Don Marti

Wed 18 Aug 2010 07:20:27 AM PDT

Free version or not?

Audrey Watters asks, Is "Free" the Right Price for Your Product?

Good question. Here's a three-part test for whether or not to do free:

  1. Do you have potential users who can't pay but can offer some other kind of value? (Upload content, send invitations to other users, offer help, whatever.) Network effect by itself doesn't count. What's a zillion Ning users times $0 per user?

  2. Is the service cheap enough at the margin to give away? If you run your own mail server you already "give away" more than 90% of it to spammers. If it's an efficient network service, the answer is probably yes.

  3. Can you offer the service in two different forms, one of which does not appeal to potential paying users? GitHub has a great strategy here. It's free of charge to use it if other users can download or fork your project. Want to control access? Sign up for a paid account.

The catch is that slotting into the right category has to be automatic and done by the user. If you have to take action to assign the user to free or paid, that'll probably cost more than the service does. Adobe has an incredibly cheap "free" program, where professional users can license proprietary apps, and student and amateur users can easily get trial "pirate" copies. Way cheaper than adminstering something like Microsoft's BizSpark or ISV Advantage.

Automatic price discrimination applies to live events, too, not just web sites. Media people and community volunteer types can't pay, but random people who should be paying try to get in as media or on some other free pass. The question is how to automatically make the free registration unappealing to random people, without doing something that will drive away the users whose contributions actually do entitle them to free admission.