Freemium: Entrepreneurs love it. And they hate it. (Or, to borrow a word-mashup like freemium itself, they lovate it.)
But love freemium or hate it, most companies that operate software-as-a-service businesses can’t live without it, and they spend a great deal of their time figuring out how to manage the model--particularly the ever-so-delicate process of transitioning customers from free service to premium payments.
That’s what we learned last month, when we at Emergence Capital convened over 50 sales and biz-dev executives from our portfolio companies and other top SaaS providers. Here are some key points from those discussions:
Powerful data can help you customize your sales strategy. If you’re committed to the freemium model, analytics will tell you how to improve your service, what to sell, when to sell, and even who to hire.
According to David Obrand, Chief Customer Officer at Yammer, “When you start with freemium, you don’t get to pick your customers. Analytics have to drive decision-making. Once you see what resonates with customers, then you can build coverage. As you develop a feel for your growth trends, you can hire ahead of the curve as you learn more about who is using your product.”
Several speakers said they categorize users based on type of email address -corporate vs personal, for example, or gmail vs AOL. That has its drawbacks, as Joel Davis, Vice President of Business Development at Doximity noted: “I know that some SaaS companies discount personal email registrations, but we find that doctors with AOL and Yahoo emails are some of our best customers.”
How many free users do you need before you can leap to sustainable premium revenue? More than you probably think.
As a rule, a successful business converts 3% of free users to premium, says Jason Lemkin, former CEO of Echosign. As a result, “Your denominator must be in the tens of millions” to produce a business of any scale.”
Which brings you back to secret no. 1 above: Mind your analytics. That 3% typically represents your power users. And in some cases, a titanic base of free users is exactly what makes your product appealing to the premium 3%.
LinkedIn is a perfect example. Scott Roberts, Senior Director of Business Development at LinkedIn, says that “Less than 1% of members pay us. We leverage the data from the free power users, and look for clusters of activity. Then we build a marketing and functionality focus around the clusters. That is one of the ways that we got started on [LinkedIn’s valuable] recruiting products.”
At LinkedIn, paid accounts offer functionality that premium users actually want, and the functionality is desirable because of the base of free users (over 225,000,000 people). As a result, only a small percentage of users need to pay.
Don’t jump from free to wallet gashing. If you can, let power users drive up usage fees on their own terms. Let users go from free, to paying, to paying more--and then let your sales team step in at the enterprise scale.
Armando Mann, VP of Sales at RelateIQ, explains this process best: “Let users help you break into the enterprise. In an ideal world, users sign up for free at home. Then they bring your service to work, and then share it with colleagues. Then they upgrade themselves to business versions. Those small deployments can convert an organization into an enterprise sale. Use click patterns and usage data to score users and determine which ones are the business ‘power users’. Those are the ones most likely to convert to enterprise.”
When selling into enterprises, it sometimes helps to allow small groups of users to serve as the entry point. Bobby Jaffari, vice president of sales of YouSendIt explained, “The beauty of SaaS is that it allows one group to test a product. Adoption doesn’t have to be a company-wide decision. CIOs have learned that they need to follow the lead of employees.”