Micro-ISV.asia

Thursday, 24 July 2008

The Economics of Free Lite Versions

Filed under: Business of Software — Jan Goyvaerts @ 18:52

As promised in my previous post, today I’ll discuss the business reasons for publishing, or not publishing, a free version of a software product. I’m specifically talking about a version with reduced functionality that yours to keep forever at no charge. I’m not talking about a free trial version of the full product, which is only free for evaluation purposes, expecting payment if you want to keep it beyond the trial period. E.g. on the EditPad web site, you’ll find three downloads. The fully licensed EditPad Pro, for people who have purchased it. The free trial of EditPad Pro, which works for 30 days of actual use. And EditPad Lite, a version with only basic features, that is forever free, for personal use.

The Lite version does not sell the Pro version. This is a common misconception. The free trial of EditPad Pro is what’s designed to sell EditPad Pro. While EditPad Lite is ultimately intended to increase sales of EditPad Pro, it’s not a sales tool. If somebody is interested in EditPad Pro, I want them to download the free trial of EditPad Pro, see how great it is, and then buy. If they instead download EditPad Lite, and are satisfied with it, the sale doesn’t happen.

Taken in isolation, the Lite version cuts into sales of the Pro version. If the Lite version offers all the features the customer needs, there’s no longer any reason for her to buy the Pro version. Worse: somebody may try the Lite version and be satisfied with it, never knowing that the Pro version would actually be a much better choice for him, even when factoring in the required payment.

Of course, no software product exists in isolation. Even if you create something brand new, you’ll have competition soon enough. Depending on the market you’re competing in, it may make sense to release a Lite version of your product, even if it will cut into your own sales.

Cut into your competitors’ sales. Just as the Lite version cuts into your own sales, it will also cut into your competitors’ sales. Offering a Lite version when your competitors don’t can be a good way to gain market share. Upgrading from your Lite version to your Pro version will be an easier sell than upgrading to a competing paid product. The risk is that you’ll end up grabbing the part of the market that would rather not pay. You may end up as the cheap solution.

Cut into a market of freeware. There are a lot of talented programmers out there with no business or marketing skill. The result is that many markets, particularly those that programmers care about, are crowded with freeware and open source software. Some of which is actually good enough to be sold, if the developers didn’t think their day jobs provide more security (they don’t). If that’s the market you’re facing, creating a Lite version of your own is a very different proposition. That’s the main reason why there’s a free version of EditPad, but not of our other products. There are a lot of free text editors out there that are very usable.

EditPad Lite isn’t intended to sell EditPad Pro. It’s aimed squarely at those people who want a free text editor. People who wouldn’t buy EditPad Pro in the first place. It’s only when those people themselves move out of that market, into the market of wanting a full-featured text editor, even if it costs money, that EditPad Pro becomes an option. And then, people using EditPad Lite are more likely to upgrade to EditPad Pro.

A landrush is another situation where offering your software for free makes sense. Instant messaging software has typically been free, because a particular brand of IM software only becomes attractive when everybody else is using it. Downside is when the landrush is over, the winner may find it hard to earn money from a market that is used to that type of software being free.

Selling is difficult when the expectation is free. A lot of people claim giving away a basic version and selling the extra features is a good business model. A lot of those people seem to work for venture-funded companies that disappear when the money runs out. The basic version doesn’t become a good sales tool until its reasonably feature complete. And when it’s reasonably feature complete, the extras you’re trying to sell start to look like overpriced luxury. If you need a good sales tool, charge even for the basic version, if you must confuse your customers with multiple versions. And give them a free trial of everything you sell, with appropriate restrictions to make the trial an actual trial. Those can be time limits, usage limites, watermarking, etc.

Making money from free software, whether that’s open source or closed source, is hard. A common strategy is selling support. That works with software that requires a lot of customization, or is inherently complex. Then the customer is probably already used to paying for support, perhaps in the form of in-house staff. It doesn’t work well for end-user software, though. If you need tech support for a text editor, that means the product has failed.

Another common way to monetize free software is to turn the software into a hook, and the user into the product, to be sold to advertisers. Broadcast media have been doing that for a long time. But is much easier to sell when the customer has limited options, such as limited channels and no Tivo. Adware (software with embedded banner ads) failed miserably in the late ’90s, despite heavy venture capital funding. Now Google and Microsoft think they can do better with online apps context ads. Though I have clicked on ads shown next to my gmail, none of those advertisers got any money from me. Ultimately, that doesn’t work. Showing ads to a user focused on her job is very different to showing ads to somebody actively searching for something. I have spent money with businesses after finding them through a search engine ad. In fact, I prefer to click on the ads instead of the organic links when I’m looking to spend money.

Before you release a free version of a product, make sure you’re ready to accept the consequences. A free version can boost your business, but it’s certainly no guarantee.

3 Comments

  1. […] Without “snarketing” tactics, the free version of something has very little power to sell the full version. Though there are certainly EditPad Lite users who later on purchase EditPad Pro, it’s not EditPad Lite but the free trial download of EditPad Pro that is designed to sell EditPad Pro. During the “new economy” of last century’s internet boom, everybody was going to get rich giving away free stuff. Well, the world doesn’t work that way. People don’t come looking for free stuff with their wallets in their hands. Be good and charge for it is a much better model. Next time I’ll talk about why we do make EditPad Lite available for free. […]

    Pingback by Snarky about Snarketing - Micro-ISV.asia — Thursday, 24 July 2008 @ 18:53

  2. According to Yahoo, your EditPad Lite page has over 7000 back links – almost twice as many as your home page. So SEO seems to be a valid reason for creating a Lite version.

    Of course, if you were a real Snarketer, once a year you could create a new EditPad Lite page and do a 301 redirect from the old page to the EditPad Pro page to pass all that link juice.

    Comment by Nick Hebb — Friday, 25 July 2008 @ 0:51

  3. The difference in the back links are a consequence of freeware stealing the limelight of commercial software. The links themselves should never be a reason to do a Lite version. They’re just a part of the reasons I’ve mentioned.

    Likewise, downloads of the Lite version are also much higher than that of the free trial of the Pro version.

    If you create a free version where there was only a paid version before, you’ll get more inbound links and more downloads. But that does not necessarily translate into more sales. That’s the whole point of this article. Free attracts crowds, not buyers. There may be future buyers in the crowd, or there may not be.

    Comment by Jan Goyvaerts — Friday, 25 July 2008 @ 17:30

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