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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | DECEMBER 24, 2002 ENTREPRENEUR Q&A To Thrive, First Survive Justin Kitch knew his Homestead Web-building site would fold if he didn't switch from free to fee. Here's how he met the challenge
Making the transition -- both with customers and employees -- from a free service to a subscription service was tough, but Homestead has survived. In the past year, its subscription business has tripled and it counts more than 12 million registered members. Smart Answers columnist Karen E. Klein recently spoke with Kitch about changing the Homestead business model midstream. Edited excerpts of their conversation follow: Q: Once you realized you had to start charging a subscription fee, how did you go about implementing it without completely alienating your clientele? A: We created a paid premium service for small-business owners in April, 2001, as a transition phase. Then, in summer 2001, we converted our entire customer base over by notifying them that they would have to start paying, or they could keep a limited-space, three-page site for free. Q: It must have been scary making that change. A: It was frightening. But I tried to be upfront about everything. I sent an e-mail to every one of our 1 million members, telling them that we respected their business but our sponsors were going away and we needed to charge them a fair price to continue using our service. I explained that we did not want to go out of business, because we'd be disservicing them if we did so. In the e-mail, I included a response form asking them what they would be willing to pay and letting them know that they would get a discount because they were existing customers. Q: What was the response like? A: I got 150,000 reply e-mails in 24 hours. About one-fifth of them were from people who were angry, who told us we were being ridiculous, it was a free country, and that kind of thing. But most of the responses were very good news. Not only did we find that there was a solid group of people who were willing to pay, but they were willing to pay more than we had anticipated charging, so we were able to give them a nice discount for the first year based on their being existing customers. I think the response form really helped, because it gave them the feeling that we wanted to consider their input, and a chance for some of them to air some grievances. Q: Where did you go from there? A: We wound up with about 10% of our active customer base converting to some sort of paying package immediately. Another 40% converted to the smaller, free site. About 50% left, but a decent amount of them have since come back, especially since other free Web building and hosting services have gone under. And of those 40% who opted for free sites, more are coming back every day to upgrade to a paid site. Q: How did you handle the customers who left? A: First, we realized internally that there are people who simply won't pay for anything, especially something they had been getting for free. So, our response was not to get upset with them, to let them know it was okay, and to give them 100 days to find another place for their Web sites because we recognized that these sites were important to them and they felt proprietary toward them. That grace period allowed people who were upset time to adjust to the idea and got them through the emotional part. Q: Why continue offering a free option, when your business model is now based on charging for the service? A: Because all the sites that we build and host include a big button on them that allows them to sign up for the paid service. So, anyone who uses our free service carries that button on their Web pages. That translates into 400,000 or 500,000 Web sites out there generating branding and word-of-mouth for our company. Hosting a small site costs less than what we get in viral marketing from having those sites all over the Web. Q: How did your staff handle the transition? A: They were upset, too, and most of them were also users of our services. We have a weekly meeting every Monday, so I eased them into the idea a couple of weeks ahead of time and introduced them to the premium service first, before I told them we were going to start charging all the members. I also let them preview the e-mail letter that I sent out, and got their feedback on it. I've found that communication and trust is the key to everything. I never give false hope or tell people I can control a situation when I know I can't. And also, I hire smart people who are not jerks, and I treat them like I'd like to be treated myself. Q: What else has changed since your business model shifted from free to paying customers? A: Almost everything. The biggest challenge was rewriting all the marketing and customer-acquisition rules for our company. And since we were charging, we had to improve the service because, suddenly, people expected a lot more from us. We didn't have a billing system or a telephone support team at all -- so we had to create all that overnight. Q: You obviously had to make some investment in the company at a tough time. How did you handle it, financially? A: We actually raised a round of funding in the middle of the transition from our inside investors, who are wonderful people and have been very supportive. And we had caught the economic shift and made the changes early enough so that our business was in good shape, financially. We had a fabulous year in 2000, but we decided not to go public as we had planned because we realized how the industry was changing. Over the next 12 months to 18 months our revenue plateaued, rather than dropping, because, as we lost sponsors, we began picking up subscriptions. Since we hadn't gone public, I still control a lot of the company, so I could do what I thought best. And I made a major pitch to the investors, telling them that if we didn't put money into upgrading our service, we would have a death wish for the company. Q: How has your new marketing program been going? A: Well, it's been a challenge growing our business. We realized that now that we have a fee service, we had to figure out a way for people to sample our product. So we decided to offer a 30-day free trial, which was against our gut instincts. But it has been one of our biggest marketing successes. All of our marketing is driven around getting people to try the service. We've also focused a lot more on small-business owners. In the last 12 months, we've gone from 7,500 small businesses that were paying $20/month or more, to 18,000 small-business clients. Q: What advice would you give to business owners going through crisis transitions? A: It's very hard when the chips are falling to keep yourself from panicking and having tunnel vision set it. But if you do that, I think you seal your doom and wind up hitting a brick wall. What you have to try is to keep the blinders off, continue thinking long term, and don't be afraid to change everything if you need to. At the end of the day, we had a product that people valued -- great software and hosting and good customer service. And that's what saved us.  Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | DECEMBER |
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