Thoughts on B2B SaaS + Freemium
The past three places I’ve worked for utilized some form of a freemium go-to-market strategy (GTM) in order to attract new customers (ranging from pre-revenue to upwards of $100m ARR). I’ve learned some lessons and have started to develop some ideas about when this approach works (and when it doesn’t).
Update: I wrote a new post on freemium vs. free trial
If you’re not familiar with freemium, here’s the definition (via Wikipedia).
Freemium is a pricing strategy by which a product or service (typically a digital offering or application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features
For the purpose of this article, I’d like to exclude software companies that offer a specific trial length (i.e — 14-day or 30-day trial). Instead, I’m focusing on the “forever free” plan with no trial length.
A few success stories
Before I jump into examples, I thought it would be helpful to provide a few examples of B2B SaaS companies who have built successful businesses using this approach.
- Slack ($100m+ ARR)
- Trello ($13m+ ARR)
- Dropbox ($1b “ARR”)
- Yammer ($23m ARR at time of acquisition)
- Docusign ($100m+ ARR)
- Mailchimp ($400m ARR)
- LogMeIn ($336m ARR)
- LinkedIn ($3b+ ARR)
In many of these examples, these are highly competitive industries, but it’s clear that this approach can build fast-growing businesses.
Let’s move on to more specifics now.
1.) Simple Value Proposition
The first (and most important) rule is that the product needs to be simple to understand by the masses (not your friends in tech). Dropbox is a service to store your files. Slack is Facebook Messenger for Business. Mailchimp helps you send customer emails. Trello is a to-do app. Safari (where I used to work) is like Netflix but for your career.
A simple value proposition is important because you can’t spend the time (or money) to educate your customers about your service over several touch-points. It needs to be immediately obvious what the value is. I’ll explain more in a bit, but it boils down to your cost to acquire a new (paying) customer.
2.) Value for Entire Organization
A simple value proposition matters because the most successful B2B freemium plays have the potential to spread across the entire organization like a virus. The value proposition needs to be short and concise and appealing to many departments.
If the value proposition is constrained to providing value for one department (only targeting developers for example), it puts an upper bound as you work to expand the account over time.
3.) Immediate Switching Costs
This next section sounds weird but is super important. The best products in this space create immediate lock-in (or at least the feeling of it). It’s baked into the core value of the product.
For example, when I upload a list of customers to Mailchimp and send a few campaigns, If I leave next month, I lose some of the send reports/data.
When I start chatting on Slack, if I decide to leave next month, I lose my chat history.
When I upload a few files on Dropbox, if I leave next month, I need to download them and re-upload to another service.
If I complete my profile on LinkedIn and decide to switch, I can export my data, but what am I going to do with it?
I call these mechanisms user inputs. These are actions in which a user is deciding to shovel data into your system.
4.) End-user focus
The best freemium companies build the product for the end user. They know that the best salesperson is the person inside the company using it. These organizations also understand that word-of-mouth is key to their business and it’s how they can differentiate against others in the market. If the product sucks people won’t recommend it.
5.) Strong Retention/Usage
The best products in this space have strong retention, in fact, many differentiate paid plans based off levels of usage.
For example, if I use HelloSign to sign and send more than three documents, I need to upgrade my account. If I use Slack with my team and want to search more than 10k messages, I need to upgrade.
The best freemium companies effectively turn your behavior and usage against you to convince you to pay. The more you use the product, the more likely you are to hit a paywall at some point.
Ah yes, pricing and packaging. Let’s move onto the next point.
6.) Simple Pricing/Packaging
My observation is that the product packaging and pricing follows a simple pattern.
The first paid offering is a continuation of the free plan (duh) that is directly targeted at the “first-level buyer”. Oftentimes this is a manager of the team. They don’t have a lot of budget, but they they have some flexibility to slap down a credit card and make a purchase if the team deems it valuable enough.
What I love about Slack pricing (shown below) is that they give you a taste of nearly ALL the paid value for free (while still maintaining a reason to upgrade). This is a tough balance to strike. It’s especially helpful as the team can educate the first-level buyer on what a particular feature accomplishes.
Let’s take another look at the Slack pricing grid (the far right column). The Plus plan is one of the most expensive plans and is targeted at the second-level buyer (in this scenario it seems like it’s IT as the features are uptime guarantees and SSO).
These conversations happen after some internal momentum starts to pick up. For Slack, it may be 4–5 teams flipping to paid accounts. For Yammer, I suspect it was based on some % of organizational adoption (i.e. — a company of 10,000 employees has 400+ signup for accounts).
For a traditional sales and marketing organization, they may spend weeks or months emailing, calling, or spamming them from multiple touch-points to book a demo. There’s very little trust in this approach compared to a well-targeted email to the second-level buyer saying, “Five teams inside $company are using Slack. Do you want to make sure your organization’s data is secure? You pay now.”
As a result, the cost to acquire these customers is far cheaper.
7.) Growth Channels
Now onto one of my favorite topics. Customer acquisition. I have a few theories around this listed below:
Many freemium software products have millions of users, but only a small fraction end up becoming paid customers. Trello has 16m+ users, Slack probably has upwards of 20m users (assuming they turn ~25% of user accounts into DAUs).
As a result, for many of these companies acquiring new users through paid channels (SEM/FB ads, etc) is off the table completely. The size of the account is too small to recover the cost within a realistic amount of time. The freemium model (unlike trial-based products) in theory could have someone using the product for years before paying, which makes attribution and measuring ROI on spend a nightmare too.
If most companies can’t use paid acquisition, what can they use instead?
It’s a good question! They have the user-base help them market the product :)
The beauty of this approach is that if you build the engine correctly, it compounds.
For LinkedIn, a new user who successfully completes their profile has built a marketing asset that drives new customer acquisition (at virtually zero cost to LinkedIn). This full profile is now indexed by search engines and can serve as a net to catch anyone who searches for the person’s name.
As the LinkedIn user-base continues to grow, this flywheel continues to speed up.
For Dropbox, a new and engaged user may quickly use up all their storage space. In the early days, these people fueled new customer acquisition, as users would share to earn more space.
For Trello, boards are collaborative. For many new users, they need to invite others to recognize the full value of the software.
For Hellosign, if I send a document that requires a signature, the recipient is shown a CTA to signup after they e-sign the document.
Do you get my point? The user-base drives new customer acquisition at a very low cost.
In my next post (update: you can read it here), I’m going to write about the challenges and where I see B2B freemium moving in the future. I hope you enjoyed this post! For more growth thoughts, feel free to check out my blog.