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A Look at the Impact of Freemium Pricing on SaaS Products | OpenView Labs

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If you’re using Freemium

Which features sit behind a paywall? You should iterate on these. They are hard to test. So running “A” tests, as a comparison to “A/B” tests is an interesting strategy. It basically means just move some features for a period of time and see what happens. There will be some backlash from existing users, but if you come up with a methodology on your approach, and something you can justify and be transparent about you should feel confident. When more customers pay you, it not only increases your chance of staying in business, but increases the amount of resources you can put into making your product even better for customers. Moving features or versions from free to paid can seem tricky, but don’t be afraid to use your support, marketing and social teams to handle backlash with customer friendly policies.

Creating smart “trojan horse” features. The smartest freemium apps help get you deep into the experience and derive value before they hook you. I remember at SurveyMonkey when we tweaked a feature and let free users collect more than 100 responses, but we had a 100 response limit on viewing. So what did that 101st respondent say? Want to know? Upgrade… Is this “evil” – I don’t think so at all. In the SurveyMonkey case, someone has already gotten tremendous value out of the product and is a great candidate to derive even more value.

If you’re using Free Trial

7 day, 30 day, 1 day? I’ve never seen 1 day, but the length of a trial is key. How long does it take a customer to really “trial” your product? If you are operating a project management (e.g., Basecamp, Asana) or CRM product (e.g., Salesforce), getting multiple folks onboard and finding time to play with the tool takes a bit of time, so 30 days feels right. But what if you are Netflix, Hulu, Spotify, PicMonkey? A shorter trial can make more sense since getting to a successful outcome (e.g., watch a movie, listen to a song offline, create a great design) shouldn’t take 30 days. The trial is your gift to the user – helping them gain confidence that the product is worth the price. The trial duration and all of your assorted engagement and onboarding marketing efforts are to make sure the customer takes advantage of their trial in a timely fashion.

Credit card upfront, or later? Put more simply, do you block your trial with a credit card requirement? If you have hard costs in offering your service (e.g., Netflix, Dollar Shave Club), capturing a credit card up front (or charging for shipping costs) may be important at certain stages of your business to reduce risk. There is a fine balance of optimizing for sheer volume of users and quality (paying) customers. The shift toward mobile consumption and federated logins (e.g., Google and Facebook) can be helpful in reducing the likelihood of fake/ghost accounts. At the end of the day, it’s always about continuously learning about your target customer and how to explain/demonstrate your value and then asking for payment at the right time/place in their journey. And what makes most sense for the customer can be vastly different based on the existing expectations, industry, product, value proposition, business model, etc.

The “Cost” of Free

Free comes with real costs which typically come in a few different forms.

Hard costs (e.g., bandwidth, compute, storage, customer support): the operating costs you incur to support those users who may never pay you directly. These costs can really add up if you are not disciplined about your model. If there isn’t strategic reason to provide a public service, or if you aren’t Indirectly Monetizing, at some point the freeloading customers can be a huge cost drag on your business.

Time/distraction costs. Free opens up your funnel which makes it harder to qualify leads. When you have a paid-only product offering, the inbound leads are a lot more qualified on average. Which would you rather have?

  • 100 sales qualified leads
  • 1,000 marketing qualified leads
  • 10,000 registered free users

It all depends on your conversion rates, your price point, your funnel, your sales process and business model…

Another consideration is that if you plan to go upmarket over time, your organization will have to be comfortable “outgrowing” your free or lower value users over time which isn’t always easy to navigate.

Perception, Expectations & Virality.

The “free monster” can set customer pricing expectations at zero which can be hard to overcome. The “free monster” is something I heard from our investors at PicMonkey and was meant to encompass the competition our paid product faces from both our own free product and every other offering out there that is using Free to acquire users. Whenever you have a free offering or you start out with a low price point, that can anchor customers. It can be very hard to upsell something that costs $5k/year when a customer is used to paying $5/month, and even harder when your brand is associated with being a “free” offering. It’s not great when users wonder how you even make money…

Many businesses can justify a low price tier or Free because their customers are doing the marketing for them by sharing their product. This is especially true for products like Facebook and Freemium tools like SurveyMonkey. One area to keep an eye on is that when customers become part of your marketing engine, the quality of their work reflects on your brand. So if your Free customers are using a limited version of your product, potentially producing lower quality output, they may be spreading the wrong message by not showcasing how great your product really is.

Hopefully this primer on the variations of Free was helpful. Please don’t hesitate to comment or reach out and keep the dialogue going, there is much much more to talk about when it comes to leveraging the power of Free.

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A Look at the Impact of Freemium Pricing on SaaS Products | OpenView Labs.