Devir Kahan evaluates the merits of pricing digital services with free and paid options, using Dropbox as the evaluative lens. While Dropbox is a private company and does not release financial information, he's pieced together what has been made publicly available (e.g., "Dropbox manages to bring in upwards of $500 million in revenue a year, no doubt from their Pro accounts", and "96% of Dropbox users stick with the free account") and makes the following assessment:

"Dropbox seems to be doing fine financially bringing in half a billion dollars every year, but most people are not paying anything at all. Most people are using the product for free, just as they would any other free product. And yet the company is chugging along just fine. They might not be making as much money as they could if they charged every costumer, but as a whole, they are bringing in cash and are doing just fine. But again, to their average customer, they are a free product. And this makes Dropbox a rather interesting example."

Doing it Right

Would other services -- could other services -- do the same? Why doesn't Instagram do this, or Twitter, or Facebook, or Flipboard, or __? Dropbox has positioned itself as an exemplary product that exhibits a model of free and pro/paid versions, existing and working well (or so we can assume based on the revenue number unearthed by GigaOm; revenue of $2mm per employee isn't shabby). Following the 96/4 logic of Dropbox's reported paid userbase, other services could assess a monthly or yearly subscription fee for pro users that earns them "more" or "better" of something, incentivizing them to stay within the ecosystem (after all, they would be helping fund it). If only other companies that current do this would come out and state (I'd hope) successful numbers, we'd have a genuine case for larger companies to do the same (and perhaps pull back from their reliance on advertising). Additionally, services (or products -- because let's face it, the news industry could really use a rejuvenation shock with compelling paid subscriptions) could establish a baseline expectation of worth instead of offering everything perceptively free.

A few examples of other companies that, I'll assume, do this well and successfully:

  • Checkvist (free service and pro version at $20/6 months)
  • Simplenote (free service with ads and pro version at $20/year)
  • Instapaper (free service with paid app and pro version at $1/month)
  • Letterboxd (free service with paid version at $19/year)
  • Rdio (limited free service with paid version at $10/month)

These services all allow free usage of their products for anyone willing to sign up. While some of the free versions of the service are limited (Rdio has limited play sessions per month, and Checkvist doesn't allow for automatic backups of outlines, for instance), they are still very functional variations of the full product. Dropbox is aligned in a similar way -- it allows for full functionality and usage of its service for free but has a limited amount of space available for free users: 2GB. The paid service is priced at $99/year for 100GB (a massive hike in storage). Apparently there are enough paying users for Dropbox to sustain its service for the non-paying userbase.

So what would the revenue numbers look like if Facebook, Twitter, or Tumblr would have charged for a pro version beginning today? I've compiled a little table showcasing this based on the Dropbox 96/4 model, and assuming a relatively nominal charge of $1/month for a pro version for each service.

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As you can see, both Twitter and Tumblr would exceed their current annual revenues by successfully charging for a pro version of their services. Sure, they could charge more (or less), or even offer tiered pricing. If the need is only for 4% of the userbase to pay, I'm sure these numbers are absolutely achievable. For some users, a meatier version of a service they use everyday or rely on is worth the cost.

Doing it Wrong

There are ways to do this model wrong, however. Apple's iCloud service is one such example. Since launching iCloud, most users have unknowingly relied on the service to backup their data every night, as well as sync various data between apps and servers. The storage available for free (5GB and the ambiguously free Photo Stream of 1,000 photos) to iOS users is paltry for 2013 standards, especially when you consider that many Apple users own more than one iOS device (say, an iPhone and iPad). Pricing for "pro" versions of iCloud are as follows:

  • 10GB: $20/year
  • 20GB: $40/year
  • 50GB: $100/year

Not only are these prices absurd, they also grind against the goodwill of Apple customers purchasing and relying on the iOS device software ecosystem. They're taking photos and videos as part of their expectation of the device, and little do they perhaps know that the Photos app is weighing heavily on their iCloud storage at 4.8GB alone. And let's not forget that the use of Apple's @me/@icloud mail service is also tied to iCloud storage. So 5GB can fuck itself -- my iPhone alone has a 7.5GB backup.

The reason Apple is perceivably doing this wrong is because of the intrinsic nature of iCloud and its oblivious reliance by owners. If several iOS owners have Gmail -- and let's assume a great number use Google's mail service -- they know never have to worry about space (Google offers 15GB+ of free space across Gmail, Google Drive, and Google+ Photos). But to be harassed by the device you bought because you're creeping on the backup limit that you may not even know how to deactivate is a frustrating friction that is a dangerous misstep. If you're using Dropbox to backup all your photos and videos, you are well aware you're a freeloader riding on 2GB. If you value the service that you chose to sign up for, and begin to rely on it, you'll likely upgrade to a paying user for more space. iCloud was never positioned this way.

The Way Forward

While I doubt many, if any, of the social platforms will offer a paid tier to their service anytime soon, it's worth contemplating for smaller products moving forward. There is no harm in offering a better version of your service for a price, especially if you can garner a large enough percentage of users to pay and sustain your entire business (including the free users). Some products, like Basecamp, probably don't work well enough to permit a free and paid option (their free option is ludicrously limited). Then again, they really aren't appealing to freeloaders to begin with -- it's positioned as a paid SaaS, and the owners won't let you argue about it. But other services most certainly should offer something compelling (hello IFTTT?).

What happens when you start paying for too many things and can't reasonably afford it? Pay for the services with the best paid options and use the other ones for free. Someone else out there will value each service in their own way and likely pick up your slack.

Sources