Pet Peeves Part Three – Converting Free To Paid

Lately, I’ve had a number of companies tell me that the business plan is to simply convert users who access the product free at home, to paid customers at work.  In addition, the argument is that the fee being charged to companies is relatively low for the value and therefor these customers won’t mind paying.

I just don’t think this is a well conceived business model.

First, there are not a lot of success stories around converting people from free to paid – even for the most popular apps.  Rhapsody, a subscription music service has 800,000 users after 10 years.  Spotify’s customer conversion estimates range from 3% to 20%, and the company won’t say what the real number is.  Can anyone even think of another?  It tends to be very difficult to get people to pay for anything they have grown accustomed to receiving for free, even if there is perceived value from it.  At some point some company will crack this concept, but for now, it’s a tough sell to a VC.

Second, the idea that companies let rank-and-file employees make decisions on productivity applications is wrong.  The CIO has security, firewall and control issues as well as employee continuity rules to follow.  So while it might be easy to charge a SaaS app to your corporate credit card, once the technical folks are on to you don’t expect the gravy train to last.

Third, price is an issue with product adoption, but not the only issue.  Just because a corporate subscription only costs $250 per month, that doesn’t mean your boss is going to pony up.  It might make the best infographics the world has ever seen, but that doesn’t guarantee adoption at $250 or even $25.

So okay… maybe you will be the first to figure how this will really work in the real world, or maybe you won’t, but you still need funding.  Here’s what you need to do:

  1. Decide on how the step by step process for conversion from free to paying happens
  2. Be able to explain the process in nauseating detail to a VC when they ask
  3. Find some market examples of successful conversion to follow and as proof points
  4. Choose very conservative conversion rates
  5. Make sure that your customer acquisition and conversion rates tie to your revenue forecast
  6. Have a backup plan in case this doesn’t work

My final advice, tread lightly Jedi warriors.  And be prepared for me to tell you to go fly a kite!