99% Of Our Users Are Not Paying—And It’s Perfectly Fine
Freemium or free trial?
This is a question every SaaS has to answer. Most choose the free trial option to get a high free-to-paid conversion rate and concentrate their efforts on qualified users.
At Email Hunter, we choose the opposite strategy, providing one of the most generous free offer among our competitors. This contributed to bringing us from 0 to 100,000 users in one year of existence, and finally proved also to be a good decision regarding revenues.
How freemium drives our growth
Most investors will be skeptical—and will be right to be—if you tell them your unique plan to grow your startup is to get word-of-mouth and “virality”. But this is what’s actually happening with Email Hunter. We prefer to concentrate all our early-stage efforts on the product and let user base grow organically.
People prefer to recommend free products
That’s a fact: you have much more chances to talk about a free product than a paid one. And not only you have more chances to talk about it, but there is also a greater proportion of your audience that will be ready to give it a try.
This word-of-mouth takes place offline and on various places online: social networks, forums, blogs, internal tools, webmails etc. It results in a growing traffic from various sources and an increasing number of backlinks to your product.
The number of websites with at least one backlink pointing to Email Hunter (Ahrefs)
Websites like Business Insider, Inc.com or The Next Web promoted Email Hunter without any action from us. I would love to tell you how good we are for PR, but the truth is that we do absolutely nothing except thanking the authors once the articles are published.
Sometimes the articles don’t bring much traffic, but they always contain backlinks which improves our SEO every month. SEO is becoming one important and lasting acquisition channel.
Weekly traffic from search engines (Google Analytics)
The same logic applies to every platform we are on, like the Chrome Web Store, where a large user base is a decisive asset to get visibility.
When to choose a freemium model?
You’re in a large market, not a niche.
If you’re in a niche, the word-of-mouth will have a very limited effect. You’ll have all the downsides of such model without really taking benefit of it. If you’re not convinced about it, think about how virality works.
Product virality = % of users recommending the product * number of people being recommended per user * % of people trying it after being recommended
By definition, in a given large audience (for example, people reading about you in a blog post), the number of people interested in your niche product will be low. The word-of-mouth will only work in small and specialized audiences, and in this case, very targeted marketing and outbound sales seem more efficient ways to acquire your users.
You target small companies first / have a low revenue per user.
If you want to sell “Enterprise” plans, good visibility and word-of-mouth can be a great asset. But you will need sales efforts anyway to close deals. The problem here is that offering free stuff not only isn’t useful in your conversion funnel, but it can also reduce the perceived value of your product and make your sales harder.
A way around is to grow your visibility with free/freemium pricing on different products than the one you’re selling to big companies.
There is a network effect in your product.
If there is an important network effect in your product (i.e. if the value of your product increases with the number of users), you probably have to design a freemium model. In this case, all the free users will bring value to your product and it’s in your interest to have them numerous and active. One of the most famous examples is LinkedIn which value increases with the size of the network.
Your cost per users is almost null.
Obviously, a large base of free users is only sustainable if you have a marginal cost per user near to zero. This is often the case in software, but you must take into account support which must scale with your user base.
Let’s do the math!
Choosing a freemium model is interesting if the gain in users compensate the lower revenue per user plus the higher cost of support/infrastructure.
Revenue = Number of users * Free-to-paid conversion rate * LTV - Number of users * Cost per user
You can calculate your revenue with the two models and compare it using this formula. The impact of a new model on the number of users and your free-to-paid conversion rate are actually quite hard to predict. But putting it on the paper can give you a good idea of how changing it can impact your business.
One more thing…
If you really hesitate between the two models, you should probably start with a freemium business model. It’s much more efficient to grow your user base and then increase the revenue than the contrary.
12 Jun 2016