Dan Martell - June 27, 2016


Freemium SaaS： The 4 Rules For Creating A GREAT Business Model & Product

Hosted by
Dan Martell
Mentioned
Hootsuite Evernote Drew
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Episode Stats


Length

5 minutes

Words per minute

197.86

Word count

1,159

Sentence count

60


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, I talk about why you should only use a freemium business model when the following 4 things are true: 1. You need to make sure your potential number of users is in the tens of millions of users 2. Free distribution is a competitive advantage 3. The product has a simple and straightforward value proposition 4. The marginal cost to serve additional users is negligible 5. It doesn t matter how many users you have, it doesn't matter how much money you make If it's free, it's a good business model.

Transcript

Transcript generated with Whisper (turbo).
Hosts, guests, and mentioned names generated with spaCy (en_core_web_sm), reconciled against Wikidata.
00:00:00.000 Only use a freemium business model
00:00:02.240 when the following three of four things are true.
00:00:15.780 I don't know if you've ever thought about starting
00:00:18.120 a SaaS company that uses freemium
00:00:20.320 or you have a freemium product today,
00:00:22.460 but I've been building companies now for over 17 years.
00:00:25.740 I've studied freemium in a big way.
00:00:27.580 I'm a formal advisor to Hootsuite, one of the largest freemium companies.
00:00:31.720 I'm friends with Drew from Dropbox, so I've seen in the early days how they've built that company.
00:00:36.500 I even integrated with Mailchimp in my company, Flowtown, so I've worked with Ben personally, the founder and CEO there,
00:00:42.000 and watched them go through that transition from paid-only to freemium.
00:00:46.860 So I've studied this industry like crazy.
00:00:49.860 And, you know, recently I was on a phone with an entrepreneur, and she was walking me through her business model and her pricing plan.
00:00:55.260 And when I looked at the market she was in,
00:00:57.960 they were B2B SaaS, and the pricing of the model,
00:01:01.600 I mean it was $7 a month, it was free to use,
00:01:04.540 and then $7 a month per company.
00:01:08.040 Unlimited users, unlimited seats.
00:01:09.940 I was like, I don't want to be critical,
00:01:12.440 but right off the bat, you'll never be able to scale this.
00:01:15.220 And it took her by surprise.
00:01:16.380 She's like, what do you mean?
00:01:17.380 And I was like, freemium in your model's not gonna work.
00:01:19.660 She's like, why?
00:01:20.420 And I said, well, you're violating too many of these rules.
00:01:22.820 And then I walked her through these four different rules
00:01:25.560 and she realized that she had made that mistake.
00:01:28.100 And it had been three years that she sat on this
00:01:30.720 and not really seeing any growth whatsoever.
00:01:33.060 And I think that conversation really sent her down
00:01:35.200 a different path and that's what I wanna share with you today.
00:01:37.300 So the first one is you gotta make sure
00:01:39.640 that the potential number of users
00:01:41.840 is in the tens of millions of users.
00:01:44.500 Tens of millions, right?
00:01:45.680 So if you're building something
00:01:47.080 for like a very super niche SaaS market,
00:01:50.180 like doctors that do a very specific type of operation,
00:01:54.480 that's not tens of millions of users.
00:01:56.260 And there's a reason why you need tens of millions
00:01:58.260 because of the way the economics work.
00:01:59.660 So number one is make sure that the total numbers
00:02:02.520 is in the tens of millions.
00:02:03.700 Second one is that free distribution
00:02:05.800 is a competitive advantage.
00:02:07.000 You know, I remember seeing MailChimp when they did this,
00:02:09.900 that was their key thing.
00:02:11.700 It's like, look, there's all these other email providers
00:02:13.880 out there, but if we do a free product,
00:02:16.040 especially with 2,000 emails on your list
00:02:18.780 before you have to pay, that is incredible.
00:02:20.880 But they, you know, Ben wrote this amazing blog post,
00:02:23.520 I'll link it up below, that walked through his thinking
00:02:25.980 and the math and, you know, 10 plus years of data
00:02:29.220 doing paid only to finally say, you know what,
00:02:31.760 if we can increase our marketing,
00:02:33.400 it was a marketing decision to go freemium,
