5 Reasons Why Every Startup Should Offer a Free Tier, and 1 Big Reason Why They Shouldn’t

A well-thought out free-tier strategy can be incredibly effective for bringing in new or “on-the-fence” customers. A poorly executed free-tier strategy can damage your brand forever. 

A friend of mine is the owner of a minor league baseball team. He once told me that he had one rule for the promotions he ran to maximize attendance at the games. He would discount – or even give away – food, drinks, souvenirs, anything associated with the ballpark experience. 

Except for one thing: The game tickets themselves.

“The minute you do that,” he said, “you devalue the product on the field.”

He’s right, of course, and that’s the one big reason you should never give away the “product on the field” for free. Yet startups, especially tech startups, give away their product all the time in the form of a free tier. They let you use their product as much as you like for as long as you like, within certain limits. 

Here’s the thing. Those free tiers work. Unquestionably, but within certain limits.

Ultimately, no matter how small the discount or how short the trial, the product will always take a perceived value hit. At some point, that hit to the brand is no longer worth the additional conversion rate. When you think of market leaders – Disney for park tickets, Apple for hardware, Netflix for streaming – you realize that the category winners don’t discount their product, or at least they make it really difficult. 

So why am I telling you your startup needs a free tier? Because in this case, devaluing your product is exactly what I want you to do. I’ve learned that when you lower the value of the product, within certain limits, you gain the knowledge and the power to prevent both you and your customers from falling into some bad habits.

Once you take away the “pain” of a product’s cost, you remove any artificial necessity to engage with it. When that happens, you immediately realize how much a customer actually “needs” your product versus how much they “want” your product.

I’ve learned that if free-tier customers don’t use or have a low-level of engagement with a product, it’s only a matter of time before the paying customers figure out that they’re overpaying for a product they don’t need, no matter the price they’re paying or how much they want it.

Figure out how to get your free tier to engage, and it’s a guarantee your paying customers will as well. 

What overuse might be suggesting is that there is not enough of a compelling reason to become a paying customer. You might be giving away too much, but it’s more likely that what you offer at the paid level isn’t worth the price. Or any price. 

There are several apps and SaaS products I use at a free tier that offer a paid level that isn’t compelling to me. However, if they told me that I would need to start paying for the same exact usage I get today, I’d pay in a heartbeat – unless I found a competitor offering the same level of usage for free, a scenario that’s usually likely. 

This is the “Waterford crystal as a doorstop” issue. Misuse or abuse of a free-tier product usually suggests that the product’s true value isn’t being communicated correctly, or at all. 

But despite conventional wisdom, misuse and abuse of a product can also shed light on opportunities in terms of use cases the product doesn’t formally address – and maybe should. If your free tier customers are regularly using your product for use cases it wasn’t intended to fill, you might be able to open up entirely new markets just by making small changes to your feature set or pricing model. 

You can usually mark down any customer satisfaction metric when the customer isn’t paying for the product. If they’re not rating your product five stars out of five, it means they’re rating it zero out of five.  

But where this really makes an impact is forgiveness. When your product or company makes mistakes, especially in terms of product usage or new features, free-tier customers usually tend to be more forgiving and patient. 

What this means is you should roll out new products and features to your free tier first, and if they accept them with anything less than “five stars,” find out why and fix it before you unleash those same problems on your paid customer base, and thus, put real revenue at risk. 

When the customer doesn’t understand or appreciate the value of what they’re getting, they’ll ask for much more than is economically feasible. 

But often, outrageous demands mean there’s either a need or an opportunity somewhere that you’re not aware of. You should address those needs before they become a problem at the paid level, and explore those opportunities before your competition figures out how to make them economically viable.