How Product Led Companies Like Expensify & Dropbox Approach Pricing to Grow The Bottom Line
Editor’s Note: This article is an excerpt of OpenView’s PLG Playbook. Download the eBook here.
The goal of every product led business should be to get the product in the hands of the user as quickly and as seamlessly as possible. By removing any barriers in the way of initial usage, you’re giving users the chance to truly experience your product free from marketing, sales or any other disruptions.
But doing so means you’ll have to offer something of initial value for free. This could certainly come in the form of a freemium edition, as is the case with Trello, Slack, Expensify, Evernote, UberConference, Drift and countless other products.
The Freemium Approach
Freemium works particularly well for companies operating in markets with millions of potential users, when there’s virality and network effects built into the product, or when you have the capital to worry about monetization later.
In the case of Expensify, a travel and expense app, a freemium offering enables the company to appeal to end users who are sick and tired of outdated expense reports. They want to make it as simple as possible for these users to find and use the product. Monetization happens later, with features that appeal to accounting teams who need more sophistication and customization. As Jason Mills, Director of Sales and Success at Expensify puts it,
“A lot of people find us organically because we’re really serving a need and a pain point they already have. We just happen to be very highly rated, easy to find and have a great business model, because it’s free to sign up and [someone can] use the product without having to necessarily make a buying decision.”
With Drift, a sales communication platform, they’ve recognized that the virality built into their free product serves essentially as free advertising for the business. As CEO David Cancel explains,
“Another reason to go free is because we want to get on as many business websites as possible. We’re willing to play along. But every one of those business websites is free advertising and a referral back to Drift, so why wouldn’t we?”
But contrary to popular belief, a freemium model isn’t a necessary component of product led growth. Conversion rates on freemium plans are notoriously low, typically hovering between 3 and 5%, and can attract users who aren’t in your target market. Moreover, if you make the free offering too good, you could end up competing against yourself in a deal. As Craig Walker, Founder and CEO at DialPad notes,
“We made our free service almost too good so we have a lot of very dedicated, very happy free users, and sometimes we have a hard time upselling them because they’re like, “Hey, why would I need anything else?” Our stiffest competition is coming from ourselves!”
The Free Trial
An alternative to a freemium offering is a free trial that doesn’t require the user to enter credit card information in order to sign up. This method is employed by companies like Datadog and Deputy. Alternatively, you might offer a free feature that ties back to the value of your core product offering as HubSpot did with Website Grader.
Yoav Shapira, who served as VP of Engineering at HubSpot during their hyper-growth years, describes how this worked and why it was a good way to quickly prove value to users,
“Trials are good to do, but trials are often too long. At HubSpot we had a tool called Website Grader… Its entire existence was about creating time to value. It’s free. You put in a URL – your site or your competitor’s – and we analyze the site using our marketing methodology.”
Join.me, the online meeting software provider, took a different approach. Initially, new Join.me users would start with a 14-day free trial of their premium product. After the 14 days, a user could either pay up to keep using the upgraded model or let their trial lapse and be kicked down to the basic version of Join.me. This strategy enabled the company to capture individual users who hadn’t been granted licenses to costlier products. Join.me’s VP of eCommerce at the time, Eric Bisceglia, explains,
“The perpetually free model in the early days actually fueled very, very massive adoption because there was nothing good in the market that was doing that…It got to the point where in a few years, we had millions of new users each week.”
Over time, Join.me’s rapid growth signaled to the company that a freemium product might no longer be necessary to sustain growth. Instead, they discovered a better way to monetize their users. Bisceglia notes,
“The decision was made to end-of-life the free product, move solely to a 14-day free trial, and if you don’t buy, you get nothing, and you have to pay to continue. It actually turned out that there was a huge opportunity to monetize that base by turning off that fully free product and going just purely to a free trial model.”
Monetizing Your User Base
Now that you’ve got your product in the hands of as many users as possible, and they’ve fallen in love, it’s time to monetize that value you’ve created for your users. Successful product led businesses set up scalable monetization models that make it easy to land-and-expand their customer base.
PLG companies land paying customers by being strategic about the features they place in paid plans and when they attempt to convert free users into paying customers. But they don’t stop there. PLG companies then use value metrics and different product tiers to increase ARPU.
Dropbox, for instance, takes a very data-driven approach to identifying what features they can monetize to upsell existing users and strike the right balance between user happiness and monetization. They do so with in-depth user research and customer development, and incorporating pricing into those conversations. As Giancarlo Lionetti, who heads up Product Marketing and Demand Generation at Dropbox for Business shares,
“We really respect the value that we give to the user with the free product, but we do a lot of aggressive testing to see like what that threshold is. What do our users really care about? … One we’ll do a lot of surveying. We’ll ask our users, do they value X feature enough to pay for it, right? There’s a lot of interactions with our users so we really understand the value they’re getting. And if it’s worth actual dollars to them, or is it just amusing. We do conjoints, we do user studies.”
Slack makes another great example. Their core offering is free for an unlimited period of time, but its message archives are capped at 10,000 messages and file storage is limited to 5GB. Once a free user runs up against those limitations, Slack has in-app notifications suggesting that users upgrade to a paid version. Kelly Watkins, Head of Global Marketing at Slack explains,
“One of the differences between a free plan and our paid plans is that one could transition to a paid plan so you have access to your entire archive of messages for all time. On the free plan, that’s limited to 10,000 of your most recent messages. So generally within the product, when you get to that threshold of 10,000 messages and go over that, we have a very small notification to you that says, “Hey, you know if you would like to have access to your entire archive, that’s available, and here’s how you access that.”
Expensify similarly tracks usage to pinpoint when a company may be ready to become a paying customer. Specifically, what they’ve found, according to Jason Mills, is as follows:
“If you get about three or more users in your company submitting things your way, that’s a signal to us that there’s a latent opportunity here. And that’s an opportunity that we need to reach out and have a better conversation around.”
Expensify also charges based on the number of active users, which gives them a great expansion opportunity as individuals share Expensify with their teams, and then their departments and entire companies.
In summary, start by making it incredibly easy for people to use your product. The value should come before the paywall sets in. After they’ve fallen in love with your product, include key features in paid plans that users are willing to pay for and communicate with your customers when their usage indicates that they’re ready to pay up. Finally, grow accounts over time with value metrics and packages that naturally scale as customers get more and more hooked on the product. With these tips, you’ll be able to implement a well-oiled PLG approach to pricing in no time.
This article is an excerpt of OpenView’s PLG Playbook. Download the eBook here.
Francesca Krihely, Senior Director, Developer Experience and Growth at Snyk, told us about how her company uses a freemium model to find new points of entry into enterprise organizations.