Saas · Pricing strategy

Is Freemium a must for a SaaS application?

Monica Borrell CEO and Founder at Cardsmith

January 10th, 2015

My company has an early stage planning and project management software with a couple of dozen charter (free) customers using it. We are currently looking at targeting the product toward freelance consultants who work in virtual teams, often across multiple clients and projects. Basecamp would be a competitor, and they don't offer a free version (min. is $20 / month), but they are also well established and the norm these days seems to be a free version with paid premium versions for either added features or added users or added content (e.g. projects). I would especially love to hear from others who have had to make this decision. Is freemium a must? What is the downside to a paid version only with say a 30 day free trial?

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Dick Hardt

January 10th, 2015

Kenny Van Zant, COO at Asana did a presentation on this and has a decision matrix on freemium vs free trial at http://www.slideshare.net/jamescham/lessons-from-the-new-sales-model

Rodrigo Vaca Product & Marketing

January 15th, 2015

Monica -

It is a very good question and there is no short answer to it. At Zoho, we have over 25 different products - and all, but one of them, have a freemium version. I'll tell you this - freemium works very well for lead acquisition. But that's it. After that... you still have work to do in product, marketing, sales, on-boarding, etc. In a start-up these all might be the same person, but they are still functions you need to consider.

I'd think about this in terms of your target market. You say you target freelancers - so that's pretty much the lower-end of the market. In my experience selling to freelancers and SMBs, it is not only hard to attract them to your site (you know this - but the PM space is crowded!), but getting them to convert -and stay- is also a continued business challenge in this pace.

Lastly, think of it in terms of your CPA. The moment you're spending tons of time talking to customers, taking them through a demo, doing follow-up, etc... you're just raising your CPA. And that's not just an accounting myth, that eats into your cash flow. 

BTW, you're technically right on one point, but historically wrong. Basecamp DID have a freemium pricing model some years ago:
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They did away with it some time ago, maybe 2 years? You can read this one of two ways:
- They were using the freemium pricing to get to be well known, and they stopped it as soon as they became successful
- They ran into trouble (Highrise didn't pan out, neither a some of their other products), so they had to turn free off to generate more cash.

Mike Web Developer

January 10th, 2015

I think the downside to a 30 day free trial is that it is such a short period of time for a project management application, in my opinion.  It might be helpful for you to determine a typical project duration for existing or potential customers.

If, as a freelancer, my projects are less than 30 days then I might give your product a trial run.  However, if I know that my projects will typically last longer than 30 days, then I am essentially committing to your product from the beginning.  What if I find that I am frustrated and dislike using your software for my workflow?  I don't want to switch project management software in the middle of a project, because that creates confusion and extra work which drives down my hourly earnings since it is not billable time.  Optimistically, I would consider a free trial to be a first-time customer discount.  If my projects run 60 days, I get a first-time customer discount of 50%.  If longer, then that percentage discount is less.

With a free tier model you (the service provider) can cap your costs by limiting user activity, and the user is likely to gain a longer trial period since they can limit their activity.  As a user, the more my activity increases and I build momentum with projects, the more likely I will want to keep using your product vs. another, because it's the path of least resistance. I think that is referred to as "customer stickiness."  Not only am I more comfortable with your software over time, but since I am building momentum, this probably means I am also generating more income with client projects, which means I might be able to justify paying for your service.  If I only have a 30 day window without a chance to build momentum, I will cancel the service before I even have a chance to build that momentum.

On a side note, if your software mirrors the sticky note analogy, make sure you are also aware of Trello as a competitor.

Hope this two cents helps.

Felix Livni CEO at Schedulista

January 10th, 2015

Freemium is not a must. As you point out, Basecamp has no free version. Many others as well.

Jason Lemkin writes re Freedmium and SaaS business apps:

"Freemium alone, by itself, simply can't scale that big absent relatively rare, universal apps that almost every single business needs and is willing to pay > $10-$20/mo for.  There simply are not enough businesses in America to make the math work."

His entire post on Freemium (and just about everything he writes) is worth reading:
http://www.quora.com/Is-freemium-a-stable-economic-model-Why

Do you have funding? Or are you bootstrapped? If you have more modest goals, Lemkin's analysis might not apply.

Some things that I have not heard from others: 

Freemium will impact your product, your brand, and your marketing in ways that you might not expect. 

