Need help to figure out what should be included in a free versus paid membership to a subscription site.

I've also been toying with this question for an app that I'm building. I want to do a free version and a premium version, but I'm finding it difficult to really think about where to draw that line in terms of features.

It is difficult to make this argument from a theoretical perspective, but we should also think about conversion rates. How many people per 100 or 1000 do you expect to upgrade to premium? This will obviously change between products, but from my research it seems that somewhere around 1-3% is pretty good, at least starting out.

So, when we think about it this way, you might consider including enough features in the free version to attract mass numbers while having some additional features that might appeal to that 1-3% of people.

This can also help you plan out you break even point. If we have 20,000 people sign up, and convert 3% at $3.99 a month, you can expect a revenue stream of $2394 if it costs us nothing to attract users. If you do marketing, and you should, it might cost us say $0.15 a user to get a signup, which translates into $15 dollars for 100 users, or $5 a conversion using the 3% model. At this point we're losing money on the product unless we are using a subscription based revenue model since we only charge $3.99 for the product.

The trick is playing with this model until it makes sense and produces the results you want. Using these figures, we have a few options to become more profitable. First, we could simply try to improve our conversion rate while keeping our ad costs stable, maybe running A/B tests on some landing pages or trying new features or special promotions. Second, we could simply raise the price to make this equation balance better in your favor. This could correspond to new features, or simply apply to all new purchases from here on out.

I'm interested to hear what others in the community think about this question.

Cheers, JE