How to Create an Affiliate Program for your SaaS

How to Create an Affiliate Program for your SaaSThe CEO of a vertical-specific SaaS vendor with a relatively high priced offering emailed me the other day with a question about creating an Affiliate Marketing program to accelerate growth.

I gave him a fairly detailed answer and I thought I’d elaborate on that answer even more and share it with you… enjoy.

“Hey Lincoln, we’re thinking of starting an affiliate marketing program for our SaaS company to help accelerate growth.

From what I’ve read and the examples I’ve seen they’re commonly offered by lower priced SaaS apps, sub $200/mo, but our app is higher priced at $1k, $5k, or $10k/mo.

I’m thinking of offering an affiliate commission of 1 month of Monthly Recurring Revenue (MRR) after month 2 for all converted referrals. And maybe double that for an annual subscription.

I know you’ve talked about Affiliate Marketing for SaaS apps before, but do you know of any successful B2B SaaS affiliate programs with similar subscription prices?”

Below is my significantly-elaborated response…

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SaaS Marketing: 21 Growth Hacks to Test Today

SaaS Marketing Growth HackingBelow are 21 SaaS marketing growth hacks you could test right now.

Of course, these are tactics and while everyone loves tactics, if they don’t make sense within your very well thought-out SaaS marketing strategy, you should probably not implement them, right?

In fact, you should also probably make sure you have a well-thought-out SaaS marketing strategy, too.

Now, some of these “hacks” I’ve used and have seen a big impact… others are just ideas I haven’t implemented yet but might if the occasion arises… and some are just crazy ideas that I think would work if the situation is right.

Guess what? I’m not gonna tell you which ones are which so use your imagination and a good bit of caution.

I’m also not going to show you live examples of what I’ve implemented or share results. You see, I’ve helped my clients with these tactics and they’d like a little bit more time out in front of you, thank you very much.

The goal here is to get you thinking in the right direction, that’s all. Fair enough?
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SaaS Freemium Customer Acquisition Costs

I got an email the other day asking about Freemium Customer Acquisition Costs (CAC) and whether or not to include the cost of supporting and marketing to free users in the cost of acquiring paying customers.

Here’s my quick answer and some other resources for you to check out.

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SaaS Customer Success: Eliminate ‘Dead Ends’ to Drive Engagement

What if I said there was something you were doing right now that was actively reducing your SaaS customer success?

What if that thing you’re doing was standing in the way of driving higher levels of engagement and was reducing the amount of expansion revenue you’re generating while potentially increasing churn?

What if I said there’s a very good chance you’re doing it right now and don’t even know it?

What if I said that it’s easy to fix if you just keep reading?

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SaaS Customer Success: Start with Quick Wins

SaaS Customer Success - Start with Quick WinsSaaS Customer Success starts by orchestrating “Quick Wins” for your customers, helping them bypass their natural tendency to seek out reasons not to use your service!

I was in Silicon Valley recently and I found myself talking about this idea of “Quick Wins” several times within the context of SaaS Customer Success and I wanted to share this idea with you, too.

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SaaS Churn Rate Improvement: Monitor and Drive Engagement

SaaS Churn Rate Improvement - Monitor and Drive EngagementIn my last post I shared some actual ways to reduce your SaaS Churn Rate, including attracting the right customer and managing expectations.

In this post, I’m going to go deeper, and share some awesome methods for improving customer retention by leveraging the power of the SaaS business model, specifically the ability of the provider to monitor for and drive Customer Engagement.

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How to Offer Both Freemium and Free Trials

free-trials-and-freemium-primaryI got this question from a SaaS vendor about offering both Freemium and Free Trial options and I wanted to share my response to him with you.

UPDATED FOR 2015!

Our current app has two pricing tiers – free and paid. Simple pricing has its advantages!

We’re coming out with a major redesign of the product (plus new features) in early 2012 and need to decide how many pricing levels to have. So far, the discussion is free plus two pricing levels.

I have also questioned whether we should continue to have both Free and Freemium, as this combination seems to be the minority case.

And here was my response to him…

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What’s Your Biggest Challenge in 2012?

I believe in moving forward, not looking back.

So my question as we go into 2012 is this:

What’s Your Biggest Challenge as a SaaS or Web App Vendor in 2012?

Is it making your Free Trials more effective at creating customers? Coming up with the right Pricing? How to handle Competition? Whether to go Freemium? Overall Business Model issues? How to handle Accounting? How to Manage Recurring Revenue? How to keep Churn to a minimum? Or something else?

I’d love to hear from you – whatever the challenge – in the comments below.

Next week I’ll aggregate your comments, responses from those on my mailing list, and insights from Free Trial Dominator members to give you an idea of what your peers consider to be challenges in 2012.

Happy New Year!

– Lincoln
(972) 200-9317

PS: If your challenge in 2012 is how to turn your Free Trial into a Customer-Creating Machine, the solution is to become a Member in my Free Trial Dominator program.

That’s a Paypal link, by the way, but you only need a valid Credit Card to make it work.

And when you join the Free Trial Dominator, you’ll get access to all of this:

  • Core Free Trial Dominator modules
    – Rethinking the ‘Free Trial’
    – Attention Phase
    – Engagement Phase
    – Investment Phase
    – Conversion Phase
  • Free Trial Resources and Tools
  • My Super Ninja Free Trial Tactics
  • Pricing Page Success Formula videos (the full 5-hour series that was priced at $397 by itself!)
  • Master Class on Beta Testing & Pricing (60-minutes / $97 value)
  • Complete Group Coaching Call Archive
  • Private, Members-Only Discussion List where we talk about all-things SaaS & Web App Marketing

PLUS… you’ll get to join us for our Weekly Group Coaching Calls – every Wednesday @ Noon Eastern

Don’t wait… Join the Free Trial Dominator program today!

Freemium isn’t just for “Startups with Nothing to Lose”

A common misconception about Freemium is that it is just for startups with nothing to lose. This myth is perpetuated by many of the Freemium advocates whose backgrounds – and current experience – are limited to early-stage, venture-funded startups. Unfortunately, this misconception really misses the point.

