Let’s talk about the damage being done to your company by customers who aren’t actually paying customers.
I hear this one a lot, especially from first-time founders. Their plan is to build a massive and loyal audience around a product or a concept, and then when that audience reaches critical mass, start charging them.
My advice in this situation is always the same: Be careful with that audience, it could kill your startup.
There is a time and a place for a free-tier audience, and it all depends on your motives. If those motives include making money, that audience is poison. And while it may be necessary to offer a free tier to customers in the beginning, you have to convert that audience to paying customers quickly, before the poison sets in.
I’ll go over why and how to do that.
Problem #1: They’re Costing You Time and Money
Think about it this way: Let’s say you were in the lawn-mowing business. How many lawns could you afford to mow for free before you start charging customers?
The reason that answer is so obvious is because we’re already familiar with the full lifecycle of the lawn-mowing process. On the surface, we own the mower, it’s a buck for the gas. Go! Right?
But we wouldn’t dream of forgetting the time it takes someone to mow the lawn. Then we get into the costs of acquiring the customer, the costs of travel, maintenance, support, scheduling, insurance, scaling, and on and on.
We totally ignore these costs in startup mode, especially for digital or knowledge-based products.
But most crucially, a free-tier audience will waste your time. An audience has mostly the same needs as a customer base, and just because they’re not paying doesn’t mean they won’t expect quality in the offering.
Problem #2: They’re Giving You Bad Information
You need your customers to tell you what to build. When your audience is consuming your product or your service for free, everything they’re telling you is coming from a customer base that hasn’t decided whether your product or service is worth paying for yet.
Yes, you may be getting a lot of input, but all that validation, all the growth metrics, all the feedback is meaningless. I’d rather have input from 100 paying customers with skin in the game than 100,000 users whom I don’t know are serious about what they’re asking for.
If we can get to a handful of paying customers, and if we can deliver our product or service at margins that are worth the hustle, we’ll have a better idea of not only how far to expand, but which parts of our product or service are going to provide the same or higher margins as we take on more revenue.
That’s the very definition of startup growth. It doesn’t work if you do it backwards.
Problem #3: They’re Making You Focus On The Wrong Things
Here’s a good gut-check: If you’re not feeling the time and money drain of your free-tier users, that’s probably because you’re not actually putting the product in front of them.
Chances are, when you have a large free-tier audience and it’s sustainable, that audience is circling around the brand or the marketing, two things which are pretty cheap and easy to sustain.
So you may be following all the rules and making all the right decisions, but all that building you’re doing is building up to a pivot point. When it comes time to apply the brand or the marketing to the product, there is absolutely no correlation between the two.
Brand doesn’t sell. Marketing doesn’t sell. You can’t pay employees with Instagram hearts.
Problem #4: They’re Skewing Your Data
When you’re getting feedback from free-tier customers, all your metrics will be off. Your audience may love your product or service, but these are all false positives. The only question is how false.
This happens mostly because free-tier customers usually won’t tell you what’s wrong with the product or service. Giving thoughtful negative feedback takes time and generates friction. If they’re not paying anything to use the product, that time and friction isn’t worth their effort. They’re better off ignoring it.
Furthermore, when you operate in that split world of free vs. paid, you live in an awful Catch-22. The larger the free-tier audience, the more of them you can convert to paying customers. In order to grow that free-tier audience, you have to please that audience. And the more you please your free-tier audience, the more value you take from your paying customers.
Eventually, either your paying customers hit a resentment point or you leave your free tier audience with no reason to convert. Either way you wind up cannibalizing your business.
Problem #5: They Don’t Want To Buy Product
10 percent. That’s the number that most free-tier operators expect to convert before they do any of the actual math. Why? Because it’s a round number and why the hell not.
It’s a tempting number, seemingly easy to achieve and at the same time kinda lucrative if you can hit it. I hear it tossed out a lot.
While a free-tier audience is a great funnel, it’s usually a terrible conversion base, because you’ve already set the expectation that you’re giving away your product or service for free. But there just isn’t any magic conversion number. It’s all circumstantial.
It’s pretty easy to launch a free tier with that 10% in mind. But what if I told you that your conversion rate was going to be 0.001%. In other words, for every paying customer you convert, you’ll have to give 100,000 people the product for free. Would you rush to launch that?
My point is, you’ll never know the conversion rate until you have paying customers. 0.001% is just as valid a guess as 10%.
So why start with a free tier at all?
Always Be Converting
There’s nothing inherently wrong with offering a free tier. Like I said, the issue is when and why and how long you let your customers go without paying.
In almost all cases, the ideal approach is the reverse of how most people start: Offer the full price product or service right away, meet the needs of those customers first, and anyone who isn’t your paying customer is your audience.
How much you meet the needs of that free tier is up to you, but you should follow some guidelines.
How To Use the Free Tier Properly
There are basically three major reasons to offer your product or service for free.
For trial: This works on a couple different levels. If you really want customers to be able to try before they buy, offer them a free trial. I’m a fan of 14 days, but choose whatever length of time gives them the full value proposition and keeps them engaged.
Now, instead of offering them a limited subset of the full product or service, throw away the concept of “tier” and give them the full offering. Just limit their usage to features that aren’t costly on your side, and don’t tell them about the limitations until they try to use one of those features.
This will also give you an idea of where your free/paid tier should be split, when your free tier users try to access features they can’t, you’ll know they find value in those features.
For good: We should always be doing some pro bono work. Give the service or product away in limited amounts to people who really need it and can’t afford it. This is not only the right thing to do, but you can learn a lot along the way. You don’t have to advertise it, but have a program to make it happen.
For marketing: In rare cases, having a free tier can open up doors to big chunks of new customers. On a case by case basis, you may want to give a certain organization or a certain persona free access to your product or service because their usage provides value for paying customers.
As an example — and this particular model is changing but it’s easy to see how it works — Recruiters never charge the job seeker, because the more job seekers they have, the more value they can offer to the employers. Another example is using a VIP program to get established names to tacitly endorse the product or service.
So a free tier doesn’t have to be a company killer. Just don’t let them hang around, don’t promise them anything, and don’t count on their numbers or their feedback as you grow.