Freemium Pricing for SaaS: Optimizing Paid Conversion Upgrades

By Dharmesh Shah on May 22, 2012

The following is a guest post by Rishi Shah, Co-Founder of Digioh and 500 Startups Mentor. Join his newsletter and get his eBook "10 Paying Customers in 10 Days" for free.

I've been building a new product and I'm almost ready to launch it. However, I'm having a really hard time figuring out the right pricing structure so I'm going to analyze my favorite Freemium SaaS businesses.

Here is what I know I want:

  1. A free plan. Since we are just starting out I really want people to use the product for free (no credit card required). I'm okay with killing off the free plan if it isn't working economically (existing free users would be grandfathered in).
  2. It is a hosted product so it will be recurring revenue. There will be a monthly fee for the paid packages (with an option to pay yearly upfront for a discount).
  3. Based on many many studies the paid packages will end with a "9". So the packages will be priced with that in mind (i.e. $11.99, $24.99, etc.)
  4. I want to leverage our free plan to get more referrals. For example the free members can earn more features or storage by referring a friend or posting a status update with our link in it. Pretty much exactly what dropbox and appsumo does.

Questions:

  1. How generous should our Free plan be?
  2. What limits should we place on it?
  3. We need our free plan to be something amazing so people will sign up. However we don't want it to be so amazing that they don't ever need to upgrade.
Graph showing the free to paid upgrade sweet spotI decided to take a look at some Freemium SaaS company that I know of and analyzed what I think they did well at.

Screenshot of 37Signals Basecamp

I'm going to start with 37Signals (the godfather of small business SaaS). This was their pricing page before their relaunch. I like how they have the free plan but don't promote it at all. They don't mention it on their homepage and it is hidden at the bottom of their pricing page. A few years back they heavily promoted their free plan and said that 98% of all accounts were on the free plan. Check out their call to action on their homepage. They don't even mention the free plan. They do mention a 30-day free trial though. Basecamp Screenshot Call To Action

Some insights (and assumptions) from 37signals' pricing strategy:

  • They really focus on getting paid customers.
  • The # of Free-to-Paid Upgrades is probably really low. They probably get most of their paying customers right at sign up which is why they have a 30-day free trial on paid packages and have their call-to action towards paid sign up (not the free plan).
  • I think a great way to launch is having an amazing free plan and once you start getting bigger focus your homepage on the paid signups.

Wufoo Pricing

Wufoo is probably my favorite SaaS business. In a presentation about SaaS he says:" always always display your highest priced package to the left and your cheapest package to the right". I made this switch for Flying Cartand he was right about it. Here is what I like:
  • Highest priced on the left, the reasoning is customers read from left to right. The $14.95 price tag doesn't seem so bad when you just read the $199.95 price.
  • The Free plan is perfect. Just enough to start (not super limited) but I am happy to pay once I have a little bit of success. This is what I call investing in your customers.
  • I also like how they have multiple thresholds from the free to the paid plan. Notice how the "Bona Fide" $29.95/mo plan has 5 users and the free plan only has 1 user. If you have 5 users you must be a bigger company and can afford the cost. This also gives a chance for Wufoo to get paid customers right from day #1.
  • I really like how they don't offer a 30-day free trial. They have a free plan so there is no need to have a free trial as well, allowing them to pull in cash as soon as possible.

Above is a screenshot of the DropBox Pricing Page. They don't promote the pricing page on the homepage at all.

Here is what I like:
  • Heavily promote their very generous free plan on their homepage - they don't show any prices, just a video and a download button
  • They leverage their free users to get more customers - amazing referral program. You can earn more space by referring people.
  • Up-sell customers after many months of usage and dependence on their product. I bet they have really good lifetime value on their paid customers.
  • My assumption is that DropBox has an amazing free account to paid account upgrade ratio which is why they focus on getting you to use the product as soon as possible.
Intuit Pricing Screen Shot I'm including Intuit but I really don't like it at all. This is exactly what I don't want.
  • Very confusing. Each pricing tier looks like it could be a different product.
  • An Asterisk next to their prices? Are you kidding me. Whenever I see an asterisk I get really scared that the price is going to jump after the first month.
  • The "Try it Free" is an okay call to action. The word "Try" makes me think I'm getting roped into something.
  • The reason I think this works is because they have a really strong brand value. People trust Intuit and they have a solid product for business accounting.
MailChimp Pricing ScreenshotMailChimp is similar to dropbox. They have an amazing free plan.
  • Mailchimp puts a "MailChimp" ad in the footer of the newsletter promoting their services and allowing the end user to earn more credits with them.

