Death to Freemium, Long Live the Free Trial
Here’s a reprint of my first guest post (in Mashable, nonetheless). Since they took out some of the juicier points (particularly why the App Store doesn’t offer refunds), here’s the original version.
There’s a psychological barrier to paying for online services, and it’s hurting both consumers and businesses.
We pay for things in real life every day. We easily spend $5 on a vanilla latte, but agonize over paying $5/month for a really valuable web service. Freemium business model has emerged as a solution to this unfortunate customer behavior.
There are a many shiny examples of widely successful Freemium companies. With Evernote’s billion dollar valuation, more people will point to Freemium as the business model to strive for. Unfortunately it’s an exception and it sets a bad example. Companies like Evernote and Dropbox are the poster kids for VC-backed success, but not necessarily an ideal model for every online service.
In my experience there are 3 main cases where a Freemium model works:
1. Evernote-like paywall
The way the product is designed, a significant portion of the users will inevitably cross the paywall. The longer you use the product, the more value you derive from it, and the closer you are to hitting the free upload limit. WriteThat.Name is another great example of this, and one of my favorite products. It extracts contact info from email signatures and creates/updates your Google contacts. The free version gets you 40 new contacts per month - 1.3 per day. Since I get more, paying $3/month for this service is a no-brainer.
2. Dropbox-like network effects and viral lift
Dropbox has inherent virality, and it’s value increases with more users (in order for you to share a folder, the other person has to be using the product). It also doesn’t hurt that you have an additional incentive to invite them - permanent extra storage. This is the classic Fred Wilson “free users are your marketing cost” argument. Most network effects businesses have to offer some form of value for free.
3. Spotify-like super annoying ads
Five bucks a month is a small price to pay to avoid the anger you feel after hearing the same commercial every 3 minutes. Of course, it’s a fine line between being a) valuable/annoying and b) just annoying. In case of (b) the user is much more likely to stop using the service than pay. From business standpoint, ad monetization sucks because it requires huge scale to generate significant revenue. So you’re much better off charging a user $5/month, instead of blasting him with ads that may get you a $5 CPM if you’re very very lucky. Sparrow, for example, gets away with charging $10 to remove an ad unit in a particularly annoying spot.
Of course, if your cost structure doesn’t support lots of free users, neither of the above will work, but for most of us user acquisition cost outweighs support cost by orders of magnitude.
The problem is most consumer internet startups want to be in the above 3 categories and probably lie to themselves just a little. But by charging $0 you’re actually anchoring that value in your customer’s mind, making it harder to raise the price later. One approach that seems to work is staying in free beta (or offering $X credit) while you figure out where to put the paywall.
Long live the Free Trial
So what if you don’t satisfy one of the 3 cases above? The model we went with at our company is the free trial after which everyone has to pay. It works beautifully - more than 25% of our free trials convert to paying users, and we don’t even ask for a credit card upfront. The remaining 75% leave, and we don’t have to support them.
“But isn’t this a kind of freemium?!” you might say. Not really. Freemium is when there’s a free and premium versions of your product. A Free Trial is more like a “no-questions-asked” returns policy for the web. I’m fine paying $120 for Microsoft Office upfront - I’ve been using it for 2 decades, and know exactly what I’m getting. But it’s harder for me to shell out even $1.99 for a product I’ve never tried.
“How long should the trial be?!” That depends on how quickly your product can show value. The more the value increases with time, the longer the trial should be. On the flip side, the shorter the trial, the faster you can optimize user acquisition (and the less free users you have to support). For us, the value is seen almost immediately, so we are currently experimenting with shorter trials.
What boggles my mind is that the Appstore hasn’t introduced a Free Trial model. There’s no real reason NOT to do it. If you try an app, and don’t like it, you should be able to uninstall it and not have to pay. It would probably increase sales for paid apps significantly. The lack of a reasonable return policy actually feels kind of scammy. I wonder how many people paid for crappy apps they don’t use, and what the active users/downloads ratio is for most apps?
Death to Freemium
There’s a lot to be said for creating something of value and charge money for it. If you’re not charging for your product, then your users ARE the product. This actually screws the user in the long run (when the company dies or gets sold to somebody who can monetize your users). It also forces you to focus on 2 unrelated efforts: 1) growing your user base, and 2) figuring out how to monetize it. (And please don’t use Facebook as an example of waiting to monetize your audience. You are not Zuckerberg.) There are many benefits to having free users and focusing on hyper growth. But the decision to go with Freemium should be based on math specific to your business - not a pricing philosophy.
