250: How and Why to Do Freemium in Your Startup Today

The Startup Chat with Steli and Hiten

In today’s episode, Steli and Hiten talk about the benefits of using freemiums (free plans) for your startup. SaaS companies are known for implementing free plans and with good reason—it’s an incredible way to get people hooked onto your product or service. Tune-in to learn the pros and cons of implementing freemiums and how to turn your free users into paying ones!

Time Stamped Show Notes:

• 00:03 – Today’s topic is freemium
• 00:37 – The first episode about freemium was The Startup Chat’s 3rd episode
• 00:58 – Listeners say the freemium episode was one of the best episodes of this podcast
• 02:21 – Hiten’s opinion of SaaS companies having freemiums has only grown stronger in the last two years
• 02:31 – If you have a SaaS business, you NEED a free plan
• 03:39 – “If people start using your product, why would you ever want them to stop?”
• 04:08 – A free plan helps you bring people onto your platform
• 04:19 – Without a free plan, you are missing a growth opportunity
• 05:04 – Having free users is a long-term marketing play
• 05:36 – In Close.io, there’s a distinction between their audience, people who engage in their marketing, and people who engage in their product
• 05:55 – When you have people using the free version of your product, they are still part of your marketing and are not actual customers
• 07:11 – Hiten often finds that the product team is responsible for the free plan users
• 07:38 – Sales want qualified leads; these leads can be those who have signed up for the free plan
• 08:34 – Freemium has activity points that people reach that qualify them for sales
• 09:21 – If you’re not into long-term marketing, don’t offer freemium. Or, you can offer it, but have an outbound strategy for sales with a paid product right away
• 09:53 – The free plan gets you marketing, word of mouth, and lowers your customer acquisition cost
• 11:04 – Do you have an opportunity for a free plan in your market?
• 12:02 – The key to setting up a free plan is knowing your limits
• 12:18 – A CRM tool with one free user is a classic example of a per-user charge
• 13:08 – Advanced settings or upgrades are also a great strategy for opting-in your free users
• 13:18 – If you are product-challenged, don’t use free plans
• 14:47 – Mailchimp is a great example of a company who gained success from freemiums
• 15:27 – Hubspot is also an example of a business with freemium offers
• 16:01 – if you dedicate your business to having free plans early on, you don’t miss out on the early customers in your market
• 16:12 – “If you don’t do free, someone else in your market might”
• 17:30 – If you have examples to share regarding using freemiums or not, send an email to Steli or Hiten

3 Key Points:

1. Freemiums are a MUST for SaaS businesses because a free plan lets potential customers experience your platform for free.
2. Setting up a free plan for your business is dependent on your offer limit.
3. If you’re product-challenged, don’t do a freemium as it will only create problems.

Steli Efti:

Hey, everybody. This is Steli Efti.

Hiten Shah:

And this is Hiten Shah.

Steli Efti:

Today we’re actually going to revisit a topic that’s been one of the most popular episodes that we’ve ever done, and that was the freemium discussion we had and freemium episode. You know, I didn’t realize this, Hiten, until I just looked it up, but the freemium episode was the third episode we released. It’s number three. I don’t know.

Hiten Shah:

Wow.

Steli Efti:

If you had asked me I’ve would’ve said like maybe … I knew it was an early one, but I would’ve said like the 30th or 40th one or something. I didn’t realize it was the third. It’s one of the most popular ones, and one that I frequently encounter when I talk to people that listen to The Startup Chat. Oftentimes, especially folks in SaaS, they say that, “Oh, the freemium episode was awesome. I really love …” What people especially liked is that we disagreed on this, or we had different stances on this, and people often ask me if anything has changed since then, so I thought it would be a fun thing to revisit. For people who haven’t heard it, just go back and look for episode number three of The Startup Chat, and you’re going to be able to hear the first freemium discussion we had about this. But here’s the basic premise, right. The basic premise was that you, Hiten, and correct me if I’m wrong, but you were basically saying, hey, you’ve done a number of SaaS, and one thing you’ve learned is that you would not do SaaS anymore in today’s world without having a free, a completely free version of your product, ’cause it’s such an important part of the marketing strategy for a SaaS product, and to be competitive in the SaaS space. You know, we were and still are very firmly in the camp of … We don’t have a free product, right. We actually are pretty premium in terms of our prices, so we don’t even have a super cheap version of our product. So let’s talk about that. Does that statement, A, is it a fair representation of your opinion back then, and has anything changed? I mean, this was in June 2015, so this is a little over two years ago. SaaS and the world has changed a ton. Has this changed in your opinion, A, is it true what I said, and then B, how do you think about SaaS products and freemium today?