Freemium is a marketing strategy – or quite often a tactic – and used most often to disrupt markets, competitors, etc. So, since when is disrupting markets relegated to startups? It is a bad idea to be focused only on the near-term and to miss the big, longer-term picture because of it.

NOTE: I originally published this paper in late 2010 exclusively for subscribers to my Mailing List. Below is the original paper, published in it’s entirety. I’ve provided updates to the numbers I cited at the bottom of this post.

While startups are often the first to market or the first to try new and risky things when it comes to marketing, if something works – or could be made to work by exploring lessons learned by failed startups – often the larger more established companies will come around. And when they do, that could be a big problem for the early-stage startups whose only real value proposition is that they are free.

No matter how you slice it, to really disrupt a market – the odd vendor that got lucky notwithstanding – requires significant capital regardless of whether Freemium is leveraged as the marketing strategy or not. But isn’t it interesting that for a startup to gain significant market penetration and traction using Freemium within the large markets required for the numbers game to work, it must raise significant capital for infrastructure and customer acquisition? Hmmm. It would seem Freemium is quite expensive for the vendor.

Here are some of the popular case studies in Freemium and how much equity capital they have raised to date (in late 2010):

Evernote $45M
YouSendIt $53M
Box.net $30M
Pandora $56M
Xobni $32M

So, who cares that you have to raise so much money to get a Freemium business to work? You should. The myth is that the built-in virality of the network effect enabled by Freemium is enough. Obviously it is not. Freemium is almost always associated with low Customer Acquisition Costs – CAC – through word of mouth, viral and game mechanics, social networking, etc. On top of that, with open source stacks and cloud infrastructure the cost – as you often hear – to support a free user is “near zero?” But support costs are just one expense usually not added to the actual CAC even though “near zero” support costs in aggregate at scale often result in something with “near many zeros.”

As was shown in the original “The Reality of Freemium in SaaS” the CAC metric must take into account all of the expenses required to land a paying customer. The true definition of CAC is the aggregate costs associated with discovering, reaching and getting the attention of a potential customer, getting them to your site or calling on them, converting them to a user, serving them (marketing, technology, human services) during the non-paying period, and then converting them to a paying customer.

In a Freemium scenario, you will have on average 97 free users for every 3 paying customers. If you have 10,000 users in the system, on average, 300 will be paying customers. That means, the aggregate CAC for each of those 300 is not what it costs only to attract and convert each of those 300, but what it also costs to attract and support the other 9,700 users while they wait to become customers. And of course, none of this is static so the 9,700 at a given time could include any number that churned out over time.

Some have argued that if you know 95% of your users will never convert then they aren’t customers and should not be figured into the CAC. Whatever it takes to justify your position, do what you will, but know that if you spent $100 on AdWords and got 100 people to come to the site, and converted 3, it was not a CAC of $3… it was a CAC of $100, or just about $33/customer. You have to get real.

If you are in a very small niche where you provide a significant amount of value to your business customers, Freemium should probably be the furthest thing from your mind. There are so many very targeted methods of reaching your customers in ways that add value and raise the value perception of your offering that you don’t need to worry about brand building or market making. Just tell people how you’ll solve their problems or help them take care of new opportunities, charge them for the privilege, and you will likely have a great deal of success.

In large, horizontal markets – especially in B2B – much of the cost associated with Freemium at a large scale is in market-making and brand building. That is, orchestrating the “organic” viral campaigns, greasing the palms of pundits, traditional PR… wait? What? None of that sounds like the Freemium we all know and love, right? The build it, make it free, and let the product sell itself. Yeah, that doesn’t work.

Even if the only costs associated with customer acquisition are the result of directly pulling in users and converting them to paying customers, few companies will look at the CAC correctly – at best forgetting to figure in “user acquisition,” too. But we know – as previously mentioned – the bulk of the expense is not in the highly-targed direct acquisition – a Google AdWords campaign – of Users or Customers.

No, for most, the cost is from the indirect acquisition methods (i.e brand building, PR, market making, etc.) and that is harder to keep in check. In fact, it is too often not calculated properly in the actual CAC and is relegated to other marketing, S&OP, etc. expenses.

How does the specific issue of Customer Acquisition Cost tie to whether Freemium is only for startups with nothing to lose or not? Well, its simple really. The problem with the way most companies leverage Freemium is that CAC goes UP simply because of the way they use it. They emphasize the FREE version rather than the PAID version in order to get “traction.” This simple marketing decision can be the death of a company or the point at which they thrive. No one ever said you MUST go through the free version to get to the paid version.

Yet, most startups are looking to get “traction” and are therefore pushing to get as many free users in the door as possible. Established companies used to generating revenue will be more likely to use Freemium as the marketing method it is but push heavily, from the moment the would-be customer lands on their website, the premium version. Free was what got you to the site, but the value of the premium product is what will get you to stay and pay.

SocialText – founded in 2002, $19M in VC funding over 6 rounds – hardly a startup – is an example of a company that has created a Free version of their service but is not putting all their eggs in the Freemium basket. For instance, they do not emphasize the Free version on their pricing page. In fact, it is not found on their pricing page at all but is instead a special program they have created to be leveraged in other ways.

SocialText can be considered Freemium, and will use that to get traffic to their site, but will de-emphasize the Free tier outside of those specific marketing campaigns. That is – if you come to the SocialText marketing website directly and not via a search for Free or Freemium or not through their carefully orchestrated campaign, Freemium landing pages, etc. then you will not be presented with that opportunity.

But is SocialText really benefitting from Freemium in the way that their competitor Yammer (founded 2008/$15M funding) is? Are they getting the press, the traction, etc. associated with Freemium in the way that Yammer is? It is hard to tell without any level of transparency, but the answer would seem to be no. So in SocialText’s de-emphasizing of Freemium, they are likely not seeing the same level of “traction” that Yammer is. The big question is then – is that a problem?