00:02:35.760 if we can increase the amount of people in our trials,
00:02:37.600 we know that they're gonna confer at this level
00:02:39.340 and overall it's gonna net us ahead from not doing it.
00:02:42.480 So it was a very deliberate business model decision.
00:02:45.280 And really it's free is a competitive advantage.
00:02:47.840 If that's true, then that is a potential
00:02:50.240 for a freemium business model.
00:02:51.340 The third one is that your product has a very simple
00:02:54.880 and straightforward value proposition.
00:02:57.020 When people sign up, if it's complicated,
00:02:59.280 if they need a customer success team,
00:03:01.160 if they need somebody to talk to from a sales
00:03:02.920 or account managers, you do not have a simple process.
00:03:05.360 When I'm talking about simple, value, straightforward,
00:03:08.220 it is like a drop box.
00:03:09.700 Think about it, I have a folder on my computer,
00:03:11.700 I drop folders or files there and I can share it.
00:03:14.200 That is straightforward and simple.
00:03:16.440 You know, and that, when you look at all the top,
00:03:18.300 you know, Evernote, very straightforward.
00:03:19.960 I put stuff in here, I can search and I can retrieve it
00:03:22.320 on all of my different devices and they're synchronized.
00:03:25.040 Very simple and straightforward.
00:03:26.860 If that's not true, then I would challenge you
00:03:29.580 that maybe freemium is not the right decision
00:03:31.620 for your product.
00:03:32.780 And then the fourth one is the marginal cost
00:03:35.100 to serve additional users is negligible.
00:03:38.120 It doesn't matter.
00:03:38.780 Like, it's like fractions of a penny
00:03:41.020 because the free is kind of taking the marketing spend
00:03:45.000 instead of spending it on marketing to get more users,
00:03:47.320 you get free users in there using the product,
00:03:49.600 getting to that moment of gratification and aha,
00:03:52.740 and they love it and the core value,
00:03:54.340 and then they tell other people about it.
00:03:56.320 It's word of mouth marketing on steroids.
00:03:58.820 And it's a decision.
00:04:00.420 If it costs you $5 supporting a user
00:04:02.700 and most of them are free, it will never scale.
00:04:05.780 And I see this happen so many times.
00:04:07.820 So those are the four.
00:04:08.840 And really quick recap is the number of potential users
00:04:12.040 in the tens of millions, okay, tens of millions.
00:04:15.000 Two, that free distribution is a competitive advantage
00:04:18.560 based on the competitive set in your market.
00:04:21.340 Three is that the product has a very simple,
00:04:24.120 straightforward value proposition.
00:04:25.700 And four, that the marginal cost to serve
00:04:28.000 an additional user is negligible.
00:04:29.900 It's like pennies.
00:04:30.700 It's fractions of a penny.
00:04:32.420 I mean, just think about this.
00:04:33.740 If you wanted to get 1% to 4% of your users to paid
00:04:39.980 to reach $100 million in revenue, okay?
00:04:43.680 So if you want to get one to 4% of your users are paid,
00:04:46.080 $100 million in revenue, charging $100 a year,
00:04:50.340 you would need to get, with a 4% conversion to paid,
00:04:53.780 you would need 25 million users using your product.
00:04:57.880 Just think about that.
00:04:59.040 Do you have the financial means to scale, to defer,
00:05:02.820 to build up, to understand, to build the capacity,
00:05:05.400 to scale that product in a way
00:05:06.740 that you get to 25 million users
00:05:09.460 because only 4% are going to be paying $100 a year?
00:05:12.860 I mean, it's, you know, there's companies like Slack
00:05:15.360 and so many other incredible freemium companies
00:05:17.180 that you can look to,
00:05:18.220 but they're the exception, not the norm.
00:05:21.460 And I think that freemium has caused more harm than good
00:05:24.680 for a lot of SaaS companies.
00:05:26.000 And I would argue if at least not three
00:05:27.900 of the four of these kind of filters or rules fit
00:05:32.020 that you might want to consider going to a kind of a free trial
00:05:35.120 to paid or paid only business model.
00:05:37.680 So as per usual, I want to invite you
00:05:39.420 to subscribe to my newsletter.
00:05:41.120 Just click right up there to get exclusive content
00:05:44.160 and invites to private events.
00:05:46.460 And I want to challenge you to live a bigger life
00:05:49.120 and a bigger business, and I'll see you next Monday.