Hiten Shah:

My opinion of it has only gotten stronger. So, the sentiment I had then is only stronger today, and so I’ll repeat it, just like you did, which is like if you’re going to start a SaaS business today, or any business to be honest, but let’s say a SaaS business, you need a free plan. I don’t mean a free trial. I mean an actual full on free plan. I do know, Close.io, your business, doesn’t have a free plan. A lot of products in CRM space do not have a free plan, a majority of them I would say, and so there’s a lot of risk and other in a business sides a free plan, and a lot of times people … One kind I’ve seen is that people start really free with a product, and then end up over time making the free product more crippled, or just getting rid of it, and just going to a free trial. That’s a very typical model in SaaS. I even did it with one of my businesses, and I, honestly it’s one of the biggest things that I wish I could go back and change. I wouldn’t say I regret it, but I would definitely go back and change and bite the bullet, and have a free plan that’s enough, and also leads to people upgrading. One big reason, and it’s just a very psychological reason is like and a philosophical one, is people start using your why would you ever want them to stop? It feels like you put all this effort into they’re using it, and then because it was a trial or something along not ready to pay, you let them go. And you say sayonara, buh-bye. One of the proof points I have with this effect, and what happens is eventually they come back, if you’re still relevant to them, you’re a good product or they’re still entertaining ones, but really, if they leave, it’s likely they picked another product. Well, if you have a free plan, it just brings people in a lot, lot easier. It reduces the friction to them getting in there, and I think that that’s super important to get a growing business going, and if you don’t have a free plan, you’re missing out on a ton of growth opportunity, just like if you’re not blogging, or doing something at your top of funnel for free, or sending e-mails for free, building out your sort of top of funnel, and it’s not as efficient and the business and the customer acquisition costs tend to be a lot higher. So, that’s kind of my quick why I love freemium and all the benefits. I know there’s downsides. I know you know them, so let’s talk about that.

Steli Efti:

Let’s rock and roll.

Hiten Shah:

Let’s talk about that. Yeah.

Steli Efti:

Yeah. So, I don’t even want to fight or combat you as much, although it might happen anyways, but the one thing that I want to zero in a little bit more, I think the thing that most people don’t understand is that having free users is much more of a … It’s a long term marketing play. It’s not kind of like some short term magic bullet that will get you a lot more paying customers immediately. Obviously, it’s probably going to get you less paying customers, right, which might be for many self-funded SaaS companies a real good reason not to have a free plan. In their mind is that it’s going to get them slower to the point where they are breaking even or being able to pay all of their expenses. But in our case, let’s say Close.io, in our case there’s a very strong and easy and simple distinction between our audience and people that are engaging with our marketing, and then our customers and people who are engaging with our product. There’s a little overlap, and that is we do have a 14-day free trial, so it’s not like there’s no overlap that exists, but when you have a free version of your product, and you have a lot of people who use your product for free, these people, in your world, I would assume, these people are a marketing … They’re still part of the marketing funnel, and still part of what the marketing team is thinking about much more so than the sales funnel or the product team. Who is responsible for the free user? I think that’s my question. How much overlap? How does that overlap really effect things in terms of when you have a free user, marketing is still responsible to a degree, but obviously product is also responsible to a degree, support will be responsible to a degree, and depending on what kind of customers you have and what kind of free users maybe even sales? Who has responsibility for that user? Where does that person sit in the overall funnel of your company? That’s one question. The other question I think that I didn’t realize I had, but I formulated that I know you have an opinion on, is the whole like this … Is free something that even self-funded companies should do, but then they should just live with the fact that it might take them a little longer to break even, because they’re giving out a lot more free product versus just paying for the product? What’s your opinion on that?