And do your part as a consumer - stop being cheap. Just because something is virtual, doesn’t mean it should be free. As we spend more time online, we should get more comfortable paying for value delivered there.
An AAPL a day
It’s been 1 week since I switched to the dark side, and I couldn’t be happier.
For years I didn’t want to be a part of the Apple cult. Then I started noticing some of the smartest people I know switching. And (almost) nobody was coming back. They must be on to something. Then I got an iPad, and finally started to understand what the fuss is about. Last week I switched to a Mac, and despite the fact that shortcuts (Excel in particular) are kicking my ass, I’m never going back.
The thing that Apple got right is hard to describe. The best way to summarize it came from Mr. Sasha Strauss. He explained that brand loyalty comes not from features, or quality of the product, but from the overall experience the brand creates. It’s much more about feeling than logic:
- The hardware. It’s SO nice to look at and touch. The touchpad feels/works so much better than the one I had on my old Samsung (which was best in class on PCs)
- The software. It gives you a feeling that it will never break, that you can rely on it 100%. It just feels “solid”. I never got that with Windows. Even if it does break, I will view it as an exception.
- The whole experience. It starts when you open the box. It’s beautiful. And it continues as you’re setting up, installing apps, and messing around with stuff. It’s really not about the features (even though they are great). It’s about the feeling you get. I literally have developed a feeling of love for the device.
I also bought a bunch more of AAPL stock. Given Apple’s growth in China, the fact that they have only now started entering the enterprise space, and haven’t even touched mobile payments, I’m all in.
In defense of Silicon Beach
As much respect as I have for Brad Feld and Mark Suster, I politely disagree with their points on the Silicon Beach discussion (here and here). The actual name of the brand matters much less than what the brand has grown to symbolize. Does anyone really associate Coca Cola with the coca plant? Or Coke with cocaine? And wtf is Pepsi? True Ventures is a great name, but the reputation they developed is much more significant to the value of their brand than the name.
Personally, I don’t associate “Beach” in Silicon Beach with “not working hard”. It’s just a nice place to live WHILE working hard (somebody should do survey on people’s perception of the term.) I also don’t associate “Silicon” with “hey let’s be like Silicon Valley”. It’s catchy, and it conveys the message brilliantly - we’re a tech hub that’s located on the beach (or 30-60 min away, depending on traffic).
Naming conventions are like nick names. They develop organically, and it makes no sense to fight them. I don’t think it’s a good use of time to continue talking about this. If you don’t like the term - don’t use it. But people actually seem to like it. There are over 600 members in our Silicon Beach Facebook group, and the name has really become something people rally around. However, if tomorrow the name of the LA startup community changed to “Bob”, there would still be a ton of awesome entrepreneurs living here and working just as hard (while having as much fun doing it).
The best to-do app in the world
I’ve tried every task/project management tool known to man. From Franklin Covey and Asana to pen and paper. I love the simplicity and versatility of pen and paper, but it lacks the aggregation and filtering. And the apps like Remember The Milk, Things, Wunderlist, Asana, etc require you to learn/use their system, and are essentially a walled garden. If you decide to switch, you’re screwed (which is certainly the goal of most businesses).
After getting annoyed with all of them, I finally came up with this dead simple but exceptionally useful spreadsheet. It lets you input, prioritize, and plan both long term (for the month/week) and short term (today). I’ve been using for a couple months now, and I finally feel I’m ready to come down from the mountain and share the knowledge.
This is how I use it:
1) put all the tasks that need to get done into buckets
2) mark important and/or urgent tasks with an X in respective columns and assign estimated time to complete them
3) mark if this involves other team members either with an X, or with their initials. (This field is helpful only if you’re working with other people. If not - just delete this column)
4) By using Excel/ Google Doc’s native filtering feature, I can quickly see which tasks are urgent or important, and look at the total hours needed to complete them
5) Finally, put an X in the Today column to mark the projects I want to get done (and have time for) today
Once a task is completed, I just move it to the “Done” sheet to keep track of my amazing progress.
