David Sacks: In the early days of PayPal, we lost money on every transaction. The product was free, and we lost about 2.5% of the transaction to fraud and credit card fees.
We liked to say, “When you’re losing money on every transaction, you can’t make it up in volume.” We realized that we needed to introduce fees.
Early on, we didn’t have confidence that people would pay for the core service, so we gave it away for free. We always thought we’d up-sell people to some bigger, better model, in the future (like a bank model or some other financial account). We never thought people would pay for the core PayPal service.
Then the dot-com crash happened, and we ran out of time to come up with Plan B. So we said, “Listen, we have to impose fees on the product right now because otherwise we’re going to run out of money.”
When we imposed fees, we migrated 95 percent of the user base to paying for the product and experienced very little attrition; almost no one churned.
Within a six-month period the company went from losing a ton of money to being nearly cash flow positive.