The pitfalls of having nonpaying customers


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For the thousands of start-ups who use a freemium model (free service) to entice customers to sign up, the moment of truth eventually comes when in order to survive, they have to convert some of these free customers into paying customers. For Needham, Massachusetts-based online-billing company Chargify, that moment of truth arrived last fall when the company announced to its customer base that it was moving from its freemium model to a premium one in which the lowest price would be $99 a month.

In a case study highlighted in this month’s Inc. Magazine, author Jason Del Rey highlights the difficult process that Chargify went through late year in changing their pricing model (and communicating that change to their customer base).

Like many other freemium-model businesses, Chargify launched their freemium model for small business owners with the hope that at least 15% of these nonpaying customers would grow into paying customers within six months of signing up. When it became apparent that Chargify had significantly overestimated the conversation rate for these customers, they were faced with a needed change to their pricing model in order to stay in business.

According to the author:

On the morning of October 11, Chargify sent its 2,500 customers an email anouncing the change. “We are grateful for all the support we have received from merchants like you over the past year,” it said, “and we are excited about the future of Chargify.” the message went on to outline the new features and included a link to the site’s new pricing page. The e-mail also explained that free customers would have 45 days to begin paying or find another provider.

Naturally, Chargify got pretty severe pushback from their freemium customers–some if it deserved and some of it not. But because of this pushback (and a whole lot of bad publicity that surfaced on Twitter and other social media sites), the company almost instantly revised (but not reversed) its pricing model–essentially cutting its lowest price by almost 60%. While the new lower price didn’t eliminate all complaints from customers, it did put out the firestorm that erupted with Chargify’s initial announcement.

In the month following the announced price change, Chargify ended up adding 225 new paying customers (up from 25 over the same period the previous year) and is in much better financial shape to continue to grow and serve its customer base.

One of the post-mortum suggestions to Chargify–and other companies working to transition from a freemium to a paying model should pay attention here–came from Nathaniel Talbott, co-founder of Spreedly (who competes in the same space as Chargify) who stressed the need to be flexible with some of Chargify’s smaller customers.

The owners of these small companies–even if they are free customers–see themselves as having made a significant investment in time, resources and energy to integrate with the product. If you grandfather a bunch of the early evangelists, it makes them feel special–and more inclined to talk up the service. Chargify didn’t do that, and I think it’s going to cost the company more in bad will than it would in money if Chargify had supported those free customers for a few more months or a year.

Here’s the takeaway: Transitioning from a freemium to a paid service requires much more than just selecting the proper price. It requires knowing when to transition, who to transition (and who not to transition) and how best to communicate the decision to your customer base. Easier said than done!

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


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