Carbonmade Pricing Screen Shot

Carbonmade has one of the most fun pricing pages. Here is what I like:

  • The top package is super cheap. $12/mo - wow. That's it and I get it all
  • How they display Free vs. Paid. The Paid package seems so much more fun and cool. I feel like a total loser clicking on the "Meh" package. I would rather just pay the $12 and feel better about myself. Other companies do this by highlighting their middle package with a "Best Option" headline.
Screenshot of the Experts Exchange Experts exchangeis a developer focused question and answer service. So if you need a coding question answered you can sign up and a real live person will email you right back. This is sometimes better than Stack Overflow or Quora because at times no one answers your questions. The Experts Exchange isn't your traditional Freemium business. When you sign up you are signing up to a paid plan (with a 30 day free trial). However when you become a customer you are given the opportunity to answer questions, the more questions you answer the cheaper your member ship becomes. This is a really interesting freemium approach. Their "Free" customers are helping Experts Exchange get paid customers. What I like:
  • The plans get cheaper if you pay for multiple months
  • They allow you to earn Free. It isn't given.

So what am I going to do?

I'm going to take the best from each one:
  1. Launch a free plan that is amazing. We aren't the first service that will be doing what we do so we need to go the Mailchimp route.
  2. Allow people to earn more features and storage if they share our service (similar to dropbox)
  3. Make our paid plans feel amazing by adding a fun icon next to them (similar to carbonmade but won't be as awesome)
  4. Make our highest paid package displayed to the left and offer multiple barriers so we can take payment on day one for bigger companies (similar to wufoo)
  5. Learn from our data after 7 months and either de-emphsize our free plan (like 37Signals) or over emphasize it (like dropbox).

Here is what my current pricing page looks like: Digioh Pricing Page

What do you think of my freemium pricing analysis? Any tips or tactics you've learned from your own freemium pricing experience?  

Topics: guest pricing
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Building It Is Not Enough: 5 Practical Tips On User Acquisition

By Dharmesh Shah on May 2, 2012

The following is a guest post by Brian Balfour, Co-Founder and CMO of Boundless. You can read more of his writing on his blog at BrianBalfour.com.

Stories about the growth of "hot" startups such as Facebook, Instagram, AirBNB, and others have created a belief that if you build the right product, customer acquisition will be easy. Don't be fooled. These stories are the exception, not the rule, and don't tell the entire story of the immense effort it took to grow their customer bases. Finding scalable acquisition channels is a time consuming and strategic effort.

If you build it, they may not come.

field of dreams

You probably have a product roadmap and a development process. But do you have a process and plan to discovering your scalable customer acquisition channels? For software development we have well documented processes such as Agile, Waterfall and Kanban. For finding product market fit we have an increasingly defined process in customer development and the lean startup methodology.

Finding scalable customer acquisition channels is as much of a process as software development or finding product market fit. Here are five mistakes to avoid in finding your initial customer acquisition channels.

1. Do Not Test A Lot Of Channels At Once

This is the ol' throw stuff against the wall and see what sticks strategy. Unfortunately this rarely works. Consider this, with Facebook ads you typically need to change your creative every 24-48 hours across 10 - 20 different segmentation combinations, with 4 - 10 ads per combination. That is in addition to all of the landing page testing you'll need to do for those combinations. It is easily a full time role. Think you will have time to focus on another channel at the same time?

Inbound marketing takes an incredible amount of time for content development. SEO requires testing thousands of page combinations, time to build influential links, and plenty of on-page optimization. My point is, properly testing any single customer acquisition channel is extremely time consuming and requires focus.

It is easy to think that the fastest way to find a channel is to test a lot at once. But with limited resources it is the exact opposite. Let's look at it a different way. If you had very limited engineering resources, would you have them try to build 4 different products at once to find one that works? I hope not. You would end up with 4 partially built products with little information on which one is going to to work.

