Recently I was invited to the TiE Mumbai office to talk about pricing strategies for internet companies. The truth is whether you run an internet company, or a product manager at Proctor & Gamble or an automotive giant like Mercedes, pricing is one of the most unscientific parts of the business.
A handbag at Walmart can be bought for USD 25 or you can blow over USD 150,000 on a custom made Birkin bag. Emotions, brand awareness, limited availability and a host of others factors drive these decisions when buying a handbag.
Internet companies face some of the above challenges and have their own digital issues such as the ability to move to a new product overnight (ex. switching from Yahoo Mail to Gmail). One of the most talked about pricing strategies is the freemium model – giveaway basic features for free then monetize the business via advanced features. Sounds brilliant right? It’s a lot like drug dealers who giveaway free samples to get customers hooked/addicted to the drug and convert them into paying customers.
When people talk about the freemium model two names always come up as executing the strategy perfectly – Dropbox and Evernote. Dropbox gives away 2GB of cloud storage for free and then as users consume more space they will ponying up real money to Dropbox and turn them into paid customers. Evernote is a note taking cloud solution, where you enter your notes on an iPhone and they magically appear on your iPad or other devices and computers connected to the same account. However, if you want some of the advanced goodness of Evernote you have to pay to play. Both are recipients of the freemium award called “Yeah, we know how to scale a freemium business.”
A couple days back I was listening to a podcast of Drew Houston, the co-founder of Dropbox, talking about his journey on how he started the company (I highly recommend listening to the podcast). The best part of the podcast was the Q&A session and one of the first questions was “how do you get people to pay” and it was asked by an Indian, god damn I love cheap ass Indians (disclosure – I’m as cheap as they come). Drew starts to talk about the value proposition where Dropbox allows you to aggregate all your data in a simple and easy to use interface. I’m pretty sure as Drew was talking that Indian kid was probably zoning out when he heard words like easy, aggregation, simple, etc…
The truth is what works in the US/Europe does not mean it will work in India. The freemium model is a perfect example of a model that just does not scale in India. Some of the buzzwords that companies use to entice users to their paid product include – easy UI, simplicity, saves time, efficiency, etc… Those “features” usually fall on deaf ears when talking to most Indian consumers and companies, they just can’t look past the price. The mentality is they will have “their guy” figure it out how to use the free version even if the end solution is complicated and convuluted. They don’t mind concurrently using 4 different cloud storage solutions like Dropbox (2GB free), SugarSync (5GB free), Google Drive (5GB free) and Microsoft SkyDrive (7GB free) as long as the overall price tag never exceeds zero.
I would really like to hear Phil Libin of Evernote or Drew Houston of Dropbox to chime in and prove my thesis wrong and reveal the conversion numbers from free to paid for India. Are the conversion rates the same for the US and Europe? However, having seen users jump through hoops to avoiding paying for software, I’m pretty sure my thesis holds true.
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There’s also a productivity level argument (instead of a cultural argument). If the average consumer’s productivity in India was the same as in the US, they would have similar mentality and they would put similar costs on time and effort. When the average software engineer is earning far less, and is far less productive, he/she is going to put a lot less cost on saving time for a superior solution.