Two examples: 

(1) It will impact customer support. If everyone pays, maybe you can put a phone number prominently on your website and talk to all potential customers, impacting conversion and changing your relationship with your customers. If you expect only a few percent to convert (IMO 5% is too high), then you probably cannot afford to do this.

(2) it will impact your options for acquiring customers. It is unlikely you can pay to acquire customers if most of them won't pay you. Advertising is more expensive as well. And, if your viral coefficient is low but meaningful (likely), viral marketing will have even less impact. 

An aside: I think it is a mistake to give your charter customers your product for free. It makes it very hard to test what is likely your primary question "Will customers pay for this?". Instead, give them your time.

Sandy Fischler Experiential Marketing Director | Event Producer | Event Management | Entrepreneur

January 10th, 2015

We've gone back and forth on this ourselves and eventually discarded the freemium option. You MUST have some kind of trial and only testing will determine exactly what works for you in terms of retention. You might need to A/B test a few different trial periods to see what the optimum time period is for keeping users engaged. 

Having spent a good deal of time examining freemium, my personal opinion is that it only works at enormous scale. Most products I know of that have a freemium model have a paid user base in the low single digits (think 5% if you're lucky). That works at a LinkedIn or Evernote level scale but I don't think it works for a small company with a big name competitor. Users attracted to FREE are highly unlikely to convert to paid, what they want is free so you have to offer something valuable enough for them to pay. 

Project management in particular is tough because you need to get an entire team on board, not just an individual user. I can't tell you how many times I've tried to entice my teams away from email and onto a PM platform and it just doesn't happen. So, what you're likely to see it a lot of signups of people testing the waters (FREE!) who abandon your product once they can't get the rest of the team onto the bus. 

Monica Borrell CEO and Founder at Cardsmith

January 11th, 2015

Thank you all so much for your thoughts and suggestions on other things to read!  I have resisted the idea of freemium up until now for many of the reasons stated above, but I recently had an outside advisor suggest that it was a must. Because we want to bootstrap for a while longer, and don't have a lot of capital, my sense is that for now we should test the value by asking people to pay after a trial version.  

Anonymous

January 12th, 2015

Question is, who do you sell to? 

If you go in low, have individual employees make the decision to start using a tool and getting used to it, then freemium is a good idea. Having to pay early, or already input their credit card will scare them away.

If you go in from the top, via CIO/CFO/CTO's, then you can skip freemium and go to 30 day trial only.

Vijay MD Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)

January 12th, 2015

You may want to look at value added pricing models.  I've seen several that allow "free" limited use for individuals if the real value is for teams -- this allows an individual to try and then recruit the rest.  Really hard to move a whole team over without one champion who already uses the platform for their own purposes

Anonymous

January 13th, 2015

Good question, Monica.

This is essentially a question of activating prospects into paying customers - the second 'A' in Dave McClure's AARRR.

Our team looked at this challenge using Sean Ellis' excellent thesis on the must have experience.

In our case, we have two concurrent products that target different markets - 1. eForm for medical clinics and 2. digital asset management for teams in Fortune 1000 organizations.

Options explored:
1. Freemium
2. Free trial
3. Live Demo (WebEx)
4. Interactive Demo
5. A combination of some, all, or none of the above.

The primary driver of our decision depended on how we answered these questions:

1. What is the must have experience?
2. What is the path of least resistance to get a prospect to that must have experience?

Through customer development, feedback and user testing we noted that the must have experience for the medical app could only be realized after weeks (possibly months) of consistent engagement. On the other hand, users of the digital asset management app realized the must have experience within minutes to hours.

Once we understood these differences, our Activation process became more evident.

I think the Freemium model is great in some situations, but not all cases. This TechCrunch article does a decent job of highlighting points to consider.

In your situation, I would find out how much support the prospective customer requires in the onboarding process. If you provide a high-touch premium solution, could you integrate service contracts into your pricing? If done right, this pricing model can offset losses for products with long sales cycles.

Mike Web Developer

January 10th, 2015

I like this discussion.  Plenty of good points to consider.



With my initial response, I assumed you wanted to acquire individual freelancers as users who would manage their own work, separate from their remote teams, but after Sandy's answer, I wonder if you want to convert whole teams to use your product.

If you're converting whole teams to your product, I would question whether any free options are necessary. If you think you can convert whole teams to your product, then free options might not be necessary.  That's not to say that your existing free users are worthless - I'm sure they've provided valuable feedback.  I'm no expert, but I would probably even keep them grandfathered in for free so that they would be my ambassadors.