Instead, you would likely evaluate each product idea, strategically choose one, focus, iterate on it for at least a couple months, and only then decide to keep moving forward or move on. Finding scalable customer acquisition requires a similar amount of strategic decisions, focus, and iteration.

The quickest way to finding your first scalable channel with limited resources is to focus on one at a single time and iterate based on feedback (metrics) just like you would with building product. At Boundless, we have been lucky to have enough resources to test two channels at once. But even with close to $10M in funding, we won't go beyond testing and optimizing two channels for awhile. Don't underestimate what it takes to properly test and optimize a single customer acquisition channel.

2. Diversity Of Channels Is Not Important In The Early Stage

Entire companies are typically built on the back of one or two channels. Look how far Zynga has gotten with basically two channels - Facebook Ads and Viral Mechanics. Only now are they starting to diversify with the launch of their new platform. Facebook itself relied completely on viral growth until they had reached millions of users. Only then did they start optimizing for SEO. AirBNB grew their initial user base almost completely on the back of craigslist.

For reasons discussed in number one, diversity of channels actually increases your risk that you never find a scalable channel at all. Remember this - momentum of growth trumps diversity of channels. Once you find a channel that is working at a small scale, don't be tempted to add another channel to the mix. Instead, focus on optimizing, scaling, and milking your initial channel for all its worth.

Your goal in the early stages is to grow as fast as possible with limited resources. Finding further growth in a channel that is already working is typically easier than finding a completely new acquisition channel. When you start to reach the max potential (where the growth curve starts to flatten), only then should you add another channel to the mix.

3. Paying For Users Is Ok

Magical stories of instant viral growth has formed a negative stigma around paying for users especially in the early days of a product. Entrepreneurs almost feel guilty if they pay for users. This leads to startup pitches that often include a slide that says "we've grown to X# of users with out paying for a single one."

Every, and I mean every, acquisition channel costs money. It is just a question of whether the cost is direct or indirect. Channels such as PPC obviously have a direct cost. However channels such as SEO and Viral are commonly seen as "free" channels. They aren't. To properly optimize SEO and Viral mechanics takes significant engineering and other employees' time. That time is costing you money. The cost is indirect, but you are still paying for users.

Those "free" channels are certainly valuable in the long term. But they often come with short term disadvantages. For example, SEO typically takes months of effort before you gain meaningful traffic. In the early stages, speed of learning is the most valuable thing. Do you really want to wait a few months to learn the same thing you could learn in less time with another channel?

Viral growth deserves its own mention here. It is the treasure that most entrepreneurs are seeking. They want to be the next Pinterest or Instagram. Keep in mind a lot of products aren't suited for viral growth. I think a lot of entrepreneurs overestimate whether or not their product is a fit for pure viral growth. If your business isn't suited for viral growth, that doesn't mean you have a bad business. You just need to find a different customer acquisition strategy.

4. You Only Need 3 Tools To Test Your Customer Acquisition Channels

The "measure everything" mantra has lead to a belief that an array of tools is needed to find a scalable channel. Between analytics, A/B testing, ad platforms, feedback, support and a host of other tools it is easy to get lost. If you wanted to learn to play basketball, would you go out and spend $1000 on the latest gear first? Or would you just grab a ball, find a hoop and start playing? Hopefully you answered the latter.

To test any customer acquisition channel all you typically need is Google Analytics, Excel, and some basic SQL skills. Those three things will take you surprisingly far for any channel before you need anything else. Don't get caught up with the tools, just get testing.

5. Avoid The Button Color A/B Testing Rabbit Hole

The rise in A/B testing and other analytics tools have created fairy tale stories of changing a button color, or moving the CTA from the left to the right and suddenly you have game changing improvements. Once again, these stories are the exception, not the rule. It typically takes 10 A/B tests to find one that produces any improvement at all. And when you do have a positive improvement, it is typically incremental instead of game changing.

Being metrics focused is important. But knowing how to properly influence them is even more critical.

In the early stage you should not be focused on incremental improvements. Your initial CPA for any new channel is likely to be a factor off from your target. That means you need to try and make big improvements to understand the viability of the channel. To see big improvements, focus on messaging, targeting and activation methods. Save your color experiments for when you are ready to optimize and scale a channel. Not when you are testing the viability of a channel.  

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What do you think?  Any additional tips on how to acquire users for early-stage product?

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