On June 28, Evernote announced changes to its paid subscription plans and freemium service. In a nutshell, it is simultaneously raising subscription prices and placing limitations on the free service. 

To me, this signals the beginning of the end for Evernote. 

The Catch-22 of Freemium Business Models

Evernote follows a freemium model — one that assumes that by offering a free version of software, it will attract enough users who eventually will be willing to pay for an upgraded version (with presumably more value). 

Generally, the software company holds back certain features from the free service. This differs from trial software, which offers free use for a limited time and requires a subscription to continue use. Freemium also differs from freeware which remains free and is not used as an inducement to buy more. 

The freemium business model's problem is that it requires a high enough conversion rate to justify the costs of the free users who stay free. It’s a built-in problem. 

The free version has to be ultimately useful enough to attract and hold users, while paid subscriptions have to offer enough additional value to persuade users to actually upgrade to a subscription. If the free version doesn't offer enough value, the company can’t attract enough of a user base. If the upgraded versions don't offer enough additional value, then not enough free users will convert to subscriptions and the company doesn’t make enough money. 

Evernote's Dilemma

The core issue is that the free version features are typically the most important features. Only power users need the extra features such as additional storage or administrative functions. 

Unless enough power users adopt the software as a work platform, most of the company’s users will be paying nothing. Worse yet, those free users cost money in infrastructure and will leave if the product doesn’t continue to evolve. 

It’s a Catch-22: Keep spending money on users who will never pay for a subscription or have no base from which to convert users to subscriptions. Evernote has faced this problem as it matured — it has to continue to develop software for people who will never pay for it. 

Evernote has tried to sell the idea that it can provide for the productivity software needs of a company, but in an better designed format. It’s pretty clear that this strategy is not working. Very few organizations can replace Microsoft Office with Evernote. 

Meanwhile, Microsoft has figured out how to do things like cloud services, document-oriented collaboration and mobile computing, eroding much of the advantages of Evernote. It also continues to evolve its core productivity suite, Office365, while creating its own highly regarded note taking application, OneNote. 

Testing Evernote Users' Loyalty

Evernote's response appears to be to punish free users by limiting the number of devices on which they can use Evernote. A higher cost for subscriptions puts one more hurdle in front of free users debating whether or not to subscribe. At the same time, Evernote loyalists will pay more for their subscriptions. 

Making the free service less attractive and widening the gap between free and paid subscriptions seems counterintuitive. It may reduce the number of users available for conversion and make it harder for those who want to do so. Upping prices for loyal customers who have resisted the urge to switch to competitors is also strange.

These changes have all the earmarks of desperate cost-cutting. The burden of so many free users is weighing down the Evernote business and it has probably figured out that most won’t convert. In these situations, it’s easy to think of free users as freeloaders who the company is better off without. Of course, many of those freeloaders may be goodwill ambassadors who advocate within their companies for Evernote subscriptions. 

It’s hard to imagine this is good for the Evernote brand either. This seems like a classic case of the financial types pushing aside the marketing folks.   

Ultimately, this looks to be the beginning of the downward slide for Evernote. It is setting itself up for the death spiral. Don't be surprised to hear about a “pivot” in the near future — which is just as well. It may need to reboot its business to dig itself out of the deep freemium hole and survive. 

Title image "Wrinkles" (CC BY 2.0) by  Son of Groucho