Why We’re Rejecting Freemium and Building a Sustainable Business Instead
Startup pricing’s a touchy subject. Nobody’s quite sure how to do it best. And at the end of the day it’s very dependent on your exact situation. But the general consensus is to just double your prices.
Recently we did (almost) just that, and released a couple new plans with slightly different features, and a little higher pricing. Our metrics all improved: higher ARPU, less support/sales needed to close new accounts, less objections overall.
From my past startup experience I was confident that price is almost never the biggest objection a prospect has when discovering new software. Features, yes. Support, definitely. Pricing, usually not.
Then this morning I was paging through our support emails in Front and my heart sank. I ended up having a conversation a little like this:
Prospect: Your pricing is way off
Me: Oh no! I’m really sorry to hear that 😔 How do you think we could improve it?
Prospect: Why not do a freemium model? Or reduce your entry price? Competitor X starts at $y/m. Why would anyone use HelpDocs?
Sure, our metrics all look great. 📈 But “way off”? I’d be remiss to not investigate a little further. So I dug out my graphs, put on my data science cap, and sent over a (very lengthy) reply.
And it got me thinking. How do we think about pricing? Why do we charge so much (or so little, depending on where you stand)?
A good comparison
Since our acquisition of Helpman, we’re lucky to have a few more data points than we had before. We can actually see first-hand how a model works with an unlimited free trial, and a slightly lower price point.
Combining that with our own 16 months of pricing experiments and growth data, we can make some interesting conclusions.
Freemium’s really hard for bootstrappers
As a bootstrapped startup that hasn’t raised a cent from investors, freemium’s a really tough model to get working.
Digging into our post-acquisition data, we can actually work out exactly how many more customers we’d need using a freemium model. For every 1 customer we have now, we’d need a whopping 110 freemium users.
That’s 110 people we’d need to support. We’d need to scale the platform 110 times faster to keep up with demand. And we’d still end up with the exact same revenue out the other end.
At a very small scale, than can work fine. With VC funding, that can work great. But for us as a bootstrapped team of 2 (we’re hiring!), we literally couldn’t afford to support that many extra customers. 💸
Having a higher entry price lets us provide better support to fewer customers, and still get to the same revenue.
It also lets us build a sustainable, profitable business, that we can 100% guarantee will be alive next month. Something it’s sometimes difficult to say about a funded startup.
Embrace your competitors, then do better
Comparing our price to competitors, we end up at the higher end. Especially since our price increase. We’re not the most expensive by a long stretch, but we’re far from the cheapest.
So why can/do we charge so much?
On the surface it’s a tough one. We have some great competitors. They make awesome products that’re a very good fit for some customers. In fact, I often recommend our competitors’ products over our own to prospects when I think they’ll be a better fit.
For instance, there’s certain competitors I recommend when people are looking for just a cheap simple knowledge base. Or when they’re looking for something super well integrated with a certain platform. And when they have really complex and niche requirements.
But there’s some areas that we really excel.
From my incredibly bias point of view, a bundled knowledge base is never going to be as good as a standalone one. We have a very specific ability at making great knowledge bases. It’s our whole company, our lifeblood, so we can focus on making it the best darn knowledge base there is.
Many of our competitors make their knowledge base software out of necessity, and don’t dedicate a ton of engineering effort to it. People choose them because they need just a knowledge base, nothing super custom.
People choose HelpDocs because they need a great knowledge base. That’s why we get a significant amount of customers switching to us from other platforms.
Holding your own while charging more
I think we do a pretty great job of holding our own against our competitors, despite us sometimes being the more expensive option.
We do that through very advanced, niche features, like more SEO optimization (we do a ton of stuff under the hood), multilingual doc support, and full custom templating. And even through simpler things like an easier to navigate dashboard, one-click custom branding, awesome integrations with other platforms, and really excellent support.
So yep, we charge more than a lot of our competitors (although way less than some). But we more than make up for it in product and support.
We have a ton of happy users, and the biggest thing we hear is how much money we save them on support. We only have to save support reps from a few tickets a month before the software pays for itself. And we actually save dozens / hundreds, depending on how large the customer base is.
Sometimes you still need to compromise
All that said, I do remember what it’s like getting started and finding everything’s so damn expensive, especially for software.
We like to take a fairly liberal approach to pricing in these edge cases. We have programs for that offer discounts to bootstrapped startups, nonprofits, charities, and more. We try and help out wherever we can.
Pricing’s really hard, and it just gets harder
Pricing’s really hard, and I don’t believe we’ve got it right yet. We’re still just getting started. As we scale, new pricing challenges come up, and we have to refine our model.
Right now we’re more likely to add features and have higher plans than we are to go freemium. If we raised money, that could definitely change.
Unfortunately it just requires more funds than we have available to capture the whole market, so we miss out on some awesome accounts that we could otherwise host.
If you’re reading this, I’d love to know what you think about it.
Any suggestions on how we could improve our approach? Any examples of freemium working for companies without VC funding (other than behemoths at Mailchimp scale). Are we still way off base with everything?
I’d love your input in the comments, or tweet me @jakeapeters.
Originally published at The HelpDocs Blog on August 30, 2017.