What is the best approach to informing customers they will now pay a fee for a service that was free

I agree with Jim. The grace period allows for clients to adjust to the news. You will lose some customers if your competitors offer this type of incentive but you don't. Try to ease the blow of the fee with added value proposition.

Ex. By xx/xx/xxxx, our company will be charging xx fee for this service due to increase xx, xx, and xx. Our company understands the importance of cost savings to our clients and we continue to give more to our clients that is why we are now offering xx free of charge. (switch something in place of it or offer a promotion for a period of time)

You need to pay attention and focus on the loyal and "regulars" customers. If they are loyal they will understand if you are able to have a reasonable explanation for the fee.

Hope that helps!

While a grace period is the best way to change your fee structure, you should also consider the type and intent of the charges.

For example, many companies now charge callers a convenience fee for payments - depending on the channel used. Web payments are generally free, IVR payments have a slightly higher charge, and agent payments have the highest charge. This structure does multiple things, including providing customers with free payment options through the channels that cost you the least.

If the service that you wish to start charging is automated, an announcement prior to the change for at least 1-3 months prior to the change is best. After the change is made, offer alternative options for free or reduced cost through announcements, web postings, and agent scripts.

I agree that the most important factor is a generous 'notice period so the client can adjust their expense budget expectations and particularly to avoid appearing to force their acceptance by eliminating the time they may want to take to adjust payment or audit processes to accommodate payment of the new fee - or to compare value to alternate offerings.
Another one I don't see mentioned yet is the importance of ensuring you are set up on time internally to bill accurately, clearly and timely. It may be unfortunate enough for the client that you now have to bill for a previously free service. Don't compound the disappointment with a billing fiasco.
As a contingency, you should also agree internally and ahead of the change which exceptions you would consider for which clients. For instance if your biggest client says they won't pay, would you stick to your fee plan or be willing to offer something rather than lose them: a volume reduction on the new fee, a delayed activation of the fee, an additional enhancement?
You may want to inform them in different ways: 'A' clients get a visit and are notified before the broadcast is made? Do 'B' clients get a call and 'C' clients just get a letter? Who should visit/call which clients? the President, the sales VP, the account manager.
And send a reminder a month before the effective date.

If at all possible give them enough advance notice to allow them to get to the next budget cycle before the change takes place. Since not all the customers budget at the same time, this can be a challenge.

Giving options is very helpful. For example if web support is still free, but there will be a charge for phone support, they may be perfectly fine with using the web support. Options help customers feel they have some control over the situation.

Most customers want their vendors to stay in business and understand that it is necessary to have a revenue stream. If the situation was appropriate, I would share it with the customer. For example, explain that phone volume is up 50% and while it was previously possible to absorb those costs, now in order to provide the same level of service requires more resources which is necessary to charge for.

With the understanding of why it is necessary, a chance to budget for the additional fees, and having options, they are likely to be understanding.

Face to face if possible but always allow for a transition period (I'd say at least 30 days, perhaps more) between the time you tell them and the first time you start billing them.

Michelle raises an interesting point. What is the service that was free but which will now attract the fee? Knowing that would help us give you more focused advice.

To Jim's point, do be sure that the service now being charged for has a perceived value commensurate with the amount involved. The tactic of trying to influence behavior with fee structures is: 1) increasingly common, 2) transparent to anyone with a room temperature or higher IQ, and 3) annoying.

I have to agree with John Green. If possible, DON'T.

These people made an agreement with you about a price ($0), and even if they do greatly value it, increasing the price feels unfair. Sure, if Whole Foods charged you $0.25 per paper bag it would make business sense. But you've already valued those at $0 and you'd be pissed. (Instead, Whole Foods gives a discount if you bring your own.)

Time and time again, changing the price on people has caused an uproar. Grandfather people into their old plans, and take the hit, if possible. You /can/ make those plans restrictive, so they want the new (paid) plan...for example, you could stop adding new features to your Free plan.

Three examples of pricing backlash in 2010 alone: http://ar.gy/o3K