Going from Free to Fee

In April, FreeDrive.com released a subscription-based offering of a service that was previously free. To build the strategy, I spoke with executives at Go2Call, GlobalScape, and others who had inside knowledge on perfecting subscription services. From their advice, we crafted what turned out to be a success, and learned some interesting — and possibly universal — rules about Internet economy, group dynamics and timing.

1. Know When You Need to Go Fee-Based?
   The hardest part may be making the business decision to alter your model. Or, it may be clear as day. For John Nix, co-founder of Go2Call, a PC-to-Phone service provider, the decision was fairly simple: "The underlying economics were showing a negative gross margin, and we were growing very rapidly," says John. "We were carrying 15 million minutes a month, and losing money on every minute because advertising was not paying the cost, and our volume was doubling every month. So it was not a hard decision to say we had to go paid."

2. Timing is Everything
   It took FreeDrive four months to create the plan and two months to make the change. Right before our release, several of our competitors had dismantled their consumer services entirely. After our release, several more followed. The timing was right for us to force a purchase decision. Is the timing right for every market? Probably not, but each time a new service makes this change, the impact is felt in all Internet-based services.

3. Be Prepared to Invest
   The cost of creating the credit-card transaction ability, sending out messaging, and fielding user complaints (and kudos!) was significant. This process took several months, though the ripples were only felt for another month after deployment, and then business as usual resumed. The seven months of strategy, engineering and deployment took their toll emotionally and financially. Much of the time and energy we invested was in team building, to get internal buy-in for the changes we were about to undertake.

4. Then Be Prepared to Divest
   After release, our per-unit cost jumped. It stands to reason: a business could spend $500 on ten users per month, or $325 on two users. The key is that production cost may decline, but overall operating costs probably will not. For the health of our business model, appropriate cost-cutting was necessary. FreeDrive was able to avoid some of the personnel outsourcing by redeploying resources into new product lines.

5. Break the Old Rules
   Is your product salable? It may not be. Associating a fee with an existing product will probably work if your members pay for similar products or services on- or offline. Or, you may need to redesign or reposition your product in the marketplace. Based on user data, we found that most of our users did not in fact require our services for storage, but for file sharing. So by drastically reducing our free storage offer, but promoting sharing as our value proposition, we were successful in repositioning our product.

6. Keep it Fresh
   After releasing a subscription, you'll need to keep a close eye on your statistics to ensure that your sales argument is not becoming stale. Tim Nicolau, CEO of GlobalScape, a content managment application developer and an industry thought leader in subscriptions, advises that companies keep their message fresh. "We've noticed that changes to our Web page have an almost immediate effect — in hours," he says. "Also we watch for leading indicators and lagging indicators to try to anticipate a trend. A plateau [in subscriptions] is an early sign that something is not working, or that we need to rethink our service."

7. Will it Work?
   Your subscription strategy will probably be successful if any three of the following apply to your company:
   • Your competitors are not free
   • Your services are demonstrably superior
   • Your services are usually associated with subscriptions in the offline world
   • Your service is unique, timely, and strongly branded
   • You have a devoted group of highly active (or addicted) customers
   • Your customers have demonstrated a willingness to pay
   • Your daily views or signups are very high, giving you exposure to new customer base every day

After releasing the subscription model, we found user activity increased, member loyalty increased and unprofitable business practices were purged from our model. We will be modifying and tweaking the services continually, and it is not yet perfect. Our pro forma models show a doubling of our yearly revenue, however, and you might say that is a pretty good start.

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