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Estd 4.22.2023
Below is a direct answer based on the principles outlined in our pricing strategy book, Price to Scale:
• The idea of a usage-based free tier is very much aligned with the cell phone plan model, where you provide a limited bundle (for example, X events or credits) free of charge to engage users. Once they exceed that threshold, they move into a paid tier. This approach not only hooks users early but also aligns with the natural growth in usage over time.
• Our book explains that when using consumption-based models, it’s crucial to base your thresholds on predictable usage metrics. You need to evaluate what “usage” really means for your product—whether it’s events processed, data used, or some other metric—and then analyze historical or anticipated consumption patterns. This helps in identifying a threshold where customers can experience value without overusing the free portion immediately.
• Here are some practical steps (as discussed in Price to Scale) to decide on where to set the free threshold:
- Collect user data or run experiments to understand typical usage patterns during the initial trial phase.
- Determine a threshold that gives users a “hook” – enough free usage so that they see the product’s value, but not so much that they never need to pay.
- Factor in the cost structure: make sure your free threshold aligns with your unit costs and your overall revenue model, so that when users exceed the free allotment, the incremental charges are sustainable.
- Consider using a 3-part tariff (often likened to cell-phone plan models) where you offer a set number of units for a base fee and then charge overage fees. This structure provides a natural transition from a free or low-cost trial to scalable revenue as usage grows.
• In summary, the decision on setting a free threshold should be data-driven and aligned with both the value delivery of your product and your cost structure. As detailed in our book, Price to Scale, analyzing usage predictability and having a generous yet calculated buffer can be the key to a successful usage-based free tier that hooks users and seamlessly transitions them into paid plans.