A to Z of Pricing for Product Managers - Part 2
Freemium, subscription, tiered pricing & much more!
Welcome to my fifth newsletter :)
In the first part of this series on pricing, we discussed pricing strategies. Moving forward, today we will explore the three most common pricing models in the Indian consumer internet space.
Pricing model is all about how you package your pricing. Let’s deep dive!
1. Freemium model 🚀
You must have used Gaana or Youtube! You can play, listen & watch unlimited music & videos for free but have to pay to use other useful features like downloading the music offline or skipping the ads.
This particular pricing model where you give your core product for free but charge for other “additional” features is called as Freemium Model.
Free + Premium ➡️ Freemium 🚀
Why freemium? 🧨
1. Freemium isn’t a pricing model. 🏆 It’s a customer acquisition strategy.
Customer acquisition is tough. For instance, in a report released by A Bright VC, 20-25% of the total revenue in the Indian ed-tech industry is spent on customer acquisition. And, acquiring customers is getting costlier every day.
Dan Ariely, a famous behavioral economist had mentioned that there is nothing in this world that attracts humankind more than the word “Free”.
The more users you have on the top of your funnel (i.e. users who use your product); the conversion rate (i.e. their likelihood to pay) is likely to be more.
When Notion converted its pricing to a freemium model; their COO Akshay Kothari made a very profound remark and summed up freemium well.
The biggest motivation (right now) is just capturing market share - getting more people to use Notion.
Freemium helps you to undercut competitors, win market share quickly and stand out in a competitive market.
2. Freemium creates better product insights 💡
I absolutely love listening to music on Spotify. For me, Spotify’s biggest value proposition is that it suggests great music.
Spotify leverages data to suggest great recommendations to its users.
More users -> More data -> Powerful recommendation
Thanks to the Freemium! Even though only 27% of the total Spotify users pay; the remaining 63% make the product more & more valuable. (for everyone)
Elena Verma who leads monetization and experimentation at Reforge mentions that products that understand their target audience, customer problems, and behavioral patterns better than their competitors win in the long run.
No matter how good your user research is, the best way to validate a product's value proposition or optimize a user experience is to see how people actually use your product.
Freemium gives you that scope. Your free users reduce your research & experimentation cost by giving you invaluable insights.
3. Freemium creates product evangelists 💋
Your free users can either become paid subscribers or can draw in someone else who becomes your subscriber (that’s network effect, right?)
Research published in Harvard Review Business states that free users can bring about 15-25% of paid users in a freemium model. (if the referrals are done right!)
What can be better than your free users turning into an evangelist?
4. Freemium creates strong user habits 🔨
I have seen this first hand with Notion. Many of us use Notion’s free personal plan for knowledge management. At first, Notion seems overwhelming but the more you start using it, you discover more and more awesome use cases. You get hooked on the product and build a strong habit.
It would be very difficult to realize the true value of Notion and making a commitment to pay for it before trying it extensively!
5. Freemium keeps the product team at its toes ⛱
Freemium also shifts the pressure of growth and monetization on the product team from the marketing and sales teams. When your product can communicate a strong value proposition on its own; it helps in building a much stronger habit, retention & growth.
I share my not so ‘important’ opinion on product, tech, design, venture capital, and human psychology on Xplainerr here. Do subscribe - no spam, ever!
Freemium & its type ⚽
Limited features ➡️ Youtube is a perfect example of a freemium product with limited features. You can use the core product lifetime for free but have to pay for additional features like skipping the ads & downloading videos offline.
Limited usage ➡️ Airmeet (a 🇮🇳 video conferencing SAAS product ) allows you to host 100 registrations per event for free. Post 100 registrations, you need an upgradation.
Limited capacity ➡️ Google Photos gives a free 15 GB cloud storage. Once you cross the storage limit; you need to upgrade.
Limited support ➡️ Mailchimp offers 24*7 support from its paid users but its free users have to wait for 1-2 working days for customer support.
Cons of freemium pricing 🔪
1. Users (a lot of them) may never convert to paying 😚
Freemium creates a scope of acquiring the wrong type of users - a set of users who are extremely happy with the core product & have little urgency to buy.
Let me give you an example. I absolutely love Grammarly. I use it almost every time I write online but I (think) I would never buy a paid version no matter how well they nudge me.
They say that the biggest competitor of Grammarly is “Grammarly free”
Conversion rates in the freemium model are always low! The typical conversion of free to paid users is only somewhere around 2-3% in India’s ed-tech space and the industry standard for free to paid conversion in the freemium model is a mere 2-5%.
2. The cost to support free users is high 💥
Freemium pricing is a cost-intensive pricing model. Why? The free users will use your product and would require support. Your developers & support team would be busy solving tickets for them! (damn! your server cost). All these costs you something (or maybe significant).
Freemium model has a lot of costs. 💰 It includes:-
The cost of acquiring a free user
The cost of serving a free user
The cost of marketing and selling to a user in a paid model
The cost of serving a paid user
3. Freemium is a product management night-mare 🤔
Freemium pricing can make the product roadmap highly feature-driven which is against the famous 80-20 rule of product management (80% of users use 20% of your product features). Product teams start chasing features mindlessly.
It also takes a lot of bandwidth for the product team to decide which features will be free and which will be behind the paywall. This is not a one-time decision too. You need to spend some time, gather enough data, and analyse which feature fits where - free or paid.
