Sramana Mitra: One thing we believe is that letting people use something for an unlimited period without charging them doesn’t really help monetization. Free trials, however, are much better ways of converting free customers to paying customers. Do you have a perspective on that?
Tom Dibble: It is very industry specific. If you look at the paywall model in media, it has proven to be very effective and directly correlated to the quality of the content. If you look at what The New York Times or The Wall Street Journal have done, the paywall model has been very effective there. We have also seen the free trial model work quite well, but there has to be a very high qualification filter around who you want to sign up for a free trial. If there is any real heavy lift at all in terms of what it takes to onboard and support that customer during a free phase, then the economics of that model will break through business.
If you can do it seamlessly in a high-volume way, where there is not a heavy lift by your provisioning and maintaining the customer during that free period, then sure, you can go that route and hope for some conversion. On a limited time basis, we have seen that you can sign up for a limited edition version, which gives you some constraint functionality, and then you gradually upsell the customer into broader premium services. We are seeing this every day with LinkedIn and some of the other newer models that have surfaced to great success. Once you get them hooked on using even a free service, you start the upselling process to try to get them under the premium service – whether that is a gold, silver, or bronze plan – and grow it from there.
SM: The other area where we see predictable monetization is tiered pricing. The whole cloud email service business has operated with that model. Essentially it is a factor of how many contacts you store and how many emails you send. At that scale, you pay more. You start out with a free trial and you scale from there. Zoho has been doing some features free, and beyond that there is a $12 per user subscription fee. In terms of the meter usage, that one is monetizing very well.
TD: We are seeing that model more and more. Some refer to the subscription element, but it is much more than subscriptions. Subscriptions are one component of it, but meter- and usage-based pricing is becoming the standard as far as eclipsing a classic subscription model. We are also seeing a hybrid of the two, where you might sign up for a subscription plan that is your minimum annual commitment that allows you a usage-based rate of x amount, whereas if you don’t sign up for a minimum commitment plan, your rate is y. We are seeing more and more of these models, where it is usage threshholding tier-based modeling that is also coupled with a minimum commitment that allows you to buy in to a cheaper consumption rate.
SM: Are other other nuances to premium pricing, free trials, or converting free users into paying customers?
TD: The back end of the business is what is essential. If you can support onboarding and supporting a lot of these new customers, you should be very liberal with the free trials. For us or a true B2B SaaS company that has any complexity around how to get them implemented, configured, etc., it is not a sustainable model. You need to be very selective about who you are going to do those models with and make sure the qualifiers are very much intact.
SM: Your third example was a telecom company. Could you speak to that industry’s evolution? Telecom services are definitely evolving. What kinds of new services are you seeing in the pipeline of telecom companies?
TD: There is a major transformation going on in the telecom industry right now – and that is worldwide. The traditional telco models are providing fixed-line business and wireless business. The margins in those businesses are now becoming such a challenge that the companies are now looking for incremental revenue strains on a recurring basis. They are looking to expand into content services like video on demand or streaming audio, selling cloud services with data center capacity to other businesses, etc. They are also looking into next generation telco services. We have seen the pull in multiple directions of telcos that are trying to launch these initiatives to augment their existing business. It is happening dramatically.