Is all B2B software moving to freemium?

Jared Tame
May 28 · 6 min read

I really enjoyed an interview with the CEO of Hubspot.¹

His thesis:

Business software is moving towards freemium models. Nobody wants to talk to sales reps, they want to self-evaluate. User experience (particularly on-boarding) is the new key differentiator.

This makes sense. At Agave, we use a lot of B2B tools. There’s Google Suite, Slack, Heroku, Slab, GitHub, Asana, many more. I’ve never spoken to anyone at any of these companies, ever. I just signed up, started using it, and then pulled out a credit card when it made sense. But I never needed the credit card until it really made sense.

Is this going to happen to all business software? Here are the old and new ways this could play out.

Patterns in a sales orgs (old)

  • Demo-driven sales process driven by a sales rep, not the user.
  • Price is expensive and hidden until the end of any discussion; this is done to prevent what’s called sticker shock.
  • Annual contracts that lock you into at least a year commitment, whether you use the product or not.
  • Complex on-boarding calls to learn how to use the software.

Patterns in a product orgs (new)

  • Instant sign-up with ability to self-evaluate
  • Price is transparent and based on usage (“Fair pricing”, “prorated to the second”)
  • Discounted plans offered in exchange for longer commitment, but no annual lock-in required
  • Only add a credit card when it really seems necessary, otherwise usage is free for an unlimited period of time (current conventional knowledge says 14 day trial convert to paid is the optimal path)
  • Support is handled through chat and documentation, or escalated to account managers on premium plans
  • On-boarding built into the product (Slack example)

If I said all business software is moving towards freemium, that’d feel like a controversial thing to say in 2019. I probably lost half of the readers at the title. This means we still haven’t experienced the shift yet — or it’s not coming.

Why does this seem controversial?

Freemium already works really well in B2C, but most consumer products are easy to use. Business software is complex. One could argue that Slack and Asana are simple business products, and therefore freemium only applies to them.

But look at a complex example: cap table management. You can’t self-evaluate Carta — it requires all of the sales org patterns listed above. It’s safe to assume this model could not be disrupted by freemium, except a startup called Long Term Stock Exchange appears to be making a dent there.³

It’d be interesting to put together a list of complex software and then look for startups attempting to use freemium models to break into those markets. It’s also interesting to look at the trends of the high-growth companies like Zoom and to some degree Atlassian (they both operate on freemium models).

Company payroll has been a complex field with a lot of legal red tape. Gusto has a self-service freemium plan. You can sign up and start using it right now without talking to a human.

Legal has been a complex field. Doing things like issuing legal agreements to investors and employees historically required going through law firms. Now you can sign up on Clerky, try it out on a free tier, and purchase based on usage (each time we issue a SAFE note to an investor, it costs us $20).

People also don’t always know what they want. There was a time when everyone defaulted to Altavista or Yahoo, and Google was this silly-looking search engine that your nerdy friends told you to start using. And you tried it out, and then you just knew it was better so you kept using it. You didn’t really need much beyond that initial push. Word of mouth still drives freemium user acquisition.

Hiring software

Nearly all hiring software is sales-driven. They’re also locked down, closed platforms. If you wanted to build hiring software — a very large and broad class of software — today, there’s no popular API outside of Greenhouse’s Harvest API. That’s your only choice. Why? Developer platforms are hard to build, especially if you’re a sales org. Just look at the change-logs and it’s almost impressive how slow new integrations take to roll out. Large companies like Amazon and Apple release major products faster than an ATS can release integrations.²

Nearly every ATS product out there (Greenhouse included) locks down the customer on annual contracts because that’s how they keep them around. This says something about the state of the products and customer experience when a company has to handcuff its users to its product through a legal agreement. This does work, but it leaves the door open for freemium. Those contracts always come with an expiration date.

I witnessed the slowness of hiring software at my last startup. I felt like I was constantly up against an invisible force. I didn’t really know what. I wanted to tweak the ATS we were using, so I asked and they said it’d cost us $10,000 to generate a pair of API keys to access our data — this took a bunch of phone calls and emails just to figure out.

Later on when I wanted to share a product I built with other users of that ATS, they wouldn’t add me as an integration because we didn’t have enough mutual customers. When I’d talk to other companies, they wanted to use what I built but only after we had it integrated into their ATS workflow. Chicken, meet egg. This not only blocks new players, but it keeps incumbents at the top. Docusign stays the leading product for digital signing, for example.

To be fair, not all products share the experience I had. I’ve seen newer startups manage to get integrated into an ATS. Maybe I’m just not good at navigating an integration. Maybe the product wasn’t validated enough, or it was too early. There are plenty of reasons why integrations don’t happen, and it’s not always a strike against the ATS. But it’d definitely be helpful if new products were able to easily integrate, and companies had more choices. Just look at Heroku Add-ons or Slack Apps.

I remember meeting up with James Lindenbaum sometime around 2012 when he was CEO and before Heroku was acquired, and most of the conversation he was encouraging me to write my own custom add-ons for the platform. That’s what a healthy platform should be doing — encouraging developers to contribute to the ecosystem.

An ATS is allowed to say what apps can integrate or not, and resources are scarce particularly in the engineering teams (remember, they’re sales orgs). But there’s still a lot of room to improve this experience.

Agave is a product org

Early on when I was raising our pre-seed for Agave, I had a call with one of our lead investors and he said something that stuck with me. “You’re going to have to make a decision early on about whether you want to create a sales or engineering organization. Do you know which one you want?”

At the time, I told him I think we’re going to be a sales org because it felt like the easy and conventional thing to say on the spot. I think he knew that I didn’t feel 100% confident about that. After giving it more thought, if we had to choose (we do) then I’d say we’re an engineering + product organization. We’ll take that bet.

¹ Hubspot CEO interview with Y Combinator

² Hiring software likes to make use of buzzwords. I refer to “ATS” frequently, which stands for Applicant Tracking System. This is the equivalent of a CRM for job applicants. If you ever applied for a job at a company, an ATS is the app that managed your job application and interview process.

³ Captable.io by LTSE

Jared Tame

Written by

uiuc, yc, bloc.io, tophatter, agave

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