Your Product Costs Too Damn Much

by drjim on October 14, 2009

Evernote Gives Their Product Away, That Can't Work - Can It?

Evernote Gives Their Product Away, That Can’t Work – Can It?

The part of being a Product Manger that I hate the most is pricing. How am I expected to come up with just the right price for my product? Who am I – Goldilocks: my product’s price is supposed to be not too high, not too low, just right? That’s a tall order. Now I’ve found out that this impossible task has just become harder: an entirely new way of pricing has shown up and it’s called freemium

Why The Right Price For Your Product Is $0 (Not!)

Like ungrateful disaster victims who grab their Red Cross food packages and walk away without saying thanks, your customers would love to get their hands on your products for free. Now while this will make your customer extraordinarily happy, it will drive your company out of business overnight. Good marketing concept, bad business concept.

Damon Darlin at the New York Times has been looking into this new pricing scheme. Just like a product management version of crack, pricing your product at $0 is so attractive that you can find even the large guys doing it: Flickr, YouTube, etc.

Having an “it fell off the back of the truck so just take it” sale everyday for their products sure gets them lots of “customers”; however, even though they are huge and seem to be doing well, a close look at their books shows that free is a pricing model that is slowly killing them also.

How Do You Make Money If Your Product Is Free?

Wouldn’t you know it, there are actually some smart product managers out there who have taken the time to sit down and figure out a way to tame the wild beast that is a free product. While everyone else is getting eaten by the cost of supporting an unlimited number of freeloading customers, these guys have actually started to make some serious money. What’s their secret?

I know where these successful product mangers have been spending their time: strip clubs. If you’ve not been to a strip club in a while then you may not be aware of the clever marketing that goes on there. To get in to the club is generally free, to get the undivided attention of the performers is going to cost you.

This is the only place that the product managers could have realized that the secret to having a successful free product is to create a better version of the free product that once hooked, their users would be willing to pay more to get their hands on. What these paying customers are willing to pay is what the company can use to support everyone else’s use of the product (or they could sell expensive beer like they do in strip clubs).

The madness of giving away the product that you’ve worked so hard to create and spent so much to market is called freemium, a term that Fred Wilson, a New York venture capitalist came up with.

Show Me Some Proof That Freemium Can Work

Instead of drinking the kool-aid of free product pricing that all of the other companies seem to downing, Phil Libin who is the CEO of Evernote, a startup that offers a web-based storage system for personal information is brewing his own brand of product pricing.

Phil’s Christmas wish is that Evernote will be able to convince enough of the folks who are using their product for free to convert to paying customers in order for the firm to start making money.

Cracking open Evernote’s books reveals some interesting user behavior patterns:

  • Longer Relationships Are Good: The longer a user continues to make use of the Evernote application, the more profitable they become to Evernote.
  • One Night Stands: An amazing 75% of the people who use Evernote end up leaving within the first four months. You would think that no company could withstand this kind of enduser turnover; however, the money that Evernote is making from the 500,000 folks who have opted to start paying them is actually growing faster than Evernote’s overall customer base.
  • Reasonable Prices: In order to entice users to become customers, Evernote keeps their prices nice and low: $5 a month or $45 a year for the extra features that heavy users just have to have.
  • More Stuff Means More Value: somewhat unsurprisingly it turns out that the more that Evernote’s customers use their service, the greater the probability that those customers will end up as paying customers. The simple reason is that once you’ve got a bunch of stuff stored at Evernote, it would be a big pain to move it somewhere else.

Final Notes

If you’d like to lose your product manger job real quick, you just go ahead and march right in to your CEO’s office and tell him / her that you’d like to start giving your product away because you read a blog post that said that it was the trendy thing to do.

Nope, freemium is a crazy idea that works for some product managers, but probably won’t work for all. If your product is trying to break into a crowded marketplace and you don’t really have any compelling features that will make your product the “must have” solution, then perhaps a freemium approach would be a way to get some attention and lots of users.

If you do this, then your product is going to have to be able to get by on slim profits from each customer. Over at Evernote they only get 3 cents of revenue from each active user during their first month of use. This gets better after a year when those customers start providing roughly 35 cents each. You’d need a lot of customers to make this work out!

Are you up to it – could your product withstand freemium pricing?

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What We’ll Be Talking About Next Time

I’ve got a quick question for you: what is the next step in your career? What do you want to get promoted to? In fact, as long as we are talking about that, what comes after THAT promotion? In product management the career ladder generally goes: product manager, director, executive director, VP of marketing, Sr. VP, CEO. Got a plan on how you are going to get to that next step?

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