Think before choosing freemium for your startup

Launched in 2010, AppFog finally gives up on freemium business model.

Over the past few months, a subset of free users have engaged in abusive actions that has negatively affected the stability and uptime for all users.

We have taken numerous steps and dedicated resources toward addressing abuse, but have come to the realization that larger changes are needed to bring AppFog back to the level of reliability our customers have every right to expect…

New customers will no longer have the option to sign up for a free plan. We will offer a trial starting very soon.

It’s nice to start by offering free accounts (even if limited), hoping that this will get you more and more users for your product, but look at the downsides.

I hear a lot this advice: “Go freemium, look at what DropBox did and it worked”. I did offer free accounts in the beginning and dropping the free accounts was a good decision for me.

1. Attracting the wrong user

In my startup, over 80% of the resources used by the free users were from Asia (India, Pakistan, Bangladesh, Indonesia) with a conversion rate to paying user close to zero.

If they do decide to pay, they will be a pain and they will have a small lifetime value. A lot of them will ask for discounts and even if you give them, they still might decide not to pay. This will also mess up your projections, thinking that you have many users and that you are growing steady, but after a while seeing a lot of cancellations.

2. Wrong feedback

The free users will not only use your server resources, but also your support time, asking many questions and having all kinds of requests.

Now if you think this is feedback, you are wrong. Don’t look for feedback from the people that won’t pay for your product, because they like to talk, they like to make you work, but in the end they will still not pay and you spend quite a lot of your time working on features that would drive your product in the wrong direction.

Also, you should not give discounts easily. I have a lot of discounts requests, but

3. Undervalue your product

If you start by offering your product for free, they will want to continue to use it for free because “hey, you can afford a small free account just for me”.

Marketing on discount websites is wrong again. I offered the product for almost free (discount + fee = zero revenue) and at the end of their discounted period, 95% cancelled. And just so you know, I had a really low churn-rate with the other users.

When to choose freemium?

There are a lot of cases when freemium work, see Dropbox or Bufferapp. Depending on your product and the resources consumed it can work for you.

You can chose freemium easier if you got a big investment and you are not pressured to go on positive operational profit very fast.

Do you have use freemium model or trial based for your startup?