- Only use a freemium business model when the
following three of four things are true.
(upbeat music)
I don't know if you've ever thought about starting
a SaaS company that uses freemium or
you have a freemium product today.
But I've been building companies now for over 17 years.
I've studied freemium in a big way.
I was, I'm a formal advisor to Hootsuite,
one of the large freemium companies.
I'm friends with Drew from Dropbox.
So I've seen in the early days
how they've built that company.
I even integrated with Mailchimp in my company Flowtown.
So I've worked with Ben personally,
the founder and CEO there and watched them
go through that transition from paid only to freemium.
So I've studied this industry like crazy.
And you know recently I was on the phone with an
entrepreneur and she was walking me through her
business model and her pricing plan.
And when I looked at the market she was in,
they were B2B SaaS and the pricing of the model.
I mean it was $7 a, it was free to use.
And then $7 a month per company,
unlimited users, unlimited seats.
I was like, "I don't want to be critical
"but right off the bat, you'll never be able to scale this."
And it took her by surprise.
She's like what do you mean?
And I was like freemium and your model is not going to work.
She's like why?
And I said well, you're violating too many of these rules.
And then I walked her through these four different rules.
And she realized that she had made that mistake.
And it had been three years that she sat on this
and not really seen any growth whatsoever.
And I think that conversation really sent her down the path.
And that's what I want to share with you today.
So the first one is, you got to make sure that the
potential number of users is in the
tens of millions of users, tens of millions, right.
So, if you're building something for like
a very super niche SaaS market like
doctors that do a very specific type of operation.
That's not tens of millions of users.
And there's a reason why you need tens of millions,
because of the way the economics works.
So, number one is make sure the total
number is in the tens of millions.
Second one is that free distribution
is a competitive advantage.
You know I remember seeing Mailchimp when they did this.
That was their key thing, it's like look,
there's all these other email providers out there.
But if we do a free product, especially with 2,000
emails on your list before you have to pay.
That is incredible.
But they, you know Ben wrote this amazing blog post,
I'll link it up below, that walked
through his thinking and the math.
You know ten plus years of data doing paid only
to finally say, you know what, if we can increase
our marketing, it was a marketing decision
to go freemium, if we can increase the amount of
people in our trials, we know that they're going
to convert at this level and overall it's
going to net us ahead from not doing it.
So, it was a very deliberate business model decision.
And really it's free is a competitive advantage.
If that's true then that is a potential
for a freemium business model.
The third one is that your product has
a very simple and straight- forward value proposition.
When people sign up, if it's complicated,
if they need a customer success team,
if they need somebody to talk to from a sales or
account managers, you do not have a simple process.
When I'm talking about simple, value,
straight-forward is like a Dropbox.
Think about it, I have a folder on my computer.
I drop folder or files there and I can share it.
That is straight-forward and simple.
You know and that when you look at all the top,
you know, Evernote, very straight-forward.
I put stuff in here, I can search and I can retrieve it
on all of my different devices and they're synchronized.
Very simple and straight-forward.
If that's not true, then I would challenge
you that maybe freemium is not the
right decision for your product.
And then the fourth one is the marginal
cost to serve additional users is negligible.
It doesn't matter, like it's like fractions
of a penny because the free is kind of
taking the marketing spend.
Instead of spending it on marketing to get more users,
you get free users in there using the product,
getting, you know, to that moment of gratification
and a-ha and they love it and the core value.
And then they tell other people about it.
It's word-of-mouth marketing on steroids.
And it's a decision if it costs you $5 to support
a new user and most of them are free, it will never scale.
And this, I see this happen so many times.
So, those are the four.
A really quick recap is the number of potential users
in the tens of millions, okay, tens of millions.
Two, that free distribution is a competitive advantage
based on the competitive set in your market.
Three is that the product has a very simple,
straight-forward value proposition.
And four that the marginal cost of serving
an additional user is negligible,
it's like pennies, it's fractions of a penny.
I mean just think about this, if all you,
if you wanted to get one to four percent of your
users to paid to reach
a hundred million dollars in revenue.
Okay, so if you want to get one to four percent
of your users are paid, hundred million in revenue,
and charging $100 a year, you would need to get,
with a four percent conversion to paid.
You would need twenty-five million users using your product.
Just think about that.
Do you have the financial means to scale,
to defer, to build-up, to understand,
to build the capacity to scale that product in a way
that you can get to twenty-five million users
because only four percent are going
to be paying 100 bucks a year.
I mean, you know there's companies like
Slack and so many other incredible freemium companies
that you can look to.
But they're the exception not the norm.
And I think that freemium has caused more harm than good
for a lot of SaaS companies and I would argue if at least
not three of the four of these kind of filters or rules
fit that you might want to consider going to a kind of
a free trial to paid or paid only business model.
As per usual, I want to invite you to subscribe
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And I want to challenge you to live a bigger
life and a bigger business and I'll see you next Monday.