PS: I heard smartsheet.com is the closest to doing what I wanted. But at this point I love my spreadsheet too much.
Problems vs Opportunities
Lately I’ve been thinking a lot about the differences between going after a business opportunity (vitamin) vs solving a real problem (painkiller). It’s not that one is better than the other. There are plenty of fantastic “vitamin” businesses that have gone after an opportunity in the market and “created” a problem for their solution.
But there’s another important distinction: is the problem a real, life-changing problem that will genuinely make someone’s life better, or is it a http://whitewhine.com problem (“My wallet is so full, that when I put it in my back pocket, it screws up my posture”)
I, and most people I come in contact with, live in a bubble relative to the majority of people on this planet. The problems we face, which entrepreneurs attempt to fix, are pretty ridiculous:
- “Video sharing on mobile is broken!”
- “We need to take the work out of networking!”
- “Finding movies I like is such a pain in the ass!”
- “I spend far too much time doing email!”
Fortunately these problems represent a significant market size (i.e. there are people who will pay money to have these problems solved).
Unfortunately, existential problems of the majority of the world’s population that really should get solved don’t represent a significant revenue opportunity, and aren’t viable businesses as a result. Sure there are NGOs, social entrepreneurs and programs like Google’s Project 10 to the 100, but I wonder when the regular, hungry entrepreneurs will start to focus on solving problems of people with no wallets. What’s it gonna take?
Lessons for next year’s #SXSW
1. Rent a bike
2. Reserve a room and flight tickets at least 6 months in advance (ideally next week)
3. Set up lunches/dinners. Playing by ear doesn’t work
4. Definitely don’t buy a conference pass (didn’t this year, and couldn’t be happier)
My birthday was a couple of weeks ago. It was the best day to be on Facebook. Even before midnight I started getting some love from a few folks in Asia, as well as those who misunderstood facebook’s note that my birthday was not actually today but tomorrow. By the time I woke up, I was greeted with 40 or so congrats from Euros and East Coasters. It’s a great feeling. Then by lunch roughly 12% of my friends had congratulated me. By end of the day the number rose to 20% (frankly, I was a bit disappointed with this turnout. More people show up to elections, goddamnit).
I hear people complain that social networks are screwing up the way we communicate, by making it more shallow. “Nobody actually picks up the phone anymore. What happened to the days of handwriting letters or meeting people? All this technology is killing our humanity.” I disagree.
I think the “Facebook birthdays” are a perfect example of technology helping our humanity. First of all, before Facebook I maybe got 5 calls for my birthday. All 5 were from my relatives. So there’s zero cannibalization from the old school ways.
Second, this year I got calls from friends who actually found out about my birthday via Facebook.
Most importantly, even though I know that the lovely 20% didn’t actually remember my birthday (what!?), they nonetheless went out of their way to congratulate me (you guys rock!)
Facebook birthdays are a perfect example of technology augmenting the human experience by giving us that nudge to do something nice for a friend. Now, if someone made an evil Facebook app that lets you auto-congratulate all your friends, and even vary the message, I would pay money for it.
Ifttt.com is awesome
The genius of this app is only challenged by its simplicity. It basically applies my favorite “If->Then” logic to multipIle online services.
They have a bunch of recipes pre-created: from “get an email if tomorrow’s forecast calls for rain”, to “Send an sms to a number, and get a call back on your phone so you can get out of that awkward date”.
I just created one: “If my latest Posterous blog post is tagged “entrepreneurship”, post it on my LinkedIn status update”. It’s actually a problem I’ve thought about before. I rant about a bunch of stuff on this blog, and not all of it deserves to be on my LinkedIn profile. This solves it quite elegantly. Feel free to use and modify it: http://ifttt.com/recipes/13844
How chess is like business
When I was a kid, and my grandpa was teaching me how to play chess, I hated it. Sitting for an hour, trying to think was incredibly boring. Now I love it. Sitting for an hour, trying to think is actually fun. I’ve played chess in different ways:
1. Like normal people
2. Drunk with my friends (great drinking game)
3. Over email with my grandpa, since we now live on different continents. This was interesting because you have a day to think over your move. Sometimes our moves took a week. It’s also interesting because my grandpa knows how to use email. Not many grandpas can say that.