SocialText by all accounts has a thriving Premium offering and perhaps they are using Freemium to win over customers who bring up Yammer in sales calls. Perhaps it is something more. The interesting thing here is that they HAVE a Freemium offering and could be waiting to unleash it on the market. Yammer – who claims penetration in “80% of Fortune 100” companies as of October 2010 – has an interesting Freemium strategy that will be covered in a separate article.

So, while Freemium startups are out trying to make noise and get the market or industry to notice them, incumbents can leverage the same Freemium tactics of market penetration as the new kids on the block, but without the need to build a brand from scratch. Whereas Freemium startups think they’ll come in and disrupt the status quo with Free and knock the stodgy old-school monoliths off their pedestal, some are being beaten at their own game. Guess what? If Free is your only claim to fame, that is all you’ll get – fame – as you enter the deadpool.

Yes, large established companies are slower to pull the trigger on things like Freemium – many will never attempt it – but for others this “slow and steady wins the race” mentality is because they want to fully think it through. They need to fully understand what happens if it the strategy fails. How will it affect their market position, the brand value, etc. What happens if it is successful? How will it affect their market position, the brand value, etc. There is a very real issue around protecting their brand from the potential of “free = zero value.”

Wherever possible, established companies will look to existing products or services that they’ve already invested in the development or acquisition of but that are new or have yet to establish a strong market presence to experiment with Freemium. Due to the inherent risks of Freemium, this is a great way for a company to try Freemium without damaging an established product line, brand, etc. If you are a startup or are in a market where larger competitors have acquired smaller companies or if you know companies have invested in IP that directly competes with your Freemium offering but they have not yet begun to market it, that should be considered a direct threat.

There are many pitfalls that established vendors will want to overcome, but when they do figure it out, look out. If you see an established company leveraging Freemium, it is likely that they have figured out a specific opportunity to go after, a market segment adjacent to their current position that they want to penetrate, or they might just want to stop competitors in their tracks. And as established brands with a lot of money in the bank, they might just be able to do that.

Amazon Web Services (AWS) would hardly be considered a “startup with nothing to lose” but they recently “went Freemium.” This is a perfect example of a company that is very successful – not a startup – deciding to use “Free” to disrupt their competition and gain even more new market share. While the bulk of the noise in the industry was around their 1-year free trial for their core services – EC2, S3, EBS, ELB – the real news was around a real Freemium offering for their proprietary ancillary services like Queueing, Notifications, and Non-Relational Datastore.

Those services are unique to Amazon and once you are using them – which requires deep integration into your application – you are effectively locked-into AWS at some level. You can always move your app from EC2 to your own data center, you can move your objects from S3 to another file host, but the *services* that AWS provides in those ancillary offerings you cannot (easily) move. Brilliant and very disruptive to other “cloud computing” players.

Another great example of a successful and established company “going Freemium” is Mailchimp. It is true, many people think of Mailchimp as an overnight success since Freemium did its job – it got them noticed. However, the company has been around since 2001 and did not get into Freemium until they had been a successful company for nine years. Mailchimp was looking for a boost – a way to disrupt the status quo in the email marketing industry and knock the leaders down a peg or two. Freemium was the method they chose.

The key to the success of Mailchimp’s Freemium strategy was the fact that they had so much time in-market that they could anticipate and plan for the additional support burden – and system abuse – associated with a surge in free users of an email marketing system. Where they didn’t or couldn’t anticipate challenges, it was that time in-market and experience that allowed them to roll with the punches and make adjustments along the way to make Freemium work.

Startups should take note of that – the additional support and ABUSE that free users would bring was the major challenge with Freemium for Mailchimp. This is where existing companies will have an edge over startups in Freemium – they know what the early-stage companies don’t yet understand. For young companies hanging their hat on Freemium, they need to be very aware of this threat.

UPDATES

Since I published this in late 2010, some things have changed…

My suggestion to any SaaS or Web App company considering Freemium is simple: Make sure you’re targeting a large enough market that would actually want to use your product (B2B or B2C) and then seek out Venture Capital firms that have funded OTHER successful Freemium ventures.

Don’t try to do it on your own, bootstrapped. Freemium requires MASSIVE AMOUNTS OF MONEY and a large enough audience. Without both, Freemium is unlikely to work for you.

Classical Freemium Doesn’t Exist At Scale

“Classical Freemium” is the marketing tactic where a SaaS or Web App vendor offers a Free-in-Perpetuity version of a product or service, often feature- or usage-limited, as well as a version of the same product or service with less limitations to which the vendor will attempt to up-sell the user.

NOTE:  I originally published this paper in late 2010 exclusively for subscribers to my Mailing List. Below is the original paper, published in it’s entirety. I’ve provided updates to the numbers I cited at the bottom of this post.

This form of Freemium is actually on the decline as the primary go-to-market method for a number of valid reasons. Aside from the notion of the “Penny Gap” being a very real idea – the idea that trying to charge people *anything*, even a penny, for what they already get for free is a major hurdle – other realities are becoming apparent.

The concept of “near zero” support costs have been found to be “near untrue,” most find it difficult to justify and continue to support a 3-5% conversion rate, and most are realizing what Freemium really is – a marketing tactic and not a business model. Freemium is evolving, however, so there are other types of Freemium that are on the rise which will be covered in a separate article.

There is yet another reason Classical Freemium as the only method of customer acquisition is falling out of favor; many SaaS and Web App companies are realizing that the true motivation behind the Freemium companies they look up to has little to do with revenue generation by converting free users to paid subscribers and everything to do with building a user base as fast as possible without consideration for a sustainable monetization strategies. These companies are instead looking to make money through M&A or IPO activity. If they stumble into a way to make money along the way, great, but that is not the primary motivation. Twitter is a great example of this.

