thanks for the reply. My responses/comments below:

TheCostumeShop.ie: Ronan wrote: »

In your example hypothesis, neither business model works. People won't pay to join a site few or no other users use; and people won't pay for a site in the long term that's success and what attracted user to the site was the fact that it was free.

Maybe I'm picking you up wrong, but I disagree...otherwise how could any successful website (in terms of users/recognition as something which provides real value) ever make money. For example, let's say Daft.ie started off free for all to use (it may actually have been, and probably was?). Once it reached a large number of users, it made sense for estate agents to pay to advertise on it, right? In fact, they couldn't afford not to.

Also I don't think that any site where the main attraction is that it is free is going to be worthy of paying for anyway - it has to offer more than that!

So what I'm really saying is:

1) Build a large user base
2) Demonstrate the value of your service
3) Charge a nominal fee for the service

TheCostumeShop.ie: Ronan wrote: »

1. Pay a transaction fee on purchases (E-bay model)

The example I used prob wasn't the most suitable - the site won't be offering products, it will be offering services. To make use of the service, the person requesting the service contacts the provider through the site.

TheCostumeShop.ie: Ronan wrote: »

Free to view, pay to initiate contact (Dating Sites Model)

This is actually the model I mentioned introducing? Maybe I didn't call it out enough...but the way it would work is that it is free to browse available services, but to contact the provider, you have to pay (i.e. subscribe or pay a one-off fee)...

TheCostumeShop.ie: Ronan

If you're charging from the start then it's not the "free model", so not sure how these two relate then. So my point was more, find a model that is working for someone else and use it's strong points.

Your concern was that people won't pay usage fee's after a time if it was free first. It's a valid concern, because they won't pay for something if you change the model that they love so much. If it's a success and then you change it you'll find one of the most avid users will just replicate it and steal your thunder.

So start with a model that is sustainable in the long term.

tricky D

Freemium = free basic service, then tiered pricing model for more service, features etc...

Free! Why $0.00 Is the Future of Business

mikefm

I would advise 'free trials' or free usage for x days/months/credits. Users know from the outset that a price is en-route. Plus, when everything is free, users may not value the offering/company...