As we came out of private Beta, we announced a pretty unpopular decision at Trak.io: we removed our free plan (and replaced it with a $9 per month plan).
I wanted to explain the reasons behind this and why we think it’s the best decision for our company and our paying customers.
Hopefully, other SaaS founders can take some insight from this and think hard before jumping immediately into Freemium! Because if you aren’t careful, you’ll actually just be giving away your product for Free!
Reason #1: ‘Free’ Is Not A Competitive Advantage In Business
One of the most prominent details we emphasized to everyone we spoke to in the early days of Trak.io was that we would offer a super generous Free plan. A free plan so generous that an average funded startup would very rarely outgrow it.
We would have floods of users dropping our competition, ripping out their old code integrations, and flocking to Trak.io because we would be Free. Free as in air.
We thought that the monthly cost, whether it was $0 or $499 per month, was how all startups chose their SaaS software (wrong!).
‘Free’ is not competitive advantage because your competition could easily do the same thing overnight. There’s no proprietary algorithm involved. No charismatic user interface to create. They just add a free plan overnight, and section off a bunch of cashflow to cover the burn.
If your competitors can copy you overnight, it was never a competitive advantage.
Reason #2: Free Users Help You To Build A Cool Product. Paying Customers Help You To Develop A Valuable Product
After introducing our $29 Priority Access program, offering Beta waiting list subscribers an instant queue jump, we started to see a huge shift in our customer development. Features that we’d previously emphasized because everyone said they were ‘cool’ no longer came up in conversations.
Instead, we started to hear about more ‘mundane’ ideas, but they had direct business value. People started asking about scenarios we’d just not thought about. Our paid queue jump users asked for Salesforce integrations. Multi-permission multi-colleague access. Custom data exports. Easier integration’s so marketing didn’t need to pester IT as much.
In contrast, our free beta users had suggested more icons for the metrics dashboard. For the ability to upload individual customer photos. For custom colour coding labels.
I’m not saying that free Beta users aren’t valuable. Neither am I saying that paying customers are the best way to innovate creatively as an entrepreneur. But, if you want to build something that people will pay for, then you should pay close attention to what your paying customers ask for.
Reason #3: Free Users Require The Most Support
Generally speaking, our Beta users who couldn’t justify a $29 expense on their business credit card, also couldn’t justify having their freelancer, agency or developer to integrate Trak.io into their app.
But that takes quite a lot of time. And usually, those users are the ones who need the most hand-holding through the first few days of using the tool too.
In stark contrast, the feedback we usually get from our paying customers is “Installation was a breeze for our developer” or “Point us to your documentation, Mike (our CTO) will sort the rest”.
Our paying users just had more resources available to benefit the most from Trak.io with minimum input from us. A junior/mid developer capable of delivering suitable Trak.io customer support will cost us around $100-$200 per hour (if we hired someone). With a SaaS product costing only $9-$299 per month, we need to ensure we’re able to support all our users without burning tons of money in support staff.
At current count, we have 1,460 users registered with Trak.io. Some of those are still free users from the Beta who have a couple of weeks to decide to pay, or leave the platform. Quite simply, there’s no way that with our current team of 3 people, we could support 1,460 users effectively and to the level they expect from us.
But, if that user count was a more manageable number in the hundreds, and those users were paying us, not only could I continue to personally say hello to each user to welcome and onboard them, we could also hire a dedicated support member of staff.
Reason #4: We Don’t See Any Viral Benefit Of Thousands Of Free Users Telling Thousands Of Other Free Users About Us
Having thousands of users talking about your product is great. But not if all of those users only talk about your product because it’s free.
Honestly, how many people would you refer to Google analytics if it cost you $49 a month? Probably zero. It’s not saying much about a B2B product if it can’t add more than $49 of value to your business a month.
When a ‘forever free’ user refers one of their buddies because “Oh yeah it’s a free analytics product!”, do you think that new person is going to become a paying customer?
Having 10,000 free users who have no intention of ever paying you is not freemium. It’s just a free product.