Twitter is a company that continues to raise money ($160M in disclosed VC funding through 5 rounds to date) and spend money to acquire more and more users but still lacks a fully defined monetization strategy. But they are changing the world so we can forgive that, right? The motivation is clearly not to generate revenue but to gain traction and grow the user base. Twitter continues to experiment with different ways to make money such as selling the tweet “firehouse” to Google, Bing, and through data aggregation providers like gnip, or promoted tweets which reportedly pull in $100k a pop, and the recently announced analytics which may or may not be a revenue source.

None of these, however, have emerged as the revenue model they’ll hang the future of the business on. Also of note; all of the revenue streams they have attempted to tap required the critical mass they had already achieved by having a 100% free service. Without the massive funding – and perfect timing and luck – required to get Twitter to the point it is in terms of “market penetration,” the monetization methods they are exploring would not be viable in the first place.

The founders of Twitter have likely already made millions of dollars through private stock sales and the company will likely be able to acquire several additional funding rounds as needed to ensure they stay around long enough to be acquired for billions. In other words, there is a very good chance the founders of Twitter will have built the company and made hundreds of millions for themselves and their investors all while having generated little actual revenue – let alone profit – along the way. Is this bad business? Certainly not. If you are building a business to generate revenue is it a model you will want to copy? Probably not. Twitter has used a risky strategy, to say the least and while it might seem counter intuitive, Twitter is successful probably because there was not a strategy there in the first place; you just couldn’t plan for what they’ve done.

Using Twitter as an example is a double-edged sword since it is an anomaly and difficult to categorize as B2B or B2C. But Twitter is such a pervasive technology service in today’s world that it is a great company to examine from the perspective of Freemium. But if you have a niche or vertical B2B SaaS or Web App, is Twitter really an appropriate analog? Obviously not. But it is a great example of a company being built around Free with little motivation to generate revenue or create profit. It is this piece of the puzzle that could be missing when companies look to Freemium as the go-to marketing method; they don’t fully understand the real motivations behind many of the companies employing Freemium. This is why it very important to know that Classical Freemium does not exist at scale!

You need to know that few companies are able to build a real, sustainable business off of the 3% conversions that most Freemium companies see. Evernote seems to be one of the few, but they are in a great position to play the numbers game required by Freemium. First, they aren’t B2B only; business customers can use the service, but so can anyone else. In fact, Evernote is one of the few companies to say – and mean – that anyone with an Internet-connected device is a potential user / customer. Most companies being honest with themselves cannot say that. So in the B2B world, building a sustainable business off of 3% conversions just doesn’t happen.

Freemium is a marketing method for getting users, for sure. But it is also a marketing method for getting a foot in the door, generating buzz or brand awareness, entering more price-sensitive market segments, or disrupting competitors. These are the scenarios where Freemium is going to flourish in the coming years for most business that leverage it. Few will be pure-play Classical Freemium and have any real success. To date, no B2B company has built and scaled a business through pure-play Classical Freemium – that is, one product line that has a free-in-perpetuity component and one or more premium versions of the same product for the same market segment.

All companies at some point must start generating revenue to remain viable. For many Freemium companies this occurs after they’ve reached some level of scale and either have new investors to answer to (especially post-IPO) or have otherwise reached a critical mass of adoption and now can begin to generate revenue. The thing to take note of is that many companies do not rely on converting free users to paying subscribers but instead rely on other revenue streams than premium versions of the free subscriptions to monetize.

You must have a clear path to monetization regardless of whether you will use Freemium or not and if you do choose it, you must do so on the applicability to your goals, your market, etc. and not because another company is doing it “successfully.” It is necessary to really and fully understand how so-called “Freemium companies” evolve over time.

If you are considering using Freemium as your go-to-market strategy, you must understand this before you choose to employ Freemium in your company. You cannot build your business based on what you see on the outside of these other “Freemium companies”. You don’t know what is going on behind closed doors. From first hand experience, anecdotal accounts, and publicly-disclosed accounts, it is clear that its not what you think!

Freemium seems to work best when the goal is simply to get people into the system and not as part of a monetization or sales strategy. If you create a free product for people to use and not as part of a sales process or what appears to be a free trial with no expiration – Freemium seems to work well. But what does it work well for? Getting users. Not generating revenue. However, if it is obvious that the free product is simply a free trial with no expiration or is limited in ways that ultimately makes it unusable without paying, it will fail to gain traction meaning it won’t even help you get users. People aren’t that stupid.

This is why the most successful and profitable methods of monetization right now in B2C revolve around an entirely free product with monetization through credits, virtual currency, product sales, or add-ons; think Facebook or Zynga. This is why over one-third of the top grossing iPhone apps are are Free, but offer in-app purchases for add-ons (additional levels, characters, chapters, etc.).

Back in the B2B world, we can look to a company like Helpstream, founded in 2004 and having raised just under $10M in VC funding as an example of a company where Classical Freemium failed and took the company with it in early 2010. While it is terrible that they failed, some transparency by the former CEO, Bob Warfield, helped shed some light on what happened. The main takeaway from Warfield’s post mortem was that Helpstream didn’t attract the right kind of users; the kind of users that would convert to paying customers. He said they were able to get 200 free users and convert 5 of those to paying customers; a conversion rate of 2.5% – just under the standard 3% conversion rate.

The biggest problem it would seem based on Warfield’s post is that they simply didn’t have enough traction to make the numbers game work. 200 users is simply not enough. Consider the numbers game here – they would have needed 100x the amount of free users they had to get just 500 paying customers if the conversion rate held. We don’t know what number of customers would have resulted in a sustainable business for the company, though.

The real tragedy with Helpstream seems to be that they didn’t make Warfield CEO earlier. His ideas about market segmentation, having the Freemium version be only for smaller businesses by putting upper limits on it (50 users in their case), and having only a free trial for larger businesses – those who are more likely to become customers anyway seem to be spot-on all things considered. Unfortunately this realization – the realization that basing their entire business on Classical Freemium was a recipe for failure – was just too little, too late; they had already ran out of money!