Hiten Shah:

Yeah. Most of the time what I find is when the product team is responsible for free, and is paired with like growth and/or marketing to make sure that there’s an optimized funnel, copy is well-written, and there’s retention going on, free works out really well. Then also, once you get the … One of the key things about free, and I know this is going to come up as we talk, is in sales, sales wants qualified leads. Some of the best qualified leads are what people are starting to call product qualified leads, which are these leads that have … On a free plan, or even during a free trial, to be honest, are doing a key activity, and once that key activity points are reached, sales starts reaching out, and then you have such a more rich conversation, ’cause it’s contextual to what people are already doing in your product. So one of the most valuable things for sales out of a free product, is this concept of a product qualified lead, and when you start really digging into that and start seeing some of these businesses that are out that are using freemium really well, they’re doing some form of a product qualified lead and actually throwing sales a ton of leads that are very qualified because they’re already using the product. One of the risks there is that sales should’ve known freemium, that doesn’t make sense. They’re trying to close deals, but sales starts getting some really interesting deal flow and prospects when you think about freemium in that way, where it’s like there’s activity points or certain engagement that people reach in a free product that leads to a much better conversation for sales. Realistically, much faster close once someone reaches that point.

Steli Efti:

What about the kind of bootstrap founder, or … I said it right all the time, but I said it wrong now.

Hiten Shah:

That’s fine. Self-funded.

Steli Efti:

Self-funded.

Hiten Shah:

All good. All good. Thank you.

Steli Efti:

I’m totally on the self-funded bandwagon for you for years now with you, right.

Hiten Shah:

Appreciate it. Yeah.

Steli Efti:

I’m right behind you on that quest. So, what do we tell a founder that’s like self-funded, single founder and is like, “Hey. I need to get to a certain amount so I can quit my job, and if I have a free version that’s going to prolong it for way too long.”

Hiten Shah:

You know what? Don’t have a free version. Or, have a free version and go after outbound sales with a paid product right away. In fact, in one of the products I’m launching very soon, we have a free product, and we’ve already started building out a trial funnel with paid ads. So, if you build out a funnel, and you know the features, and even if it’s not a funnel, if you start doing outbound sales and have a free plan, there’s nothing wrong with that. You just got to be really smart about what’s included for free and what’s included in the paid product. Here’s the thing, right, like the free plan gets you marketing. The free plan gets you word of mouth, and the free plan actually lowers your customer acquisition costs, which tends to be a much harder problem when you’re self-funded. You don’t have money to buy leads. You don’t have money to do marketing in the same way, while a free product can do the marketing for you, as long as you’re dedicated to keeping on improving it, and making sure that leads to people who buy. So I like the parallel track where I’m building a product. Why not let people use it for free while I’m figuring out the sales process, and actually going outbound to go get customers? The reason is when you’re a solo founder or a self-funded or whatever, don’t have a lot of capital, you have two problems, one, you don’t have money, obviously, to go do marketing or anything really. You’re the do the marketing for you. So that’s my first sort of statement. You’re the founder. Go out there and get sales. You have to do that, too. So it’s moreso like how do you structure your product, how do you structure your business so both of those things can work in parallel. It doesn’t mean you have to listen to me and do freemium. What it means is you have to just entertain and then think about is there a opportunity to have a free plan in your market that you think is going to lead to people paying.

Steli Efti:

What do we tell … How do we structure a free plan today, right, because what I know is that there’s a bunch of companies out there, they have free plans that if you actually look at it, it’s kind of … I don’t know. It’s a little farcical. It’s like such a bullshit zero value thing where with it … It is free, but if you want to do anything with it, it always will prompt you to upgrade, right, and it … To me, I don’t know. That just rubs me the wrong way where I’m like, “It’s not a really free version of the product.”

Hiten Shah:

Yeah, me too.

Steli Efti:

Are you just … And it’s basically just a free trial, but you’re lying to people pretending there’s a free version of your product, but it’s not really free. How do you design a free version that’s not so powerful that nobody ever needs to pay you, but is useful enough so it’s not total bullshit?

Hiten Shah:

