The Chasm Between Free and Pro

After our first blog post, we got a couple questions on our business model and exactly how we plan on actually generating revenue from helping people discover and share the best web apps and services out there.  As I mentioned at the end of that post, we’re working with top-notch developers, designers, and software co’s to offer the premium/unlocked version of their apps or themes at stellar deals.

People have asked…”Why would any developer discount their products up to 80%?…doesn’t that kill their profit margin?”  Well, profit margin – temporarily, yes…but overall revenues, definitely not.  Based on discussions I’ve read and had with various developers, the main focus is on three things in this order:

1. providing the highest quality user experience
2. reaching the most users as possible
3. generating revenue.  

Of course, this may not be the case for all devs and designers, but the one’s I’ve spoken to are extremely focused on driving exposure and user acquisition while maintaining brand equity.  One way to do this is using a third-party, like StackSocial, MacHeist, AppSumo, and the like…to run a time-limited, “flash” sale.  It typically garners not only media attention, but also social media buzz with their core potential customer base.  (I’ll get into the differences between us and our competition in another post.)

The point being is that developers realize with, on average, only 10% of their user base going “pro”…roughly 90% of their users are not unlocking the full potential of their apps and thus perhaps not fully satisfied with their experience.  Getting further into the psychology of why ISV’s benefit from doing these types of deals:

1. Exposure and recognition to new customer segments are very valuable. 
2. Marketing is our expertise…It’s what we’re built to do.
3. More users means more chances to up-sell and increase users’ LTV.

So, the question becomes what incentivizes someone to go “pro”?  

In my experience, its been situation where I have some tacit knowledge of an app…and then the combination of two things: 1) a recommendation from a friend or industry maven (Fred Wilson, etc) and 2) an extremely discounted initial offer. Queue…StackSocial.

Once the user gets to experience the app or service’s full “pro” potential over the course of 6 -12 months and therefore invested a significant amount of resources, you have an opportunity to exponentially increase their lifetime as a user.  So, you may ask…isn’t this the same as what is already being done by the developer? (i.e. – offering a limited “Pro Trial”).  No…it’s not.  Offering one month of pro experience just isn’t enticing to many users because its simply not enough time to get to know the product.  Furthermore, many users don’t want to invest in pro features that they aren’t sure they’ll be able to use after the 30 day trial ends.  Having 6-12 months on the other hand instills confidence that there is plenty of time to invest their resources and evaluate next steps without worrying about getting shut out weeks later.

If you want to read a deeper analysis of freemium business models, check out these great posts by Charles Hudson and Andrew Chen.

– Team SS

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