What is frightening interesting is that some companies are actually developing their pricing and building their business around a goal of 3-5% conversions. A fascinating post from Hootsuite – a builder of social networking tools for B2B marketers with just under $4M in VC funding – where they claim to want to build a business off of 5% conversions are hopefully putting up a smokescreen to the real revenue streams at scale. This quote is from a post clarifying their pricing after they initially released pricing that did not sit well with their customers:

“To determine the pricing levels, we analyzed data from active customers to ensure that 95% of current users would remain free based on current patterns”

Without deviating from the point of this article too much, only looking at usage data to determine pricing is not ideal. It speaks volumes when a company justifies its pricing decision based on data analysis to its users who are upset by the pricing announcement / change. Clearly, the company is not listening to what its users and customers want, but is instead looking at data that doesn’t tell the whole story to find the answers. In this case, they are using data to back into a Freemium Strategy and Pricing Model where 5% of their users will want or need to pay to use the service? Best of luck to them, but this seems like a very bad idea.

What Hootsuite seems to be failing to realize is that companies leveraging Freemium that have a 3-5% conversion rate from free to paid are not happy with that. They want higher conversions, it just seems to be that the nature of Free and the Penny Gap keep that from happening. Some do achieve higher than 3-5% and that should be the goal. Backing into a pricing strategy with a specific conversion rate in mind is a bad idea – and severely limiting. This is why pure-play Classical Freemium does not exist at scale in B2B SaaS; no B2B SaaS company actually sets out to build a system where 97% of the users of their system do not pay.

It would seem that Hootsuite might be falling into the trap of building a business around a marketing strategy employed by those that have no real interest in revenue generation on the product for which they’ve used Freemium. It must be noted Hootsuite has begun to use market segmentation within their marketing website and pricing and Freemium strategy by offering regular customer and Enterprise customers different options. Perhaps they quickly saw the err of their ways.

Here’s the dirty little secret about externally-funded Freemium companies and you must understand this. Most are not out to generate revenue – only grow the user base. Generating revenue and growing a free user base are two very different things and in many cases, doing both well is very difficult in B2B SaaS. For most companies using Free or Freemium, it is as a way to get a large number of users and build an audience. Many of these companies have no intention of getting money from those users – ever. This is so critical for bootstrapped companies or those with just a little external funding. Freemium is a Marketing Strategy used to get a lot of users fast – “hyper scale” as some people have put it. if you don’t have the money to support hyper scaling of a huge free user base, you should not attempt Freemium.

This is hard for the bootstrapped startups with a couple of founders simply looking to replace their corporate income with a SaaS or Web App to wrap their heads around. Why would you do something in your business that is not going to immediately result in revenue – even if it is only 5% of those people that pay? For the founders of companies employing a strategy that does not include revenue generation they will make money in other ways – ways that might even be counter to the longevity of the business as a stand-alone entity.

There is often a tipping point where you start to see products being more aligned with market segments, different versions being created specifically for revenue generation, you might see acquisitions of smaller-yet-profitable businesses, etc. Generating revenue is very different than acquiring users. Many of the entrepreneurs standing behind Freemium made their money not from revenue generated by the services they worked for but by the sale of those companies or the IPO. Is this a bad thing? No… its great and we should all be so lucky. But it speaks to the underlying fact that Freemium is not about revenue generation as much as interest generation by others – acquirers, investors, or an ecosystem.

Now the latter of those three – ecosystem – is very exciting and a very real, sustainable, viable and profitable business can be built around that – M&A or IPO be damned. But do not for one second forget that it takes a substantial amount of funding to get to this point. All of this comes down to the fact that Freemium is itself not just one thing. There are five types of Freemium in use today (covered in a separate article) and the type of Freemium to employ must be based on many factors, including the time-line to reach goals. Freemium strategies are either short- or long-term.

Short-term Freemium strategies are used for market disruption, to get a foot in the door, crush an upstart competitor, etc. and is often used on existing product lines or new alternative products (as detailed in the original “The Reality of Freemium in SaaS” under Alternative Product Strategies). Long-term Freemium strategies are employed by those businesses built from the ground-up to leverage this pervasive go-to-market strategy and is where the idea that Freemium is a “business model” comes from. These companies basically put all their eggs in the Freemium basket and if it doesn’t work, it often leads to complete failure.

For short-term strategies, monetization occurs through more traditional methods often using the free version as a foot in the door for a brand to up- or cross-sell to more established products to new customers, market segments, etc. Aside from M&A or IPO as the method of “making money”, long-term Freemium strategies are designed to monetize in ways only possible at scale by tapping into the network effect, ecosystem, or ancillary revenue streams made possible only after “critical mass” (which is relative) is achieved.

Consider companies that build an audience and monetize through ads – critical mass occurs when they have enough eyeballs to get the advertisers attention. For some companies, like Spiceworks (founded in 2006 with $29M in funding so far), they’ve been able to monetize not only the eyeballs of their 1.2 million users, but the activity of those users by selling network effect data to the advertisers.

Spiceworks has 1.2 million free users, but only around 200 customers – the advertisers – and is a perfect example of the notion “if you aren’t paying for the product, you aren’t a customer, you are the product.” Over time, Spiceworks – who is really in the advertising business not the IT management business – has used network effects generated by their 1.2 million users to add more value to the offering for advertisers. Spiceworks is technically Freemium since users can pay a monthly fee to turn off the ads, but this is not promoted as they see advertising – not subscriptions – as their primary and most scalable revenue stream. Again, Classical Freemium is not present in a company many consider to be one of the most successful B2B “Freemium companies” around.

Evernote is another example of a company building a big enough audience to get the attention of those that will pay to have access to that service in other ways. Evernote has been the poster-child for Freemium over the last few years and while they are not an analog for most B2B SaaS companies, it is definitely an interesting study in how to leverage engagement or “investment” in your product to produce conversions. We should all be thankful to CEO of Evernote Phil Libin’s frank and open discussions of Evernote’s growth and even revenue. Evernote, founded in 2005 and having raised $45.5 Million over 3 VC rounds, worked hard to build an immense user base. Libin has shared that many users and customers alike access the Evernote service from multiple devices, therefore as the service grows, makers of devices that could access Evernote are taking note.