Pro-tip: Always launch the feature free for a certain time frame & then move it to the paywall if a lot of users are using it.
2. Subscription model ✈️
As descriptive by name; in the subscription model, you make our users pay & commit for a longer time duration.
Why subscription? 🏳️
1. Users can’t discover the true value unless engaged for long 🍌
Dating apps (think Bumble), OTT platforms, digital media publishers (think Ken), etc; need their users to stick with them for a longer time to unleash the true value. Imagine paying & being on a dating app for a couple of days. Oops! You would be so disappointed that you would never come back!
2. Reduces customer acquisition cost (CAC) 🍗
Let’s come back to CAC again! Patrick Campbell, the Founder & CEO of ProfitWell & the OG of SAAS pricing mentions that the rise of the subscription pricing model (post-2015) is directly correlated to an increase in CAC.
He mentions that post-2015 CAC has increased a lot because the cost of building products has considerably gone down and hence so many players have erupted in the ‘same’ market who are fighting for the same attention span.
Additionally, no major acquisition channel has come up post-2015 except Tiktok. This has also pushed the CAC higher. (Remember how cheap Instagram, FB ads, and Google Adwords were in the initial days.)
Humans are lazy. Every time they make a buying decision; a lot goes behind the decision-making process. (Cognitive load🧠)
So, every time you are trying to push a payment; you are trying to remove the friction of decision making. It has a cost.
Let’s see a very simplistic model to understand why subscriptions are a way better pricing model than per pay transaction model solely from the cost of acquiring customer point of view.
Wait! Loving this content on pricing? You can either scroll away or contribute to make the content paywall free ❤️. Ab toh kar lo yaar 😜
Subscription disguised as a one-time payment 🍟
Subscription payment has traditionally been recurring with the option to cancel when you want. Think Netflix. Think newspapers.
In India, you will not find a lot of consumer tech companies sticking to recurring payments. (But why?)
Every time you are asking your user to pay; there is a possibility of losing out on the transaction (churn in a fancy world). For the same reason, Amazon Prime India didn’t launch its monthly subscription for a very long time post-launch.
In the use case podcast, Dr Sreelata Jonnalagedda, Associate Professor at IIM Bangalore says that the regulation in India inhibits recurring payments. There is a lot of friction that comes in the way.
All these and you would find numerous pricing models disguised as a subscription but just supports one-time payments.
Subscription & Unacademy 🧬
When Unacademy started monetizing its free product in 2019; they went with pay-per-course pricing.
Their hypothesis was that more learners would want to pay only for specific content from a particular educator and pushing a high ticket price subscription would be hard.
The pricing model backfired. (You can check this reaction on Quora). Most learners who wanted coaching desired a comprehensive bundled package of the entire syllabus.
Subscription costs less than an unbundled offering 🎁
Power users love subscriptions. As we have discussed above, as a subscription has a higher lifetime value; it can be bundled with much more value at a lower price. A Quora user mentioned that buying individual courses that would cover the entire syllabus would cost them ₹1 lakh+. (And pushing so many transactions isn’t easy as our mind goes through the same cognitive load while making a purchasing decision.)
Unacademy (eventually) shifted to a subscription pricing 🧸
Considering the lifecycle of government exams (which is typically 2-5 years for an aspirant) subscription helped Unacademy nail its pricing.
3. Tiered pricing model 🥣
All your users aren’t the same! Tiered pricing is a model where you price your product according to the needs your users have.
Let’s see the tiered pricing model of Disney + Hotstar!
Characteristics of tiered pricing 🐵
The first plan is normally free with limited features.
The plans are arranged in an incremental manner; depending upon the features offered and usage limit.
Tiered pricing is often an extension of the freemium model. The first plan is free and the last plan has maximum features and advantages (like unlimited usage access, best streaming quality)
Best practices for tiered pricing 🐷
Always give your plans a simple/catchy name. e.g:- VIP, Premium, Pro, Basic (Shaktiman 😝)
Don’t overwhelm your users with a lot of choices. Show 4 options at max.
I would suggest going with 2 to 3 choices as the more choices your users have, the harder it is for them to decide, and in turn, the less likely they are to buy.
Nudge the users with the option you want them to buy. Highlight the plan & show them a copy like POPULAR / RECOMMENDED or keep the plan selected by default which you want to push.
Keep a clear distinction between the tiers - both in terms of pricing & features.
Understanding tiered pricing in a nutshell 🙉
Hope you liked my post on pricing models. :)
If you loved my post on pricing models and found this valuable, I hope you won’t mind showing a small token of appreciation!
Do you know? You can contribute as low as ₹ 89. Help me to make my content paywall free & accessible for all! Please show your ❤️ here.
OR
Are you looking to break into product management but don’t know how?
I provide detailed guidance on how to break into product management - how to make your resume, how to prepare for interviews, etc. ❤️
Why spend ₹ 50,000+ for a product management course? Why not book a slot with me at ₹ 999 and get personalized mentorship here.
BTW, I also do regular shit-posting on Twitter here. Let’s stay connected :)
And if you have come this far, what is stopping you to subscribe to this newsletter?
Until next time!
I am your power reader : P
Good summary! Just a possible typo: "Even though only 27% of the total Spotify users pay; the remaining 63%.." ( should be 73% unless 10% are accounted for something else I missed)