SaaS Pricing: Our Big Free Plan Mistake
This post originally appeared on Hubstaff.
There is a strong temptation when beginning a startup to offer a generous free plan, even if you aren’t planning a SaaS pricing model. The idea is appealing, especially to young companies, because we think once people try what we’ve built for free, they’ll eventually upgrade to a paid version. These people will tell their friends and the cycle will continue until we’re making money hand over fist. This was the logic we followed at Hubstaff’s inception and it was what led to our big free plan mistake.
It’s easy to see the appeal of offering something for free, since some of the biggest tech companies in the world don’t charge users a cent. Facebook and Google offer basically everything you’d want for free. Has YouTube ever asked for money before it let you watch a video?
An important thing to note is that these companies are the exception.
Unless you continue to grow like crazy you’ll eventually need to turn a profit. For SaaS companies, free plans don’t make sense (or cents). My co-founder, Jared Brown, knew this. He championed a pricing model called “cheapium” in a blog post, which basically said companies should charge minuscule amounts for what would normally be considered a free plan. Despite all of my co-founder’s blogging we eventually settled on a free plan in our SaaS pricing model that offered up to three users limited access to Hubstaff.
The Hubstaff Free Plan Mistake
Here’s what one of our earliest pricing plans looked like:
Notice the “Free Forever” plan on the far right?
The thinking was that we could become a market leader by offering a free plan and acquiring a ton of users. Naturally, some of these users would drop off and some would continue to just use the free plan. However, some would decide to upgrade to a paid plan, either to add more accounts or access more features.
Word-of-mouth helped Hubstaff grow early on and continues to do so to this day. We thought that by having more users we would get more people talking, whether it be on blogs and social media or just friends telling their friends about us.
Why It Didn’t Work
We had great expectations for our free plan and the users who signed up for it, but those expectations were never realized. Our free plan ended up losing us money and stunting our growth! Here are just a few of the things we learned:
- Paid products carry more value
- Free users bring more free users
- Free users eat up support
- People take advantage of free accounts
Paid Products Carry More Value
Think about how many free apps or services you would stop using if a paywall appeared overnight. The reason you would drop them isn’t because you’re cheap, but because there’s likely another free option out there. Free stuff just doesn’t carry as much value as something you paid for.
A great example is Pandora, which follows the freemium model.
Pandora offers a free plan with unlimited streaming music, albeit interrupted by ads. Pandora One goes for $4.99/month and offers higher-quality audio without ads. However, I’m happy with my free version of Pandora, as it offers all I need and I don’t mind the ads too much. If Pandora were to force a paid plan upon me I could switch to Spotify or any other music streaming service that follows the freemium model. Those who’ve been with Pandora for a while remember when listening was capped via a monthly hours limit.
When you hit your limit, did you upgrade or just go to YouTube or somewhere else and wait until the month ended? When we modified our free plan, many users left because they didn’t value Hubstaff enough to pay for it or because they found another free alternative.
Free Users Bring More Free Users
It’s great when people talk about your startup because you built something with great features, a user-friendly interface, multiple integrations, and other positive aspects. It isn’t great when people talk about your product just because it’s free.
When a user on a free plan tells someone about that product, their biggest selling point is most likely the cost. If you gain new users this way, you gain them because of the promise of something “free,” not something useful and awesome.
Another thing worth mentioning is that in our case, those using the free account didn’t really register as influencers. Granted, the remote teams industry that we’re in is fairly small and we cater to a niche. Regardless, it’s unlikely that someone who only wants/needs three (free) accounts is going to have a high-profile blog or be big on social media.
Free Users Eat Up Support
If a large amount of your users have free accounts, that means you’re probably spending a lot of time helping them instead of your paying customers. Someone who is willing to pay for your product shouldn’t have to wait for help behind an army of people who use it for free.
If you take too long to answer a ticket that should be priority, then you risk losing a paying customer. On top of that, free users generally require more help; remember that they likely value your product for its price (or lack thereof) and may need more hand-holding.
