The longest-running American TV game show host Bob Barker once said, “You can’t fool television viewers with dancing girls and flashing lights.” The same mindset goes with prospects. The smoke and mirrors show won’t get you far when potential customers decide on who to pick when they come down to price.
This is the fork in the road for every software company ready to sell their service or product. With the goal of getting on the right path to revenue, SaaS organizations are often thrown into a debacle of what pricing model to use because there are so many of them.
Do they require a customer to pay per seat? Or per active user? This is a relatively new pricing model and it’s gaining traction, with Slack at the forefront. What about offering tiers in which certain features and functions are unlocked with higher rates? There’s also pay-per-use, pay-as-you-go, monthly charges, or the option to cancel anytime. The subscription model allows the customer to unlock savings with longer-term commitments.
And then there’s freemium, which I’ll explore further, given the latest resurrection in interest in this model, as stated in Mary Meeker’s long-standing Internet Trends report, and with Slack’s IPO, alongside other popular games and services that have done swimmingly well with the model, such as Fortnite, Dropbox, Spotify, and others.
The People vs. Freemium
Freemium is essentially a pricing strategy that aims to give no-cost access to basic but “sticky” features of a software, with the aim of demonstrating value to a potential customer and showcasing additional high-value features to convince purchase. This model has been around since the early internet days and has a number of variations.
There’s free full function, but for a limited time or limited use, or free limited features with the paid upgrade otherwise free basic tiered premium. Others offer free single-use and then require a customer to pay after. One other model is free ad-supported, in which customers use the software free with in-line ad placement (user subscription is monetized via ad revenue), paid upgrade to ad-free (a common in-app model).
On a positive note, if you decide to go on the freemium path you expose value and features to new buyers with low risk for customers and high conversion opportunities for the seller. Your brand would ideally create a “stickiness” with the user. Once the user captures value initially, it becomes harder to live without.
There’s nothing that seems more enticing to someone than the notion of free, so you essentially remove cost as a barrier to entry. In the case of ad-supported, you can simultaneously accomplish above and generate incremental revenue. On the flip side of the ad-supported model, there’s a risk compromising the true value of service and experience with clutter and latency of 3rd party messaging. You can fail to deliver a compelling experience to convince purchase or risk concession of the “compelling event” to premium conversion among users who will “just live with” the ad-supported experience.
The ad-supported experience isn’t the only model that has two sides to the coin. The path from freemium to premium can be a steep uphill climb and, even worse, users won’t even attempt to take that first step into the trailhead if the conditions aren’t optimal.
Freemium can backfire. If the service is not truly “sticky”, it can expose product weakness and encourage churn and abuse. You must think about what you’re providing to the customer for free because if it meets their needs, asking them to pay in a premium version can be difficult. Some companies have made the mistake of setting a premium price point that’s set too high, leading to customer perception skewed to the free offering being worthless. If your premium offering is not clearly differentiated, this can cause the customer to question why they pay for something you (vendor) can obviously provide for free.
Opting out of the Free Grab Bag Options
Yes, freemium is a shiny object right now but other models have proven worthy and great acquisition and revenue models. While these tips may not work for every SaaS organization, I have seen a few recently that have resonated quite well across various verticals.
- Offer the product you most want to sell as the mid-range price option. There’s a good reason behind this and, in short, it’s because people want to feel like they are getting a good deal.
- Be transparent. It’s a good rule to be as explicit as you can with what things cost and how you got to those prices. If you show a customer how much you’re making on their purchase, it can inspire confidence.
- Along the lines of being transparent, don’t pretend pricing is set in stone. Everyone knows that there isn’t a final drop the dead price so create options for customers to take action or engage in comparison shopping that will enable them to capture savings and control their own satisfaction with the purchase.
Given that I come from a SaaS company that has products we price and our products are designed to assist other companies in their own pricing, I can tell you what has worked for us.
We’ve seen success with a no-fuss monthly subscription in our category, most other providers require complex multi-year contract commitments with penalties and expensive losses on cancellation (we’re an enterprise B2B solution serving companies with at least $50m annual revenue) so one of our competitive differences is we’re an easy out, no long term commitment provider.
Our customers can leave the service with no penalty at any time, which is dramatically different than others. While this might seem highly risky, the opposite has been true because we remove the upfront fear and barrier of a long term commitment, customers feel much safer engaging quickly knowing they aren’t going to be penalized if it doesn’t work out.
If you offer competitive pricing and a great product, customers wind up staying for a long time, in many cases far longer than they would have had and forced into a long term agreement upfront.