Now it is getting more and more a tendency to study the cases of the most successful Software as a Service projects from monetization model point of view. Choosing wisely between Freemium, Free Trial and Subscription Service strategies must be considered carefully as the competition in the SaaS world is getting higher.
Different business types – different monetization models
There is no one-size-fits-all pricing solution regarding the launch of you SaaS because each of them contains potential risks and obvious benefits. We will try to give a brief summary of Freemium, Free Trial and Subscription SaaS pricing strategies, their strong points and situations when each of these models will quite probably fail to satisfy needs of your start-up. Freemium Model: When it pays off Introduced as a revolutionary new model in 2010 by SnapLogic[1], the Freemium model has become wildly popular, chosen as a monetization strategy by such incredibly successful enterprises as Dropbox, Evernote or Slack. The Freemium model – based on making a free entry-level tier and supplementing it with paid packages with additional facilities to convert free customers into paying ones - removes the barrier which always holds potential customers aside, i.e. the necessity to pay. Those SaaS which have a potential viral effect have all chances to benefit from the Freemium pricing model: they attract a significant amount of users and, keeping them interested in their product, offer them extra services or features for a fee. With the Freemium economics, the program becomes profitable only when this simple formula is followed: your paid users’ lifetime value (LTV) must be greater than the combined costs of acquiring new customers (CAC), serving free users (CSf) and serving paid users (CSp). LTV > (CAC + CSf + CSp) It means that for being sustainable in the long-term, the best freemium services need to be low-cost to run (in terms of customer acquisition and service costs), and have the potential for viral growth with a large audience. Knowing high-profile success stories of companies using Freemium model for their SaaS, we hear much less about those startups who have failed, mainly due to the pricing model chosen. However, there are serious arguments against the Freemium pricing model and it is worthy to take them into account as well. The Baremetrics start-up representatives stated a failure of introducing the Freemium model in their blog, “When your available resources, whether it be team size, performance caps or money, are tight, then “free” has a real possibility of causing more damage than providing any real benefit.”[2] For them providing an access to the free tier of the product led to increased operational issues (down time, delayed data and inaccurate metrics) and therefore a deteriorating support experience (increased loading time, inability of the support team to provide a necessary level of assistance), as a result the churn rate doubled, taking away any benefits from the proposed Freemium offer.
Revisiting the Baremetrics example, it becomes clear that for being a successful Freemium-based SaaS product it is important to:
· Develop adequately both free and premium versions and keep the balance of the product features wisely. The free version must provide an effective solution to a widespread problem in order to attract a huge number of users and convince them to stay with the product – but keep its most useful and desired upgraded characteristics in premium version. Solving the problem with a basic tier won’t convert your free users into premium ones – it will just make the product free, when users won’t understand why they should pay for an advanced tier if the problem has already been solved. · Demonstrate a clear upgrade path for the customer. It can be done by either providing limitations that will be reached in a reasonable time frame (storage space, number of users, etc.) or offering attractive premium features free customers will be interested in and will be willing to pay for. In the Dropbox case users shortly run out of the freely provided storage after an intensive usage of the product (photo uploading, docs adding, etc.) and quickly get willing to upgrade for additional storage. · Realize that the stickiness of the SaaS product doesn’t just involve a significant amount of users but makes them willing to pay at a certain point – and stay with the product for the long run. The high long-term retention rate is essential in the SaaS world where the key characteristics are Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). Evernote provides a good example of effective application of this principle: active free users of Evernote come to rely on the product and to start to pay for it. As stated by Phil Libin, Evernote CEO, their users are 8 times more likely to convert into paying subscribers after a year of using the product than they are after using it for just a month.[3] Also, the fact that customers’ conversion into paying users always takes time, must also be taken into account. · Keep its maintenance and support costs relatively low, in most cases due to the simplicity of its functioning; therefore the profits generated by premium users can support service costs caused by both free and paying customers. · Have a scalable product infrastructure which will be able to support a dramatically increased (in successful cases) flood of new customers. Free Trial: How to introduce it correctly Free Trial is another pricing strategy including the word ‘free’. Its work is based upon another principle: SaaS owner provides a free access to the whole product, but for a defined period of time. The problem of this strategy is comparable with the ones faced by the Freemium model: it aims at adopting a serious number of users, part of whom will turn into paying customers after the trial period is over. As with Freemium, the vendor gives away part of its infrastructure. Therefore, like in the previous case, first of all, he must seriously consider the technical facilities which must be ready to manage a multiplied number of users. Second, the strategy must aim at generating an incremental profit greater than the incremental cost of delivering the free service. Customers must have enough time to perceive the value of the product, so that they will see how the product can make their lives better and will be interested in buying a paid access to it once the trial period is finished – and it would be better if the potential customer could do it without investing too much resource. That’s why technically complicated SaaS products, which require a lot of time and effort to get to know it and comprehend its functioning, may be not very successful with the Free Trial strategy. There are also certain doubts against applying the Free Trial model to expensive SaaS products. New users can be interested in working with the service while it is free, but then they can be seriously turned away by high price. Attracting new customers with your internal sales department can be a more effective sales strategy than using the Free Trial marketing model which most probably won’t manage to keep users interested in high-priced products when time comes to pay hundreds or thousands of dollars. Subscription Services: Future of the SaaS market? Over the past few years the Subscription Service model has gained a lot of attention and caused a lot of discussion. The success of such SaaS as Salesforce.com or Bigpond.com is attracting more and more start-ups, mainly those who offer cloud-based solutions. With this pricing strategy, customers can choose the level of service they want (containing or not different upgrades and add-ons) and the frequency that they want to be billed. A Subscription Service-based SaaS can develop packages tailored to the needs of the most different subscribers who have different needs and budgets: big corporations or small businesses, a group of people or an individual. This model has its strong positive points because it lets your business develop long-term relations with customers and monetize your ongoing relationships with them. Acquiring new customers is difficult and expensive, that’s why maintaining already existing customers and getting recurring payments from them with the help of the Subscription Services model can be an effective solution for long-lasting SaaS business. Conclusion Choosing the pricing model for your business may generate additional value to your start-up – or, if the analysis hasn’t been done properly, destroy it on the market and lead to serious financial loss. The better you envisage your potential customers, their expectations from your SaaS and their needs for the solution for which they will agree to pay, the more prepared you are when it comes to defining your future SaaS pricing model.
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