4. Recently I downloaded a chess app onto my phone, and can play a blitz game while passing time.
Playing with my phone has been especially insightful, because I can play A LOT of games (over 100 in the last couple of months) and you can take back moves, which lets me learn from mistakes much faster. For example, at the end of the game, I can track back to that ONE critical move that started started the path towards winning or losing. This has taught me a lot about chess, and the several parallels it has with business:
A) One wrong move can ruin the game. Its obvious when taking back moves in a lost match to see what caused the chain of events. When playing a strong opponent (Android 2.2.2 or my grandpa), one mistake and you’re done. I had several situations in life, where I worked very hard towards something, made 1 mistake, and lost in that particular situation.
B) Good news is there’s usually a rematch. Really, it’s no big deal. There’s always another opportunity ahead. I just have to not make the same mistake again. And if I do, that’s probably ok too. There’s usually another rematch… But that’s it, after that you’re f’ed.
C) You have to think at least 2 moves ahead. Your opponent is.
D) The end game is especially critical. Stakes a higher with few pieces on the board. Mark Suster has a fantastic post “Don’t celebrate until the ink is dry and cash is in the bank”, on how you’re most vulnerable when you’ve almost won. (This has been my challenge. I tend to celebrate too early and lose guard.)
E) You have to observe patterns. You don’t have to calculate every move. There’s a bigger picture.
F) When in doubt, flip over the board and look at it from your opponent’s point of view (thanks Bob Hotz).
Everything is a remix, even startups
I used to have little respect for startup clones. According to Steve Blank’s definition, a “startup is an organization formed to search for a repeatable and scalable business model”. So if you’re cloning an existing model, you’re no longer searching, you’re just scaling, right? Sure.
Then I saw this: http://www.everythingisaremix.info. Basically this guy has a thesis that most iconic pieces of music and film are a remix. It’s pretty interesting.
And, of course, startups. Facebook was a remix of MySpace, and MySpace was a remix of Friendster. Google Adwords was a remix of Overture (which actually wasn’t a remix of anything…what up Overture). And besides basic clones, there’s a million Groupons for X, or “ABC for XYZ”.Are they innovative technology companies? Probably not most of them. But some may have an industry-changing insight (kind of like Facebook did, when they decided to enforce real names instead of handles, thus making Facebook the identity layer for the web.)
But are clones solid businesses? Absolutely - just like restaurants. No restaurant is the first in the world. But every business should strive to be the best in their market, however “market” is defined in their case. When VCs try to give grief to my new Berlin friend, who has built several clones, he says “Well, did you invent the VC business model?” It’s also somewhat funny to see a company that buit a minimalistic task management tool praise their non-cloneliness (we won’t name names, but let’s just say it rhymes with Schmundermist). Take it easy guys - you cloned pen and paper, as well as a zillion online task planners that came before you.
In markets outside of US, Germany in particular, due to a number of issues, investors are more risk averse, and the traditional “through it against the wall and see what sticks” VC model hasn’t worked historically. VCs prefer to limit the risk and invest in clones, which won’t be billion dollar opportunities, but will provide a nice ROI. As a result, while being a solid business, clones play a very important role in the German entrepreneurial ecosystem - they train the next generation of entrepreneurs. The list of alumni of several Berlin incubators is quite impressive, and these guys are going to seriously kill it.
Of course, the downside is folks working on clones don’t get nearly as much experience in product, or Lean Startup/Customer Development methodologies, which are super important.
So let’s give some love to clones.
Berlin Startup Community ist Wunderbar
I just spent 2 weeks plugging into the tech/startup scene in Berlin. I love that city for lots of reasons. One of them is this: I believe it will become the next New York of the startup world. Most of the ingredients of a successful startup ecosystem are there, and the missing ones are arriving quickly. I’ve met many fantastic entrepreneurs who are making it happen.
To all of my new Berlin friends - it’s been a real pleasure getting to know you. And a big thank you goes out to those who went out of their way to show me around (in no particular order): Ben Berlin, Regine, Ben T, Stefan, Oliver, Gregor, Jose, Joel, Robert and Markus.
Disclaimer: after only 2 weeks I don’t claim to be an expert on the subject, so 75% of what I’m saying is learned from speaking (actually listening) to local entrepreneurs and investors, and 25% is my personal opinion and analysis.
Mark Suster has developed an excellent framework for analyzing the development of the entrepreneurial community in a particular city, so I won’t reinvent the wheel, I’ll just add 2 spokes in the end.