We don’t want our viral engines of growth to rely on the fact that our product is free. We want users to refer their peers because we bring massive value to their business, an order of magnitude more than the couple of bucks a month we charge them.
Reason #5: We Get No Value From Their Data
At Trak.io, we aren’t selling aggregated data from the millions of people our software is tracking. We just provide the platform. The data belongs entirely to our respective customers who stored it with us.
Other analytics companies (and a few other B2B SaaS platforms in different industries) offer a free service in exchange for you giving them total access to resell and use your data. They take the aggregate data (or cookies), and sell it to the highest bidder – usually market research firms or ad-targeting networks.
We think thats just creepy.
Because we don’t do any ‘backdoor sales’, there’s no way we could monetize the data that our free users would bring to the platform.
Reason #6: We Want To Build A Sustainable Business Around A Product People Love (Enough To Pay For It)
The success stories of Freemium usually get a lot of spotlight. However, no one really talks about the cases where freemium bankrupted startups. Or crippled a startups efforts to monetize their product later (because everyone was so used to it being free).
People love to point out Mailchimp’s freemium model:
“They’re worth a Billion dollars and they have a huge free plan!”
What they fail to miss, is that Mailchimp launched in 2001 and spent 7 years building a massive product with tons of features, and built up to 85,000 paying customers, before introducing a free plan in 2008. It actually took them a few years to even offer a free trial!
Once you have a product people love enough to pay for, you have a healthy cashflow, and you’re confident there’s a viral engine of growth in your product… thats when you should consider introducing a freemium model in your B2B business.
If you’re in B2B, you need to focus on building a solid, sustainable business built around a product people love.
Reason #7: We Totally Changed Our Pricing Metrics, and Miscalculated Our Costs
During the Beta, we hinted to users that our pricing would look something like this:
Free, $29, $49, $149
At launch, our pricing now looks like this:
$9, $49, $149, $299
Initially, we were going to offer only 6 months data retention (we figured startups only care about short term data) which meant our costs were pretty much based around only keeping a few terrabytes on high spec servers at a time.
In reality though, we learned real businesses want to have the peace of mind of knowing they can run annual reports on their data and compare Q1 this year to Q1 last year.
This meant we instantly had to double all our assumptions on server costs!
We also intended to charge based on the number of visitors to your website/app. We soon realised this was a metric totally uncorrelated to the revenue or success of a product, and scaling on that just wasn’t a meaningful value-based metric.
As this meant we would now be storing a lot more data for an average account, as we were now storing potentially millions of anonymous visitors data, we had to increase our server cost estimates again.
Also throwing our cost estimates off were assumptions about how many events an average app would track. With similar products like KISSmetrics and Mixpanel, you’re charged on the number of data points you store. While this does have a a direct correlation to our costs, we soon realised it was unrelated to the business value the user gained, and actually created a bit of anxiety when users were first integrating:
“Which events should we track, we don’t want to track too many things because of the event storage limits!”
In reality, I want our users to track as much as possible because they’re going to kick themselves in 3 months when they learn about a problem in a workflow, but they didn’t track every individual step in that particular process.
I’m not trying to say that a B2B SaaS app shouldn’t ever consider Freemium. And I’m not saying there aren’t great examples of it working.
I’m also fully aware that we’ve pissed off a lot of our very early Beta users by dropping our free plan.
However, I am saying you should really analyse your reasons for choosing freemium, and make sure you aren’t actually choosing ‘Free’. Free is just a vanity growth number that’s going to burn a hole in your cash.
Freemium should be a customer acquisition tactic.
We think the introduction of our $9 Solo plan will allow us to separate the free users who have no intention of ever paying for software, from the early-stage Bootstrappers, and we’re pretty happy with the decision so far!
Please leave a comment if you’ve had to approach the ‘Freemium vs. Free’ decision in your startup!
UPDATE Tues 5th April 2014: Edited to remove the term ‘Freeloaders’ after a few readers correctly pointed out this was a pretty douchebag term to use, especially when WE were the ones who put the product out for free in the first place! I didn’t mean to offend anyone when I was writing the first draft at 4am. Lesson – get proof readers!