Wednesday, September 30, 2009

Freemium model for SaaS pricing is broken!

Recently I got this email from one of the SaaS companies that they are going to increase the subscription fees. The reason they stated was that their costs have gone up due to a surge in subscription for their free plan. That got me upset because what they are essentially asking is that we the paid customers have to subsidize the others who are using their service for free. Although I appreciate their candor (albeit it is a mistake from marketing perspective), but I find it difficult to accept. It is not right to pass the costs you incur for your "free plan" on to your paying customers.

It got me thinking that the popular "freemium" business model is not kosher from ethical perspective. I am sure this company is not the first to find itself in this situation. It is common to offer a free plan to attract new customers. Yet companies cannot continue to pay for the free service as their free customers increase. They are forced to pass the costs along to their real customers- the ones that pay. Not everyone admits this problem. Instead all companies bake the cost of free plan into their paid plans. Don't you think it is unethical? How would you feel about paying for a service that offers a free plan knowing now that you are subsidizing others?

There is another issue with the freemium model. You start with the free plan. As you start using the service more, you need to move to one of the paid plan. Did you consider that your costs of using the service is has just gone up both at the aggregate (which is understandable) level as well as unit level (which I have a problem with)? You will never see your unit costs go down. Shouldn't it be the other way around? That is your unit costs for a service should go down as you use more. You should expect volume discount, right? The vendor should encourage more usage of it services by providing volume discount. In reality, we see quite the opposite. Talk about misalignment of goals. Win-lose or lose-win proposition. When customers use free service, customers win but vendors lose. When customers use paid services, vendors win but customer lose.

Why not we all only offer free trial and make all out plans paid plans? Nobody subsidizes anybody. Customers get an opportunity to try things out before they pay for it. Vendors do not have to worry about how to pay for free plans. Customers are encouraged to use more and get discounts. That way we all win.

What is your thoughts on freemium plan? If you are a SaaS company, how are you paying for your free plan?