1-2. Community Leaders, Organizers, Passionate Entrepreneurs & Ambassadors
Obviously the most important ingredient, and there’s no doubt Berlin has it. Just sign up for Startup Digest Berlin, and you’ll see a ton of activity. There’s also a lot of other more exclusive events. Stefan Wolpers organized a breakfast with the legendary Jerry Colonna. Alexander Hüsing runs “Real Time Berlin” - a quarterly meetup of entrepreneurs and investors. Oliver Beste organizes a small private event where entrepreneurs meet VCs one-on-one. There’s Silicon Allee, Co-found.me, Lean Startup meetup… And of course, American events come to Berlin too: Mobile Monday, Startup Weekend, Social Media Week, etc. I’m not advocating being a conference ho, but this list is a reflection of community leaders making shit happen.
3-4. Patron Companies and Elder Statesmen
This is the reason for the initial inertia. Amazon, eBay, Microsoft, Google and Facebook are in Silicon Valley. There are many more large exists in the US than in Europe. But here’s a recent example of what happens with second-time-around entrepreneurs: the founder of Plazes (sold to Nokia) just started Amen, which quickly raised money from US invertors.
The good news is you don’t have to sell your company for hundreds of millions to be a valuable mentor – it’s about realizing that the more startups in your community do better, the better for everyone, including yourself. For example, our Silicon Beach Facebook group has become a hub for LA entrepreneurs to get advice and support. Berlin needs the same (hint hint). In particular, successful Berlin startups (like Soundcloud, which have also raised money from US investors) can open many doors for others.
5. Playing to Your Advantages
This is my favorite. Here are the advantages Berlin has:
- Location – 2 hour flight from anywhere in Europe, and direct flights to the US and Asia. Berlin is culturally global. Everyone speaks English fluently, and it’s super diverse (translation = great international food!)
- Talent – You know how easy it is to hire a developer in Silicon Valley during a bubble. It’s also impossible to bring an employee from abroad for legal reasons (hello Startup Visa). Berlin is located in the center of the Europe and (as part of the EU) it’s ridiculously easy for someone to move there.
- Super low cost and excellent quality of living – you can get a really nice 1 bedroom flat in the center for 750 Euro. There’s no traffic, but public transportation is excellent and you don’t need a car anyway. It’s incredibly green. Nightlife is amazing. All of this means you can attract talent much easier, and for less money.
- Universities – Berlin has several schools. With so tech coming out from universities, scientists could really use some hustlers to turn it into a business, a la Stanford.
- Designers – I found that on average, German startups get design/UX much better than in the US.
- Clones – German clone incubators (despite all the negative hate they get) are a very important part of the ecosystem - they raise a generation of entrepreneurs. I’ll write about this in more detail in another post.
6. Marketing/PR Muscle
In Silicon Valley it’s hard to rise above the noise. In Berlin it’s much easier. I’m going to use Amen as an example again. With their all star team, and raising money from Ashton Kutcher, they have generated a ton of PR for themselves - and for the Berlin community, as a nice side effect.
7. Local Angel Community / Recycled Capital
I don’t know enough on this subject, but I’ve heard there are plenty of angels investing in seed rounds. There are also several government programs offering cheap funding to startups (I’ve met a couple companies which got over $1M euro from government programs at a great valuation). The problem is this funding often comes with strings that make it harder to raise follow on rounds. There is a great opportunity for Berlin entrepreneurs to work with the government to streamline business <-> government interaction.
8-9. Venture Capital and Foreign Direct Investment
This is by far the biggest problem. While there’s funding for seed rounds, there’s a lot less Series A capital. There haven’t been many large exits to support the typical VC model. As a result, local VCs prefer to invest in proven business models (i.e. clones) in order to mitigate risk. My interpretation of a typical dialog is this:
VC: “I like your pitch, but why hasn’t anyone in the US done it?”
Entrepreneur: “Ahem… because we’re a startup. We are creating a new product and business model?”
There are a handful of VC funds in Germany. Most of them invest in clones. And because clones are usually local market businesses, they aren’t interesting to global (i.e. US) investors. It’s a bit of a vicious circle. I bet we’ll see several companies raising money from US investors in the next 12 months.
