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The Case for Freemium
DECEMBER 2017

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Freemium and I have a
long and sordid history…

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Freemium is an acquisition model.
Not a revenue model.

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Freemium is a scalpel, not a sledgehammer.

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Your success will hinge on having
some form of free product in the next 10 years.
THE MARKET DEMANDS FREE

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Growth density is becoming too great.

Channel growth is leveling off.

MARKETING CHANNELS ARE PLENTIFUL
Number of Sales & Marketing Channels Utilized
Sales & Marketing channel utilization has expanded rapidly, giving the rise of more opportunities to
acquire customers from numerous different places.
AVERAGE#OFCHANNELSUTILIZED
YEARS AGO
SOURCE: 2017 MARKETING STUDY Brought to you by
0
5
10
15
15 YEARS OLD 10 YEARS OLD 5 YEARS OLD 3 YEARS OLD 1 YEAR OLD TODAY
13.89
13.22
12.43
8.31
4.72
2.31
N = 1168 software founders and executives
N
1168

Our CACs are out of control.

UNIT ECONOMICS AREN’T WHAT THEY USED TO BE
Customer acquisition cost has increased significantly
Customer acquisition cost has increased significantly over the years due to market saturation of
marketing vying for consumer attention.
BLENDEDCACRELATIVETOFOURYEARSAGO
SOURCE: 2017 CAC STUDY Brought to you by
-18%
0%
18%
35%
53%
70%
5 YEARS AGO 4 YEARS AGO 3 YEARS AGO 2 YEARS AGO 1 YEARS AGO Today
B2B
B2C
WHEN MEASUREMENT WAS TAKEN
N
743
N = 743 companies

Offers level off pretty quickly now

GROWTH DENSITY IS BECOMING TOO GREAT
The Life of an Ebook has greatly diminished due to density
Our ebook offers (as an example) are greatly diminished in their effectiveness with a leveling off effect
quicker in their lifecycles
AVERAGE#OFMONTHSACONTENTOFFERISEFFECTIVE
AGE OF OFFER
2017 MARKETING STUDY Brought to you by
0
4
7
5 YEARS OLD 1 YEAR OLD
2.9
6.4
N = 835 ebook offers

We’ve responded by getting better…

…but all channels die in effectiveness.

Freemium circumvents this by
lowering blended CAC

GROWTH DENSITY IS BECOMING TOO GREAT
CAC for Free isn’t Growing at the Same Rate as Paid
Customer acquisition cost has increased significantly over the years, but one pocket that’s been
protected a bit have been our free compadres.
BLENDEDCACRELATIVETOFOURYEARSAGO
SOURCE: 2017 CAC STUDY Brought to you by
0%
18%
35%
53%
70%
5 YEARS AGO 4 YEARS AGO 3 YEARS AGO 2 YEARS AGO 1 YEARS AGO Today
NO FREE
FREEMIUM
WHEN MEASUREMENT WAS TAKEN
N
646
N = 646 companies

You essentially have a catalyst with free.

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Freemium is a catalyst in lowering
the activation energy for lead velocity.

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You “own” the lead.

GROWTH DENSITY IS BECOMING TOO GREAT
Retention is noticeably better for freemium products
Net dollar retention is noticeably better for companies utilizing the freemium acquisition strategy,
driven in part by a forcing function for monetization, as well as a better experience.
NETDOLLARRETENTION
SOURCE: 2017 RETENTION STUDY Brought to you by
70%
80%
90%
100%
110%
5 YEARS AGO 4 YEARS AGO 3 YEARS AGO 2 YEARS AGO 1 YEARS AGO Today
NO FREE
FREEMIUM
WHEN MEASUREMENT WAS TAKEN
N
143
N = 143 companies

GROWTH DENSITY IS BECOMING TOO GREAT
NPS is greater for companies with freemium products
NPS scores for the paid product is typically better for those companies who have a freemium model of
some sort
AVERAGENPSSCORE
YEARS AGO
SOURCE: 2017 SAAS STUDY
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0
5
10
15
20
25
30
5 YEARS AGO 1 YEAR AGO
23.7
29.9
15.8
24.5
NO FREE FREEMIUM
N = 129 software companies
N
129

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SURE, BUT SOME OBJECTIONS

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But I don’t have the resources…

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…you need to get them if
you don’t want to go up market.

The market doesn’t really care that
you don’t have the resources…

Product is getting *really* good. Value isn’t.

The relative value of features is declining.