You know, that’s a great question, and a very common one, and the key there is to figure out where your limits should be, whether it’s a certain number of things you allow people to do, and after that they’re capped out, which is more of a free trial based on usage not on time. Which is fine. That’s a good step in the right direction for free. For example, a CRM tool with one user for free can really help you capture a certain piece of the market, and then as that company grows, or that business grows, if they grow, they want to add more users, they pay you more money, so that’s a very classic way to think about freemium if you have that per user model of charging per user, and that doesn’t hurt your word of mouth or whatever. Another opportunity is when you really think about, “Okay. There’s certain type of user that’s going to help us grow the business and bring us more users.” Those people have different requirements than people who want to pay. Those requirements tend to be, they need a simpler product, an easier to use product, something that has less complicated features, and then you kind of upgrade. You get upgrades because people’s usage leads them to wanting more from your tool, so advance settings is a great example. Any kind of advanced settings or advanced options are things people would gladly pay for once they’re really happy using your product. I would say that if you are product challenged, and what I mean by that is you don’t naturally think about product development. You’re much better at sales, much better at marketing, and feel like you don’t have the energy, time, experience to really dig into product development and think about different sort of types of users and how they should have different features, then don’t do free. Please don’t. You’re going to have all the challenges of doing free that we’ve brought up before and we’re bringing up now. You’re not going to dedicate yourself to building a very great free product. You’re going to think it needs to be crippled or whatever in order to make it work, and maybe your market isn’t right, because you’re so into sales or you’re so into marketing that that’s your strength. One of the things that I’ve come to that’s different from a few years ago is, maybe I was more dogmatic before, but I’m not dogmatic about, “Hey, everyone needs a free plan.” What I’m saying is you should entertain it, and if you feel like you’d rather sell, you’re better at outbound sales, you’re better at marketing than you are at actually thinking through product, don’t do free. It’s a product problem. That’s really the truth. That’s the conclusion I’ve come to.

Steli Efti:

That’s interesting. Do you think that … I mean, I would assume you would say it’s much easier to start with free than to introduce it later on. But are there any really good examples of a company that was doing … Only paid for two, three, four, five years, whatever, and then introduced a free version and did that well?

Hiten Shah:

Yeah. I think MailChimp’s a good example. They went freemium many years into their product, almost a dozen years. They’ve written a big blog post about the benefits of it for them, and now they’re doing like $400 or $500 million in revenue a year. They’re in one of the biggest markets on the planet, which is e-mail, they’re an e-mail provider, but they’re a classic example. They’re also self-funded, and they’ve been around, I think almost, I want to say almost close to 20 years now.

Steli Efti:

That’s a long time, yeah. Yeah, yeah, yeah.

Hiten Shah:

Yeah. So, they had a big change, and they went free, and dedicated themselves to it, and it’s had tremendous growth, and it was hard, right, so that’s a good example. Another example, which I think is an example of freemium early, and then they went freemium again, and I’ll explain, is HubSpot. They have their grader tool that they’ve had, which got them a lot of leads, but I wouldn’t consider that freemium, because it was just meant to generate leads for them, not meant to be engaging or get retention. Now, they’ve got like a bunch of ancillary products. Their CRM is completely free, and they’ve got a bunch of products that are free in their portfolio of products, and it’s a much newer thing for that business, you know. That’s a pretty good example. If you look at their filings and the growth of the company since they’ve gone public, I’m sure free has helped them tremendously, too. To me there are examples. I would say that if you dedicate yourself to it early, then you don’t lose out on the early customers in your market. One other reason, which is a little bit of a fear uncertainty doubt reason, which I don’t like, but it is relevant, is that if you don’t do free, someone else in your market might. It really depends on your market. In your case, Steli, I’m sure you guys are doing fine, ’cause you have such a great marketing top of funnel. If you didn’t have that, then entertaining free would probably be a much stronger thing for you, ’cause otherwise how do you get users.

Steli Efti:

Yeah, I think that that would be a big thing, and not to say that we never. We have the freemium discussion quite regularly. Once in a while we’ll take a hard, good look at our funnel, and we’ll ask ourselves “Is our pricing still right? Should we lower the pricing in any way?” But I do think that because of the brand that we have, and because of our marketing, and the numbers that we see our funnel in terms of conversion rates and all that, it makes a big difference. Also, the size of the team. We have a very, very small team, and we’re accomplishing a lot with it, so we’re always super careful in committing to too many things, or committing to things that we’re not going to be able to do with excellence. I think that’s been a big part of this. And we like money. But I think we’re on the same page there with you. You just believe that it’s a better way to get more money than we did in the early days.

Hiten Shah:

Yep. That’s the bottom line for me. Exactly.

Steli Efti:

Awesome. Well, and there’s a lot more to talk about this. Maybe we’ll do even a third episode at some point, but for today I think we’ll wrap it up, but if people have examples to share of successfully going freemium, successfully moving away from freemium to paid only, or anything in between, or have questions about this topic, we always love to hear for you. Shoot us an e-mail. [e-mail], [e-mail], or ping us on Twitter. Yeah. I think that’s it for this episode for now. We’ll hear you very soon.

Hiten Shah:

Yeah. Enjoy the freemium debates in your company. See ya.

Steli Efti:

See ya.

The post 250: How and Why to Do Freemium in Your Startup Today appeared first on The Startup Chat with Steli & Hiten.