As a SaaS company, we spend a lot of time and money on support, and we want to be sure our paying customers are being helped as quickly as possible. You just can’t be sure that’s happening when free accounts make up so much of your user base.
People Take Advantage of Free Accounts
This was the biggest “I told you so” moment from our big free plan mistake.
Our first free account was limited to three users, but you could add more users by signing up for a second (or third) free plan with different email addresses. We were hoping that people would upgrade when they needed more users, but why would they pay when there were fairly easy ways around it?
This happened enough that it caught our eye, and it was just another reason for us to back away from the freemium model.
What We Learned
Our plan to offer free accounts for three users didn’t work out, but we did learn a lot from our failed experiment. Here’s what our free plan taught us:
- If someone values a product they’ll pay for it
- Plans for three users are our highest draw
- You need to value your work
If Someone Values a Product They’ll Pay for It
The sky didn’t suddenly fall when we axed the three users free plan.
We still offer a three user plan, but now it goes for $15/month. We’re continually working to improve Hubstaff, and from where we stand this plan adds much more than $15 bucks in value.
If you’re in the SaaS industry, you shouldn’t feel the need to offer your product for free simply because you’re worried that no one will try it otherwise. You also shouldn’t see user acquisition as a money making arms race.
Liam Gooding, founder of Trakio, said it best when he wrote that “free is not a competitive advantage.”
Plans for 3 Users Are Our Highest Draw
As you can see, our top plan is our three users for $15/month option. Another plan that attracts a lot of sign-ups is our one user for $5/month and three for $149/year. All of this is revenue we would have been missing out on if we continued to offer a free plan for three users or less. Remember that people were also signing up for multiple free accounts, so we would have missed out on getting people to choose our monthly and yearly five user plans.
You Need to Value Your Work
This was the most important lesson we learned from our big free plan mistake.
Running a startup costs money, just like any other business. You put cash into developing your product, marketing it, supporting your users, and so much more. You need to value what you’ve created, and if you want to keep building it, then you’re going to need to start charging users.
A $15/month paid plan didn’t put us in the red, but it did bring more paying customers to Hubstaff, which helped us cut our monthly expenses. It wasn’t much, but any money we saved could be reinvested into the business.
You need to value your work, and a big part of that is putting a price on it.
Where We Are Now
This may sound hypocritical, but (plot twist) we still offer a free plan!
Today’s free plan is good for only one user and is labeled “lite” for a reason. You get limited screenshot storage and user settings. This plan allows someone to try a limited version of Hubstaff for free, and if they like it the jump to a full solo plan is only $5/month. In fact, this plan clocks in as our fourth-most popular in terms of total sign-ups. This shows us that there are people who value Hubstaff enough that they are willing to pay $5 more to have access to the full version.
Oh, and our 14-day free trial doesn’t hurt either!
Our big free plan mistake is not unique.
For SaaS startups, and for many other tech companies, free just doesn’t work. Yes, getting people to sign up is great, but all the free users in the world won’t help pay the bills.
The majority of your free users exist because they don’t have to spend money to use your product/service or access your site. This means you’ll spend a ton of money building something for people who don’t value your work enough to pay for it. This is fine if your company is well-funded or if you plan on being bought. But how many companies actually get enough funding, or make enough through ads or paid user subscriptions, to support a glut of free users? If your business plan is to be bought or acquired then you might want to rethink things.
For us, a lite free plan and free trials have worked best. We’ve also played around with our pricing plans to see what works best. You shouldn’t worry about driving away users by asking them to pay for what you’ve built. If you’ve built something useful and unique, put a fair price on it and people will pay.
How did the team at SurveyMonkey know it was time revamp their pricing strategy? Find out which signals tipped them off and how they made it a success.
Mike Walsh, CMO at Reflektive, has gone through multiple pricing processes and has developed his own framework for assessing the situation and then developing pricing that is appropriate and effective. Learn more about his 4-step framework here.