As of May 2010, the poster-child for Freemium was making $500k per year – a not-insignificant amount – from licensing (the ecosystem revenue stream) by mobile carriers and device manufacturers to pre-load the Evernote app for their customers. Carriers and device manufacturers want to attract the attention of the vast – and dedicated – user and customer base of Evernote to sell more devices or network access.

If Evernote had charged for access to their service from day one, not only would they not have reached the scale they have and arguably the amount of subscription revenue due to the aforementioned engagement-based conversions, the reduced scale would not have attracted the attention of those that want to buy access to – in the form of licensing – that user base. Evernote clearly has a long-term Freemium strategy that employs Classical Freemium, but they are not pure-play Classical Freemium since they also employ other revenue streams. Also remember that it takes millions of dollars – $45.5 million so far – to get to this point.

The moral of this story is – for the companies that saw success from a revenue standpoint with Classical Freemium, that success was achieved by raising a lot of money and using that to build a large base of free users. Once they reached a certain level of scale, they had to branch out – or finally could branch out – to other, more lucrative revenue streams. When we can literally point to just a handful of “successful” Freemium companies with few of those employing pure-play Classical Freemium at scale or even in a very long time, it is at best difficult to consider Freemium a successful “Business Model.” For some heavily-funded narrowband horizontal SaaS companies, Freemium and Free have been the key to gaining critical mass before employing monetization strategies outside the scope of Classical Freemium.

UPDATES

Since I published this in late 2010, some things have changed…

SaaS Freemium Model Resource Guide

I put together this list of my BEST SaaS Freemium posts just for you. I hope it helps!

If you’re curious how I help SaaS and Web App vendors increase conversions and improve retention / reduce churn, you can learn more and contact me here.

The 7 Secrets to DOMINATING Your Free Trials

Free Trial Dominator - The 7 Secrets to DOMINATING Your Free TrialsIn addition to the years I’ve been working with SaaS & Web App vendors, I’ve spent 2011 totally immersed in the business of free and have helped dozens of companies – from super early startups to MASSIVE $B/year companies – completely DOMINATE their free trials.

Nothing else I’ve done has produced such AWESOME results – so fast – for so many SaaS & Web App and traditional software companies. Yep… turns out my stuff works for non-SaaS companies too!

So I figured it was time to share my findings with you in another one of my free webinars.

This time I covered…

The 7 Secrets to DOMINATING Your Free Trials

#1 Metrics S’metrics

#2 Sales Funnel Fallacy

#3 The Product Won’t Sell Itself

#4 Freemium vs. Free Trials

#5 The Credit Card Wall

#6 The Perfect Free Trial Length

#7 No More Evaluations

I decided to post the video from the webinar so if you missed it live, or want to watch it again, just fill out the form below and you’ll get INSTANT ACCESS to the ~65-minute video.

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Thanks!

Wait… You Actually WANT to Be Average?

What is the Average Conversion Rate for SaaS Free Trials and Freemium?What’s the average conversion rate for free trials, pricing pages, or Freemium with SaaS or Web Apps?

There are some fundamental problems with “average conversion rate” which is why people rarely like my standard answer of: “It depends” or my more direct answer of “why, so you can be average?”

Look, if you have a 1% conversion rate right now, 2% should be looking pretty darn good to you, right?

If you have a 25% conversion rate, 26% might not be that exciting. 30% might be though!

Or if you have a 25% conversion rate, maybe 5% is what we’ll shoot for because we want more cold traffic coming through and will expect a lower rate for a little bit until we figure things out, right?

The number that Joe’s SaaS company is getting vs. Claire’s Web App doesn’t matter, regardless of what the people that have surveyed 327 “SaaS” companies to get aggregate data without context want you to believe.

We don’t even know what metric companies are basing their “average conversion rate” on and we can assume most people who talk about their numbers talk about the ones that make them look good!

But, we have been trained as an industry to look to average numbers for guidance.

So let me ask you… how can looking to averages lead to anything but average results?

When we look to average numbers to plan our businesses around, aren’t we planning on being average?

Did you create your web app just to be average?

Did you go to work for Giant SaaS Co. and seek out resources like I’ve put together so you could just be average?

Here is why “average” is damaging, aside from the whole “shoot for the middle” mediocrity problem it brings with it.

Average lacks context.

If I told you the average conversion rate for Free Trials in SaaS was 10% (and I am NOT telling you that, BTW), you’d aim for that, right?

And 10% would be a nice goal if you were currently at 5% I suppose.

But if you have an 85% conversion rate, 10% just wouldn’t make sense, right?

Even worse, it could make you think you’re doing really, really good with your 85% conversion rate and could keep you from taking corrective action.

Maybe you’d just go spend a lot to get more traffic before you realize that 85% conversion rate was an anomaly based on early-adopters and doesn’t hold-up against cold, mainstream traffic.

Look, “average” is a pointless number for so many reasons, not the least of which is…. well, that it is “average.”

You see… context is usually missing which is what the folks with the 85% conversion rate that I helped out needed to know to figure out where they really stood (and it wasn’t as good as an 85% conversion rate sounds!)

Here’s the simple way to move forward.

Figure out where you are today – something most people (including you, I bet) don’t actually know – and then figure out how to make it better.

This works whether you’re a one-person, bootstrapped shop or a tiger-team w/ buckets of VC money.

Don’t worry about what others are doing.

But then again I don’t make money selling survey results so that’s easy for me to say, right?

Look, if you’re at a 1% conversion rate, let’s shoot for 2% and DOUBLE where you are today.

Remember, that is a 100% increase over what you have now…

Isn’t a 100% increase in conversion rates hard enough to do without trying to meet some number that an analyst came up with that probably doesn’t even directly apply to your business and certainly lacks context?

