Nate Weiner posted a brilliant article today articulating why his company - Pocket - moved from an upfront paid model to a freemium model. The insightful post had lessons for all software companies looking for a simple framework to drive developing their pricing strategy.
Nate's argument boiled down to a failure of his previous (upfront) model to match the value the customer received over time to the price charged for that app over over time. Pocket (formally ReadItLater) was charging upfront for an app that didn't deliver value until much later in time. Nate's insight was that when the value is received upfront - charge upfront; but when the value is received over time, charge over time.
Here is a copy of the graphic from the post that neatly summarizes the different models for how value is delivered over time:
Expanding on Nate's post - with these three types of value-over-time models, there are a matching set pricing models available to most digital companies:
- Value upfront >> Charge upfront (e.g. video games)
- Value over time >> Subscription fees (e.g. Carbonite - desktop backup software)
- Value grows over time >> Freemium (e.g. Evernote - note taking software)
In each cases, the pricing model allows the company to match the timing of the preceived value to the price charged. Additionally there is a 4th type - when the value grows exponentially over time - specifically when there are network effects involved. In these cases the matching pricing model is to be free, and then to find alternative ways (e.g. advertising) to monetize the value created. That's why social networks like facebook or twitter don't charge the heavy 'users' of the platform that are actually helping them create value.
While this is a bit simplistic the core philosophy of matching the timing of the value delivered with the timing of the price charged is very powerful. Taking this one step further - the best companies in the world have found out how to not only match the timing of value delivered as described above, but the amount of the value delievered. This is where models like Google's Adwords, or Salesforce.com per user pricing are some brilliant. These comapnies have mastered the ability to match the timing and amount of value delivered - therefore creating successful, retainable customers and build remarkable businesses.