The following is a guest article by Ruben Gamez of Bidsketch.

Not too long ago it seemed like every product I knew was offering some sort of free plan. The strategy was brilliant: get loads of people using your product and eventually turn them into paying customers. Everywhere I looked there were stories of people making money hand over fist with this approach.

When 37signals talked about giving something away for free as a marketing strategy, it made a lot of sense to me:

“For us, Writeboard and Ta-da list are completely free apps that we use to get people on the path to using our other products. Also, we always offer some sort of free version of all our apps. We want people to experience the product, the interface, the usefulness of what we’ve built. Once they’re hooked, they’re much more likely to upgrade to one of the paying plans (which allow more projects or pages and gives people access to additional features like file uploading and ssl data encryption).”

So when I launched Bidsketch — a SaaS based proposal application for designers — offering a free plan was a no-brainer in my book. Out of all the important decisions I spent time mulling over before my launch, I gave this one the least thought.

Early on, things were working out nicely. In the first few days of my launch I had more people sign up for the paid plan than the free plan.

“Man, this free plan is really working out,” I thought. Here is a look at the numbers:

The numbers looked but great, but I suspected they weren’t sustainable because I had launched to my mailing list. A well-maintained mailing list tends to convert much better than traffic from other sources.

In any case, I was still happy with the results a week later, once I started converting general website traffic:

While the numbers looked good I knew they wouldn’t last because I was relying on a limited time offer. I just didn’t realize how much worse things would get:

For the next month only 1% of users would choose the paid option. My user base was growing fast but the money was barely trickling in. Also, support was starting to get tricky, which left me uncomfortable at the thought of what things would look like six months down the line.

How many of the free accounts was I able to upgrade to paid? I didn’t fare any better upselling users: 0.8% of free user accounts eventually upgraded to paid.

When things started going south, I figured I was to blame for this. I simply wasn’t carving out the right features. Or maybe I wasn’t prompting for upgrades at the right places.

I tried all sorts of tactics to convert my free users:

More upgrade prompts

Less features on free accounts

Premium features for 15 days

More emails aimed at upselling users to paid

None of these changes had a significant impact. The only thing that seemed to be consistent about my growth was that my revenue was relatively flat while my user base kept growing.

If I stayed on this path, I’d soon have thousands of free users to support.

So in a desperate attempt to get things moving in the right direction, I experimented for a week by killing my free plan. I didn’t tell anyone that I was getting rid of my free plan, I simply deleted it from my pricing page.

My major concern was that I’d keep the same number of paid users coming in and I’d lose all the free ones. Which means I wouldn’t have a targeted list of users to try to upsell to a paid plan. Not that I was having much success getting them to upgrade, but at least it was something.

Things didn’t quite turn out that way. This change that took all of five minutes to make, led to an 8x increase in paid conversions.

Look at that again. That’s not 8%. That’s 800%.

I felt comfortable enough with the results to try it out for the entire month. Amazingly, this resulted in a 10x increase in paid conversions for the month.

And I’m not the only one

It wasn’t long after I got rid of my free plan that I started to notice that a lot of people were citing similar issues with having a free plan.

I saw that 37signals had hidden theirs.

Before:

After:

And then I ran into a Mixergy interview where 37signals founder, Jason Fried, talks about their free plan (6:00 into the interview):

“… The majority of the revenues for our products come from people who sign up for the paid versions upfront. So we definitely have people upgrading from free to paid, but the majority of people who are on pay started on pay… of course, more people are going to pick the free version and stay on the free version, but if you’re looking to get paying customers, ask for money upfront and you’ll have a lot better shot of getting them.”

The so-called Freemium success stories had similarly low ratios of free to paid accounts. We can see numbers published about Pandora, Evernote, and MailChimp showing this pattern.

Pandora started out with less than 1% of their user base as paid subscribers. Once they focused on delivering a better premium offering they were able to increase that to 1.7%. Still, pretty underwhelming unless you’ve got 20 million people using your service like they do.

Evernote is looking at a 0.5% conversion rate to paid accounts initially and can convert 2% of the people that stick around for a year.

While there wasn’t a specific conversion rate published for MailChimp, they did mention the negative side effect of abuse-related issues:

“But the biggest bumps of all? A 354 percent increase in abuse-related issues like spamming, followed by a 245 percent increase in legal costs dealing people trying to game the system.”

Holy crap. Where was this info when I needed it?

CrazyEgg decided to drop its free plan in Jan of 2009 and they haven’t looked back. I asked CrazyEgg co-founder Hiten Shah why they decided to drop their free plan back then. “We thought that if we dropped it we would make more money,” said Hiten. This turned out to be a good move since it doubled their revenue that month.

LessAccounting co-founder Allan Branch said while they don’t claim to know what the best approach is in regards to a free plan, they haven’t seen a good reason to change what they’re doing now. With them, users have to sign up to a paid plan trial, and will get dropped to a free plan if they don’t enter payment information at the end of the trial. Obviously, this approach of making users choose a paid plan at signup has worked well for them so far.

An Example We Can Relate To

A lot of us aren’t at the same level that these guys are; we’re not dealing with millions of users, or even hundreds of thousands. So an example like Pluggio might be easier to relate to.

Pluggio is a Freemium Twitter web app created by Justin Vincent. He has a great stats page that shows everything from monthly revenue to the breakdown of users by plan type.

Taking a look at that page reveals that he’s actually doing very well for a relatively young app in this space.

He’s been averaging about a thousand dollars a month since November of last year. And unlike the bigger guys, his paid users make up 2.5% of all accounts. That’s damn good for any sort of Freemium app judging by the numbers that we’ve seen so far.

I spoke with Justin to ask him about his experience with the Freemium model. He seemed to be doing well with Pluggio which is why I was surprised when he told me he was seriously considering killing his free plan.

His reason for doing this? Revenue has been relatively flat and the number of users has been steadily increasing over the last few months (currently nearing five thousand).

This says a lot about the pitfalls of having a free plan for entrepreneurs with limited resources.

Do they ever make sense?

I’m not saying that it’s impossible to be successful if you launch with a free plan.

Obviously free plans have worked well for companies like Wufoo, MailChimp, and FreshBooks, so we know they can work. But the problem is that we’re not them.

We need to stop blindly copying them and start thinking about ways to bring in revenue.

I’ll concede that there are certain types of apps that are more likely to succeed by offering a free plan and going with the Freemium model. But the vast majority of apps aren’t in this category, and the vast majority of people don’t have the resources to make that model work.

Taking advantage of word-of-mouth marketing requires more users than most of us will attain. Instead, we end up with a large number of free users zapping away valuable resources for nothing in return. To top it off, most free users will never end up converting to a paid plan.

If we have thousands of users that don’t increase awareness and will never pay for our product, why do we insist in offering something that’s going to hurt our business? Maybe we should just skip that free plan and focus on making money instead.

About the Author

Ruben Gamez is the founder of Bidsketch, web based proposal software for designers. When he’s not developing software, he’s furiously working towards becoming a better Micropreneur.