You can reach 2% from 1%, right? Easy.

But if you see 25% sitting in front of you as your immediate goal – because that is the average conversion rate (it is NOT!) – that might be discouraging.

On the flip side if you have an 85% conversion rate and you feel that something is off, dig in and figure out the context. A super-high conversion rate is fantastic, but only in context.

Here’s a hint… the most important “context” for most real companies is revenue.

So the next time you pull up Google, or Quora, or LinkedIn to look for “average conversion rates” stop for a second and think about what you’re doing.

Don’t be average.

By the way, I KNOW someone is going to say “Lincoln, that makes total sense. I get it for sure. But, hey, so what is a good conversion rate number to put in the business plan?”… which is why business plans are pretty much irrelevant most of the time!

There are 7 Types of Freemium and Why That Matters…

There are 7 Types of Freemium and Why That MattersYou think you know Freemium in SaaS? Think again!

In 2009 I released the version of “The Reality of Freemium in SaaS” PDF and since then the “Freemium” landscape in SaaS has continued to evolve rapidly.

Freemium use in B2B technology / software / SaaS / Web Apps / Cloud (whatever) is evolving and I wanted to take note of where we are at today… where we’ll be tomorrow I can’t tell you, but I guarantee it will be different.

I wanted to also call attention to the fact that the use of “Classical Freemium” – the idea of a free version of a premium product – is losing popularity as the go-to method for adopting Freemium, with other types of Freemium coming into play.

This is with both pure-play startups and established companies moving to Freemium.

I’ve made a list of the 7 different types of Freemium below, but this isn’t meant to be an exhaustive list… if you have other ideas, please share them in the comments.

Further, few companies will tell you they conform to any of these, which is great… they shouldn’t be trying to conform to these “types” but instead do what is best for their market, users, customers and their company.

I even had a hard time deciding where to put certain companies – like Evernote and SolarWinds – because they don’t nicely fit in one “type”. But I don’t think that makes these “types” any less relevant.

In fact, many of these “types” of Freemium aren’t exclusive within a single company. The most successful models use a hybrid approach, for instance using the Freeware 2.0 & Ecosystem models together.

What I’ve tried to do here – more than anything – is indicate that there isn’t just one way of doing “Freemium” and maybe to a larger extent show the term “Freemium” is used even when there isn’t a clear Free > Premium path.

Pretty much, if there is a “free” component to a marketing strategy these days, it is called “Freemium.”

Where most companies go wrong is when they confuse “Free Trials” with “Freemium.” If you think Freemium is just an extended “try before you buy”… you’re in for a serious rude awakening.

There are MASSIVE psychological differences between “Free Trials” and “Freemium” that you need to understand. But for now, just understand what I am listing here are “Freemium” and not “Free Trials” and that confusing the two will cause massive issues and probably not give you the results you’re looking for.

The 7 Types of Freemium

1. Traditional/Classical Freemium

  • Free-forever feature-limited-but-usable version of a premium product
  • The one that started it all
  • The one that most people know
  • The one with the major penny-gap issues
  • Expectations that most users will never buy – by both the vendor AND user

Examples: OfficeDrop, Dropbox, LogMeIn
Notes: Read “Classical Freemium Doesn’t Exist at Scale” where I tell you why this type of Freemium rarely exists beyond early-stage (and heavily-funded) startups.

2. Land & Expand

  • The up-and-coming model
  • Free to acquire by users
  • Monetization at organization level
  • Adopters & Users are often kept out of buying process
  • Where the user & buyer are the same, the model uses a lock-in model to gain a foothold within an organization
  • Expectation by vendor is after x users in an org, they’ll pay

Examples: Yammer (Acquired by Microsoft in 2012 or $1.2B), Xobni, Amazon Web Services
Notes: Yammer is the most successful example of this model within pure-play Freemium organizations. Xobni uses this model to push their Enterprise-focused products. AWS uses this model a bit differently, offering their proprietary technologies as Freemium in an effort to get companies to invest in integration and thus make switching costs too high.

3. Unlimited “Free Trial”

  • Not really a “Free Trial” – the vendor likely doesn’t understand the true dynamics of Freemium (which will likely come back to haunt them)
  • Free-forever feature/usage/UX-crippled version of a premium product
  • Expectations by vendor are that they user will convert/upgrade
  • Expectations by user is continued-forever use for free
  • This seems like a risky type of Freemium to adopt since it is mixing the elements of a Free Trial with the psychological aspects of Freemium.

Examples: Echosign, Basecamp
Notes: WHAT? Basecamp is an Unlimited Free Trial? But they’re Freemium. Or maybe you said ” Yeah, they’re ‘Freemium’ but they hide their free plan.” Whatever… the idea is that their Free plan is so limited it just doesn’t make sense to even use it, and as Jason Fried has said many times, most of their paying customers STARTED as paying customers. Think about that for a second.

Now go back to the idea of why you would even have a FREE plan if you can just have a FREE TRIAL when you know MOST of your customers – those who pay – start out paying. I’m not even sure why they keep the free plan around except to appease those who would rip them to shreds on the interwebs if they ever got rid of it.

As for Echosign and others that have a very low usage-cap on their Freemium plan, this can work or it can cause work-arounds. You have to be very careful how you design your app and in-app marketing experience to draw users in and get them to use the product, selling them the whole way so when they hit that usage gap they’re ready to convert to paying today… rather than trying to game the system or put off some signatures for a few days to get into the next “billing cycle”…

4. Freeware 2.0

  • Free-forever, fully-functional product
  • This is their main product or a completely new stand-alone product line within a larger organization
  • No expectations of  conversion/cross-sell by MOST free users
  • Monetization is through add-ons for the free product created by the company itself

Examples: Evernote, Skype, AVG
Notes: I know someone will say Skype or Evernote are Freemium, not Freeware… and they are. All of these are examples of Freemium. I’m breaking down the different types of Freemium here. And why I say Evernote, for example, is Freeware 2.0 is that is 100% usable for free, forever, and the expectation – as noted by CEO Phil Libin – is that most people won’t pay.

