This past week our top support question was, “What is a free customer?”  Chargify’s pricing plans are based off of the amount of paying customers you have, so it is important to understand the difference between a paying customer and a free customer, as it affects the amount we charge you each month.

What constitutes a free customer?

A free customer is one that has not paid you for the current month we are billing for.  A common point of confusion on this is when someone pays you once a year for a subscription.  If you charge a customer’s card once a year, they are not considered a free customer for the other 11 months they are not billed because they have already paid you for those months.

What constitutes a paying customer?

A paying customer is one of your users who paid you for the month that we’re billing you.  If you charge your customer $10/month, every month, then we’re going to count them in your paying customer count each month that we bill you. If you charge them once, for a whole year, we’re still going to count them in your paid customer count each month, because they paid you for those months.

A few days ago, we changed our pricing so that we could provide better care and additional features to thousands of Chargify customers. Although the change in pricing was the result of careful analysis of the way people have used Chargify over the past year, we didn’t communicate this change properly. In fact, our communication was non-existent, which was a major mistake (you can read more about what I learned from this on my blog and hear from our CEO).

After listening to your passionate feedback on the price change, responding to hundreds of your emails and tickets, and speaking to many of you on the phone, it became clear that we had to make some adjustments while standing firm about not offering free plans.

Here’s what we’re doing to move forward:

Insight into why we changed our pricing (definitely not greed!), and an apology from our CEO for the missteps we made.
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Hi all,

We’re still hearing the feedback and we’ll write up a “postmortem” soon regarding how we (mis)handled this. A number of people have asked for something like that and I think we can learn from it and convey some lessons from which others may learn from our mistakes, too.

I just want everyone to know that it’s definitely not because of “greed” that we made this change. “Greed” to me would mean that we’re already making tons of profit and we just want more! That is not the case.

I updated an earlier blog post earlier today to add a tiny bit about this, but the reality is that our old pricing was going to bankrupt us - if not for the fantastic backing of Grasshopper Group.

To be clear, Chargify is NOT in financial danger - Grasshopper Group ensures that.

But Grasshopper Group has a reasonable expectation for Chargify to reach profitability sooner than later. With the old pricing, and the fact that the bulk of our merchants would be on it and the majority of them paying us $0 for quite some time, the future profitability was much too far in the future. It’s costing a lot of money each month to provide what Chargify is inside and out.

A frequent complaint about web startups is that despite being cool or popular, they lack a clear business model. One textbook example was YouTube. The service had millions of adoring users, but financially speaking, YouTube ran at a loss until Google bought them out in 2006 for $1.65 billion. For a time, the default business model for high-traffic but unprofitable websites was displaying ads. But since effective advertising depends on more than just mass exposure (like targeting) it is not always an effective business model.

A better answer for many has been the “freemium” model, where a company offers its core product or service for free and charges for advanced or special features. Rumors have cropped up in recent years that web giants like Twitter and Facebook, for example, are considering freemium strategies. Below, we’ll profile seven companies that have already mastered the freemium model, and how they did it.

Skype

Web-based telephony company Skype provides an excellent example.