THE MARKET IS DROPPING OUT BENEATH US
Consumer Willingness to Pay has Declined Over Time
Software willingness to pay has declined significantly over the past few years due to increased options
and higher demands.
WTPAS%OFWTP4YEARSAGO
SOURCE: 2017 CONSUMER WILLINGNESS TO PAY STUDY Brought to you by
0%
30%
60%
90%
120%
5 YEARS AGO 4 YEARS AGO 3 YEARS AGO 2 YEARS AGO 1 YEAR AGO TODAY
Core Features
Single Sign On
Integrations
Analytics
WHEN MEASUREMENT WAS TAKEN
N = Varies by line, but minimum of 10,000 customer respondents per line
N
921k

-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5
Revenue Drivers
2017 SOFTWARE MARKET SURVEY Brought to you by
WE’RE BUILDING THE WRONG PRODUCT
Calculating the expected impact of product on growth
DEVIATIONFROMMEDIANWTP
RELATIVE PREFERENCE MAGNITUDE
Differentiable Features
High Value/High WTP
Add-Ons
Low Value/High WTP
Core Features
High Value/Low WTP
Trash Land
Low Value/Low WTP

-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5
Revenue Drivers
2017 SOFTWARE MARKET SURVEY - N = 5K+ INPUTS FROM 1282 DIRECTOR, VP, OR C-LEVEL PRODUCT LEADERS Brought to you by
WE’RE BUILDING THE WRONG PRODUCT
What we think we're building
DEVIATIONFROMMEDIANWTP
RELATIVE PREFERENCE MAGNITUDE

-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5
Revenue Drivers
2017 SOFTWARE MARKET SURVEY - N = COMPOSITE DATA FROM 1.2M CUSTOMER INPUTS Brought to you by
WE’RE BUILDING THE WRONG PRODUCT
What we're actually building
DEVIATIONFROMMEDIANWTP
RELATIVE PREFERENCE MAGNITUDE

We’re going to “DEMOCRATIZE DATA ANALYTICS”

….f**k it…too hard. We’re going for the C.R.E.A.M.
We’re going to “DEMOCRATIZE DATA ANALYTICS”

PROFITWELL
Free financial metrics for
subscription businesses

EATING OUR OWN DOG FOOD
Buyer WTP for a SaaS Metrics Products
Customers weren’t willing to pay as much as we thought for a SaaS Metrics solution. This was especially
bad when looking at the multiple between the lower end customers and the upper end customers.
WTPFORASAASMETRICSSOLUTION
SOURCE: 2017 CONSUMER WILLINGESS TO PAY Brought to you by
$0
$75
$150
$225
$300
$0 - $50k $51k - $100k $101k - $250k $251k - $500k $501k+
Upper
Lower
Median
COMPANY’S MRR
N = ~300 companies

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Quantified buyer personas are data driven profiles of the
customers you’re targeting or choosing to ignore.
FIRST DRAFT OF YOUR BUYER PERSONAS
Startup Steve
VALUED FEATURES
‣ Price
‣ Design
LEAST VALUED
‣ Actionability
‣ Depth
LIFETIME VALUE $600
WILLINGNESS TO PAY $50/month
CUSTOMER ACQUISITION COST $550
TARGET PERSONA
Miderprise Meredith
VALUED FEATURES
‣ Accuracy
‣ Depth
LEAST VALUED
‣ Price
‣ Design
LIFETIME VALUE $1,500
WILLINGNESS TO PAY $150 - $200/month
CUSTOMER ACQUISITION COST $3,000
POOR PERSONAPOOR PERSONA

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Free stacks the marketing and retention paths you need,
depending on the structure of free taken.
PROFITWELL GOING FREE
1
2
3
Low CAC with
constant value
Creates the
Requirement
Path to Share of
Wallet
ProfitWell
Financial metrics for the subscription economy
100% accurate SaaS
metrics for free
integrating 1-click with
your billing system
Central fulcrum to cust
success, sales, finance,
marketing e-team, and
rest of stakeholders
Allows interface to
clearly point to
problems and reinforce
value of paid add-ons

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Engineering productivity has never been better.
Find a way to use it or go upmarket.

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But what about monetization…

“Free erodes the value of my paid product”

Maybe.

BUT WHAT ABOUT MONETIZATION
WTP for an initial tier has increased pretty dramatically
Despite the pull of free, the willingness to pay for different first tiers of a product have gone up pretty
dramatically, supporting the thesis that free doesn’t erode the brand.
WILLINGNESSTOPAYFORINITIALTIER
YEARS AGO
SOURCE: 2017 SAAS STUDY
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0
167
333
500
667
833
1000
5 YEARS AGO 3 YEARS AGO 1 YEAR AGO
$784
$305
$147
N = 3,192 consumers
N
3,192

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SO HOW CAN I USE FREE?

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There are many types of free.

Faux Free Trial.

The Tangential Free.

Pool building free.

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Freemium is a scalpel, not a sledgehammer.

• Not for an early stage startup*
• Not for enterprise companies who have never done the world of subscriptions**
• Needs to be a fully functional product that’s good (Mailchimp free NPS is 55, ProfitWell is 60)
• Requires dedication to the point of conversion above all else
*G or Balfour on your team
**Unless you buy a company with subscription DNA
FREEMIUM IS A SCALPEL, NOT A
SLEDGEHAMMER
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— THECASEFORFREEMIUM

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Your success will hinge on having
some form of free product in the next 10 years.
THE MARKET DEMANDS FREE

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Q&A