The Slow Death of Freemium – And What Comes Next
November 28, 2016
Only a few years ago, the conventional wisdom held that startup founders should offer a substantial part of their product as “free forever,” which would lead to viral adoption and – maybe, eventually, hopefully – revenue. There have been some phenomenal freemium success stories, too, namely Hootsuite, Yammer, Slack, Evernote, SurveyMonkey and Dropbox.
But things have started to change. Venture capital is no longer an unlimited commodity. SaaS startups are under greater pressure to prove that they have a sustainable revenue model and can generate paying customers, not just free users who drain scarce resources.
Startups have also had more time to test freemium and determine whether, how and when it moves the needle for their business. They’ve learned that giving away free product does work in certain instances or for certain businesses, like companies chasing a market with millions of potential users or ones that have deployed a product led growth (PLG) strategy.
Unfortunately, most enterprise SaaS businesses do not have these characteristics and should steer clear of a classic freemium model. For these businesses, having a free offering attracts too many people outside of their target market who would never convert to a paying customer. Even worse, by showcasing an attractive free version, they shoot themselves in the foot when they try to move upmarket and close 5 and 6 figure deals.
Looking at Google Trends data, interest in freemium has fallen substantially over the past two years, and is down to only 25% of its 2015 peak.
This decline is backed up by survey data from SaaS operators. In its 2015 annual survey, Pacific Crest asked SaaS operators how much of their company’s new ACV was driven by freemium leads. Three-quarters of companies generated no new ACV from freemium, and only 9% derived greater than one-quarter of their new ACV from freemium.
In other words, freemium has pivoted from being at the core of a SaaS company’s revenue model to just another lead gen tool in the marketing toolbox, albeit one with some pretty significant downsides.
What Comes After Freemium
With classic freemium decreasing in importance, SaaS entrepreneurs need to get more creative with how they generate leads and new business. Sometimes that means turning back to old-school tactics that have been around for decades. Here are four approaches to offset a failing freemium model.
1. Free trial
The consumerization of IT has conditioned buyers to expect to play around with a product before being locked into a long-term contract. This has in turn led to the popularity and effectiveness of free trials or “try before you buy” strategies. Free trials, as opposed to freemium product versions, showcase premium features that are disabled when the trial expires (the user fails to pay). This creates a much stronger incentive for the user to convert from free to paid. The same Pacific Crest study that debunked the effectiveness of freemium shows that free trials remain as essential as ever. Of the SaaS operators that were surveyed, 30% said that free trial leads drove greater than one-half of their company’s new ACV.
2. Tailored, hyper specific free products for lead gen
What’s so appealing about free products is the potential for viral adoption and rapid, cost-efficient growth in product usage. Companies like Clearbit have cleverly tapped into those benefits with tailored, hyper-specific free products that appeal to their target buyers without cannibalizing their paid offerings. One of Clearbit’s free products, the Logo API, generated tremendous buzz among developers on both HackerNews and Product Hunt, and they’ve seen repeat success with other free products. Unlike a classic freemium product, which gives free users the keys to the castle, Clearbit’s Logo API only makes one of Clearbit’s 85 data points available for free.
3. Product qualified lead (PQL) engines
As HubSpot’s VP of Product Christopher O’Donnell explains, “Freemium fell short in B2B and from its ashes rose the PQL.” He recommends combining the velocity of freemium or self-service offerings with the higher deal sizes that come with an inside sales team. One way to achieve this is to sell entry-level versions of a product to individuals or teams within larger enterprises as part of a land-and-expand business model. These offerings create a self-funding customer acquisition engine that allows companies to more seamlessly break into large companies from the bottom up before eventually selling an enterprise-wide deal.
4. Anti-lean startup approach
Rather than starting out with a minimum viable product, getting it out the door quickly and then monetizing later, some companies are reversing the playbook and becoming “anti-lean” startups. These companies, including AI personal assistant x.ai, take a more thoughtful and ambitious approach to building their products. The happy consequence: their products solve a clear need, stand apart from alternatives and attract customers that are willing to pay for them. With x.ai, it took almost three years to get the product to market, but they “launched to a pool of eager customers willing to pay,” and according to CEO & Founder Dennis Mortensen, “the sky’s the limit.”
Do you offer a freemium version of your product? Why or why not? We’d love to hear from you and learn about your results!