Same goes for Skype.

When they do pay they are paying for extra storage and additional features/add-ons, but the base product is good-enough that few people percentage-wise will pay. Virus software, screen-sharing, video chat, etc. are also sectors made up of Freeware 2.0 plays.

5. Alternative Product Strategy

  • Similar to Freeware 2.0, but from a company with an existing premium product-line of which this is a discrete subset.
  • A Free-forever product with no direct up-sell path to “premium” version
  • Often used as a foot-in-the-door strategy
  • Goal is to cross-sell other offerings from the company

Examples: Autodesk’s SketchBook Pro for iPad, join.me (a product of LogMeIn), SolarWinds
Notes: This is actually where many SaaS / Web App vendors are turning to Mobile apps for a distribution channel to new customers. Make sure you watch my interview with Healy Jones from OfficeDrop about their experiences extending their Web App with Mobile apps and how they were basically forced to go Freemium. This can be awesome, but it can also have unexpected consequences.

I also wrote extensively about Alternative Product Strategy in my 2009 work “The Reality of Freemium in SaaS” (PDF) which you can download for free.

6. Ecosystem

  • Free-forever base product
  • Monetization occurs through revenue share with 3rd parties, like add-ons by 3rd party developers

Examples: iTunes, Google Apps, many commercial open source vendors leverage this plus professional services for monetization
Notes: I mentioned iTunes because the software is free creating the base-platform which you can use forever to manage your own music without ever giving Apple a dime. Monetization occurs via a marketplace rev-share with 3rd party content creators. I didn’t mention the Apple AppStore because the base product – an iOS or MacOS device – is not free. Make sense?
Google Apps has a premium version, but monetization around the free version occurs through its ecosystem play.

7. Network Effect

  • Monetize eyeballs, aggregate behavioral data, etc.
  • This is the idea – to whom I cannot find original attribution – that if you aren’t paying for the product, then you ARE the product. Or you’re creating the product through your use of the system.

Examples: Wave, Spiceworks, Google (advertising), Mint.com (revenue share from offers)
Notes: Spiceworks currently has 1.6M users, but only really has around 200 customers… those customers are the advertisers!

For immediate consultation and advice on leveraging Freemium in your SaaS business, schedule a 60-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.

– Lincoln

Why OfficeDrop Went Freemium… and how Mobile Apps forced their hand

Was OfficeDrop forced into Freemium at phone-point?

Healy Jones, VP Marketing at OfficeDrop, told me exactly how leveraging mobile apps made Freemium the right strategy for them.

Do you prefer to listen on the go? Download the .mp3 audio file (33.7MB) here.


Wistia has kindly donated business video hosting to me, which pretty much makes them awesome!

If you aren’t familiar with OfficeDrop, it is a really cool SaaS startup out of Boston that started out with the ethos of “web only”… no installed software.

Healy (@healyhoops on Twitter) goes into great detail about how they eventually started to use installed software on PCs and Macs to extend their cloud service – they have to integrate with peripherals like document scanners – and then moved into mobile device-native apps.

And that was what CHANGED EVERYTHING!

They realized mobile apps weren’t just an extension of the product functionality, but also a distribution channel to new customers.

While that sounds great, what they found forced them to make some massive changes… including adopting the Freemium model.

Healy also goes into detail on how they avoid commoditization in their pricing – especially around storage – and the surprising results they saw when they added a Free plan to their pricing page… it was not what they expected to happen.

Then we round out this amazingly awesome and mind-blowing conversation with some ideas on how to fire up your Free Trial conversion rates.

This is an awesome interview that you will learn a SUPER HUGE TON from and I can’t wait for you to watch it.

Tell me and Healy what you think in the comments…

Assistly Marketing VP Tells You Why They Dropped Tiered Pricing and Picked Up Freemium

UPDATE: Assistly was acquired by Salesforce.com shortly after we did this interview… they are now Desk.com.

I sat down and chatted with Assistly’s SVP of Marketing Matt Trifiro via Video Skype and he spilled his guts for you about why Assistly changed their pricing, adopted Freemium, and set out to disrupt the market… all at the same time.

The conversation is about 40 minutes… Check it out:

Do you prefer to listen on the go? Download the .mp3 audio file (36.3MB) here.


Wistia has kindly donated business video hosting to me, which pretty much makes them awesome!

Recently SaaS startup Assistly changed their pricing strategy and included Freemium at the same time, and it made a huge splash with the industry news outlets.

This is just another reminder that Pricing is Marketing that we should all pay attention to.

While this change was covered by a ton of different media outlets – Matt and I were even interviewed for the same article – none of the articles went into the depth that I wanted on what is a pretty MASSIVE change.

So I reached out to Matt and asked him if we could talk about it and record it for you.

He thought that was an awesome idea, too, and we made it happen… just for you!

Some of the things you’ll learn:

  • Is Assistly just trying to acquire free users to sell to a company that will monetize them or are they using Freemium to drive revenue?
  • What the #1 metric SaaS vendors must focus on for long-term success
  • How to use behavior-driven In-App Marketing to effectively segment customers rather than up-front self-selecting market segmentation
  • Why SaaS companies shouldn’t look at Amazon Web Services as the sales model, but at Amazon.com e-commerce
  • How to create a system for pulling users into the app deeper to grow Customer Lifetime Value (CLV)
  • Why they moved away from tiered pricing
  • How Assistly moved the pricing / buying decisions to further in the app and extended the “funnel” into the product
  • And a TON more!

I hope you enjoy – and learn from – the conversation I had with Matt as much as I enjoyed – and learned from – having it.

Please comment below and let me know what you think.

Thanks!

– Lincoln

SaaS Business Model Resource Guide

I put together this list of my BEST SaaS Business Model & Architecture resources just for you. I hope it helps!

If you’re curious how I help SaaS and Web App vendors grow their businesses – and how I can help you grow yours – you can learn more and contact me here.