Pivot to Profit: Ditch Freemium and Start Making Money

Let me be clear… I don’t hate Freemium.

In fact, I don’t hate any marketing strategy, revenue model, or user acquisition method – including Freemium – I just think sometimes more thought needs to go into the selection – or subsequent ditching – of your business model.

What I’ve seen in just the past six months – and what I believe is a trend that will continue to accelerate – are companies that went to market using the Freemium model, deciding that it just wasn’t working like they thought it would and ditching the model for something more appropriate.

This is what I call Pivoting to Profit!

For the companies I’ve worked with, the model they moved to from Freemium was the simple and super un-sexy Premium service + a Free Trial.

I know, boring, right? Well… depends on what you’re looking for out of your business and how much funding you have with which to find it.

Freemium Success Stories: The Usual Suspects

Now let’s be clear… there’s a reason we (the collective we) can only point to the same handful of B2B Freemium success stories… and that’s because there are only a handful out there.

And those handful of companies* have some MASSIVE – like jaw-droppingly massive when I looked at the latest updates – amounts of funding behind them or are public.

Those companies are usually:

• Evernote $166M funding to date
• Dropbox $257M in funding to date
• Box $284M in funding to date
• LogMeIn $20M funding before going public
• Yammer $142M before Microsoft acquired them for $1.2B in 2012

*I’m sure there are others… I’m equally sure there are only a few others and that’s my point; for every Freemium success story there are a bunch (I don’t have stats) of Freemium failures… but something to really focus on is that for every Freemium success, there are hundreds of Premium-only success stories that you just don’t read about on Techcrunch.

By the way, to me, Yammer was the one of those that was super-relevant to the Enterprise Software market since they employed such a unique sales model and completely disrupted a legacy incumbent – Sharepoint – to the extent that Microsoft bought ‘em rather than compete with ‘em.

And Yammer was generating revenue (not sure if they were profitable yet) so they weren’t just building a user base and hoping someone who knew how to monetize those users would buy them (like Instagram – acquired by Facebook for just shy of $1B in 2012 and with ZERO revenue – for example).

The Rules for Freemium Success

Freemium works, it just takes a MASSIVE market and MASSIVE amounts of money to give you time to:

1. Build the user base
2. Figure out how to leverage that user base to grow itself (viral coefficient)
3. Figure out how best to monetize that growth*

*This is one of the big problems with Freemium… it’s often too late to efficiently monetize existing users because the psychology of “free forever” has already taken hold; expectations were not managed so the “Penny Gap” issue rears its ugly head.

But for companies with less funding, those that don’t have a massive market, have a relatively high incremental cost of serving customers, or those that know they have a valuable service and can make a ton of money selling it to a smaller addressable market… Freemium might be better left to others.

Pivot to Profit: Three Examples

Three companies I’ve helped over the past six months have made this Pivot to Profit, moving away from Freemium and onto the path to profitability.

1. Qualaroo (formerly KISSInsights, acquired by the company formerly known as CatchFree) – Sean Ellis mentions in this Wall Street Journal article titled Freemium Isn’t for Everyone that having a Free tier for Qualaroo was “anchoring [their] solution at a pricing point that did not support our revenue growth objectives.” The WSJ article is definitely worth a read.

2. Stormpulse (USA) – Stormpulse had millions of visitors to their site every month, many of those were HUGE multi-national organizations that were using their FREE service to secure Billion-dollar assets, and yet they only were able to convert a few paying customers (the aforementioned psychological barriers to paying for what you already get for free).

So they raised their prices 10x and ditched Freemium.

Fast forward just FOUR months and now they have a $1.2M Annual Recurring Revenue (ARR) run rate and are profitable!

3. Email Marketing (Eastern Europe) – This company was started in a garage 10 years ago and moved on to become a huge success story in their country, but that success came at a price. Where many SaaS companies can say that adding new customers – aside from Customer Acquisition Costs (CAC) and other on-boarding expenses – has very little actual incremental cost associated with it, this company wasn’t so lucky.

Being in the email marketing space there is a cost associated with letting people use your service, and supporting free users was causing the company that – revenue-wise seemed to be doing well – to generate less and less profit over time.

And, in this case, the free users were often the ones that would do the things that required the company to spend more to defend or otherwise work around their actions AND were less likely to help spread the word about the company.

This company was “Freemium” before “Freemium” was a term and did a lot of things right, but found that the quid pro quo with the free users required for Freemium success wasn’t there…. so their CEO decided enough was enough.

They switched to a Premium-only offering with a Free Trial and are now producing PROFITABLE revenue. I’m helping the CEO curb a relatively high churn rate right now which will help them profitably grow at a faster rate.

4. Learning Management System (Italy) – This company currently offers an on-premises, installed LMS product that is doing quite well – including use by top Italian brands – and boasts customer lifetimes of 5+ years. To scale the business and take advantage of the wider market not accessible with only the legacy LMS product, they created an on-demand, Cloud-based offering

This company originally took their Cloud service to market by leveraging the Freemium model; however, after 7,000 sign-ups for the free version resulted in zero free-to-paid conversions, they moved away from Freemium to a try-before-you-buy Free Trial strategy and are now acquiring actual, paying customers.

The CEO of the company was so excited when we went over the numbers in our last meeting because he now feels there is a market for their Cloud offering and that the investment in creating the offering was justified.

The Allure of Freemium; Resist the Siren Song!

One thing I have to note here is that Enterprise or Traditional Software companies that are considering moving to the Cloud often find the allure of Freemium and the ability to quickly build a “user base” very compelling.

In fact, I can’t think of one time in the last couple of years that I’ve been asked to help a Software company transition to the Cloud that Freemium wasn’t at least floated as a valid Go-to-Market strategy…

… and for some large, legacy software vendors Freemium might just work, too, though if they do Freemium, a different approach from “Traditional Freemium” is likely the best strategy.

Should You Pivot to Profit and ditch Freemium?

If you currently use the Freemium model in an effort to grow a Profitable business and are finding the results thus far to be less than optimal, perhaps you need to Pivot to Profit and ditch Freemium.

But before you make a big strategic decision like that, contact me and let’s setup 30 minutes to chat about the options available to you to reach your goal of creating a PROFITABLE SaaS business.

- Lincoln