It takes time to grow a community. Berlin tech won’t become as big as New York overnight, but the clock has started ticking, and the change is happening now because of all the awesome people driving it. You can feel it if you spend time there.
The next 2 are my additions to Mark Suster’s top 10.
Germany has a very different attitude towards entrepreneurship, risk and failure. Bankruptcy, for example, is a crime. Having a failed company is frowned upon (unlike in the Valley, where it shows character). Education is highly valued, and dropping out of school to start a company is just not that cool. There is no culture of underage hacking – kids starting to program while in high school and not really giving a shit about grades (I did meet one awesome dude, but he’s clearly an exception). Germans are much more risk-averse than Americans. Maybe more Americans need to move to Berlin and go bankrupt to show everyone how it’s done?
Currently most European startups (with notable exceptions, of course) are focused on the local markets. Most American companies are more global in nature, but do focus on the US as the initial target market (it is big enough, after all). But really, how global can you be if you’re sitting in the Bay Area? You’re in a bubble, 5 hours away from New York, 10 hours from Europe, and 15 from Asia. Berlin is located in the heart of Europe and is uniquely positioned to truly think globally. I believe it’s the future.
My main take-aways after 2 weeks in Berlin are these:
- It’s filled with awesome people and energy.
- The leaders needed to drive all of the above are already here. I’ve also met several Americans, and countless Europeans who came to Berlin to make shit happen. But the more the merrier.
- The change is here. The train has left the station and is gaining speed. Most of what’s needed is in place, and as time passes gaining momentum will be easier.
WHY to temporarily move to another country
In my last post I talked about how to temporarily move to another country. Here’s why you should do it:
1. It’s good for business. It took me literally 2-3 hours from the moment I google’d “Berlin startups” to:
a) set up several meetings with entrepreneurs
b) register up for a bunch of meetups and
c) sign up to speak at a conference
I’ve been here for over a week and the tech/startup scene in Berlin is amazing. According to the Startup Digest, there’s actually more going on in Berlin than LA. It’s super international, and everyone speaks English. I’ve met a lot of great people and made great connections. This week there are a couple of conferences so it will get even busier.
Basically working from another city and plugging into its community grows your network and provides a completely different point of view on what you’re doing.
2. It’s good for the soul. Traveling expands your mind better than LSD (well maybe that’s an exaggeration). But becoming a local, if only for a couple of weeks, is much more mind-expanding than being a tourist. No hotels - only apartments. No taxi - only subway. (I still feel like a bit of a douche because my German is that of a 1.5 year old, but I’m working on it).
3. It’s good for the stomach. I’ve gotten stuck eating the same food at the same places back home.
+8 hour work week
For the past 2 weeks I’ve been living and working in Europe. It’s been pretty awesome for a number of reasons.
1. I’ve travelled a lot, but have always done relatively short trips - 1-2 weeks per country. Sometimes even less. Between travel time and jet lag, it’s pretty painful (especially with a baby). I’m now convinced that the best way to travel is to move somewhere, even if temporarily: no hotels, only staying with friends or AirBnB-type apartments. This way you can actually absorb the culture and not be a tourist. Of course it’s not really possible with a typical US 2 week vacation. You have to get creative.
2. Working from anywhere is a reality. Internet connection at the place we’re staying in Berlin is actually faster than back home in LA. Between Skype, Google Talk and Google Voice, a lot of the people I work with don’t even know I’m in Europe. My day is a little different than back home, but I love it:
I get up at 8-9, have a nice breakfast, go for a walk, read, hang out with the fam. Then I check my email, and have a few hours to actually get work done before peeps back in the States get up and start bothering me. By 2pm East Coasters are up, and by 5 so are West Coasters. That gives me several hours to work together, and I can email back and forth throughout the evening.
3. If I can do it, so can you. We have a 4 month old, a dog, 3 guinea pigs, 2 cars, a house and a job - if I can take off for a few weeks, anyone can. Sure we are lucky to have great friends back home who take care of our pets, great friends in EU offering a place to stay, and work that can be done remotely. But I would argue everyone can do the same. Use AirBnB to sublease your house and get one in the city you want to go to. Then all you have to cover is travel costs. Oh, and read 4 Hour Work week - @tferriss has an awesome checklist on how to do this.
A change of scenery is always nice. The time to enjoy the flatness of the world, is now.