Is Freemium Compatible with Enterprise Software?

Sure it is… despite the gnashing of teeth that regularly flares up when the discussion of freemium is engaged in.

Freemium is not magical pixel dust, it is a way to deliver a multi-channel business model that intersects customer segments regardless of size, complexity, and revenue opportunity. It does require you to rethink your business from top to bottom, beginning with how you meter your pricing model and ending with how you use your website.

The metering discussion is critical and you have a range of implements you can take advantage of, including metering by number of users, time, type of organization, features, and specific capacity dimensions. If you are offering free to high priced enterprise license agreements the metering by feature model creates landmines that you will have to deal with, most notably the bias that will emerge in your development process which results in packaging of high value features to defend your high price points which then results in the most interesting stuff you build being available to the smallest audience in your customer base.

Pricing for growth and pricing for margin are on different ends of the spectrum and if metering features supports margin then capacity must be in support of growth, right? Wrong, pricing on pure capacity creates a different kind of problem that you have to consider, which is leaving a lot of money on the table as a result of product realities that frustrate consumption. An example is a complex signup process that frustrates casual users or a deficient getting started process that creates barriers in the initial trial process. When pricing by capacity everything your development organization does must be viewed through the lens of creating consumption, even at the expense of value.

By the way, speaking of the initial trial process… will you have one? The trial process is valuable only if you are using it to facilitate a purchase decision otherwise you are better off having a “buy now” process or at a minimum have it as an option. If someone coming into a trial product experience isn’t using it in the first 30 minutes then it’s unlikely you will get them to use it over 30 days (which by the way is optimal if for no other reason than managing your internal reporting… all trials created in one month convert in the next).

Will the free product experience initiate in the trial process or as an explicit free product signup? If I were you I would go with a single trial product that converts into a paid or free product at the end of the trial, which works only if you don’t front load the trial process with payment information. The conversion rate for trial-to-paid will be low, probably 3-6%, at which point the debate shifts to getting people into the website and as efficiently as possible into a trial experience… it’s a pure numbers game at this point, feed the funnel with x number of site visitors to get to y number of trials to z number of paid customers.

The website is where the conflict between enterprise and monthly subscription customer segments will be realized. Enterprise marketing – the traditional kind – is entirely focused on content and getting contact information from a site visitor in order to have a sales resource follow up with them. This doesn’t work well for online freemium goto market strategies because it frustrates the goal of moving site visitors from the top of the funnel (your homepage) into a trial experience.

The conflict gets exacerbated when you realize that enterprise leads are opting into the low friction trial experience and once in that buying path the effort to shift them into the traditional enterprise path is cumbersome, mostly because of the pricing disparity. However, this fails to acknowledge that you, as a business, should not care how prospects come into your funnel and if your pricing model is appropriate for your business then prospects will naturally coagulate around the pricing plan most appropriate for them… pricing for growth.

The other dimension of the perceived channel conflict that you should consider is that it is unreasonable to think that the majority of your customers will start in free and end up in enterprise. Customers who select into one buying path are doing so because of what they want rather than what you are getting them to do… a customer who comes in via self-service trial, automatic conversion and monthly subscription renewal, and never talks with someone on your team is doing exactly what they want…. and that is not talking to you. Get over it, you can still serve them well and they will be happy, as evidenced by the fact that they renew each month.

You can help customers find the best fit for them among your product portfolio but doing so successfully at scale is as much dependent on in application marketing as it is good content on your website. Once you acquire a customer spend money designing and delivering a compelling product experience that facilitates upgrades and add-ons, rather than extensive email marketing campaigns and call centers.

Some enterprise products are not appropriate for freemium models but almost exclusively the result of high COGS and/or specific industry vertical issues (e.g. compliance). These are edge cases but you do need to be aware of them.

In summary, freemium works for enterprise software if you:

  1. Carefully consider all of the consequences of various packaging and metering models.
  2. Build your product to maximize the Hour-1 customer experience and then in support of the metering model you select.
  3. Build your website for throughput and efficiency in support of customer acquisition through the trial experience.

Freemium Mechanics

I read an interesting blog post by Ruben Gamez titled Why Free Plans Don’t Work. If you are interested in freemium business models or any of the variations on the theme, this is well worth reading however I take issue with a couple of points.

First and foremost, Gamez uses a statistics breakdown (in %) to highlight the disparity between free and paid plans. Whenever someone does this they invariably open the door to the question about what their customer numbers because a percentage breakdown without knowing what the denominator is will lack the proper context. Knowing that 1% out of 100 customers are paid versus 1% out of 100,000 is a fundamentally different discussion to have… and there is no discussion about the cost to serve free product customers.

Gamez points out a number of well known freemium companies and the transitions that they have made between free products and free trials. This is an interesting discussion and the body of work that can be studied is relatively small and fluid given the immaturity of freemium as a business model. However, a couple of things are increasingly apparent for people who are running these businesses.

You can have a freemium business that depends on a free trial process instead of a free trial and a free product option at signup, there is no debate about this, and you can have an exclusively paid product that depends on a free trial process for acquisition and onboarding. This is a smart decision in my opinion and at Get Satisfaction we are constantly tinkering with and evaluating the options relative to placement and purchase path for the free product. The idea here is to route every website visitor who becomes a prospect into a funnel that exposes them to the full product before downgrading them to a free product.

In 2010 we relaunched our website with a new “plan picker” page, which over the course of the year went through 2 significant updates that are very relavent to this analysis. Initially we had Free placed as a promo box on the sidebar, separate from the monthly subscription plans but highly visible nonetheless… this is the control group as best I can provide one because with each subsequent change to the plan picker page we changed more than just Free product placement.

In April of this year we elevated placement of the Free product to equal standing with the monthly subscription plans. Almost immediately the number of new communities created through the free product jumped substantially (and for the record, I am not going to disclose actual customer numbers so I’ll do my best to avoid putting up percentages, following my own advice above). At the same time the number of new trials created for our monthly subscription products remained flat and in some months declined materially, however the number of free-to-paid conversions for customers who were net new (not a previously paying customer who canceled) went up.

The net result was still a decline in new customer conversions and our churn rate (turnover of all paying customers in a single billing period) stayed constant or declined slightly so I would have to say that elevating Free to first world status did not improve the business.

In August we changed the plan page again and pretty much hid the Free product option. The resulting decline in Free product signups was dramatic but offset by the trial signups and associated trial conversion rate, however churn went up as well so the net effect was offset by customer cancelations in the first 90 of total life.

Churn is a really important consideration in freemium models and not just because of the financial impact. The raw churn number is obviously important because that represents the size of the hole you need to fill each month before you can start adding customers, however when churn happens is often overlooked.

You should be doing a cohort analysis each month on cancelations to determine what the survival curve is for each customer segment, which graphically represents how quickly cancelations are happening in the customer lifecycle as represented by the 25th, 50th, and 75th percentile groups.

This first example is basically a bad curve because it shows that over a proscribed period of time a large percentage of your customers fall off. It’s basically telling you that you are attracting the wrong kind of customers and you are going to invest disproportionately in replacing lost customers.

 

 

 

 

 

This next curve is a pretty good one, the drop is initially steep but then levels out and after 12 months you still have over half of the customers you acquired in any single cohort. What this curve is telling you is that you are losing customers who are not a good fit for you very quickly and then cancelations stabilize.

 

 

 

 

 

In the context of freemium this information is very valuable because it is a consequence of how prominently you are positioning free vs paid product options. If you are hiding free in order to stimulate take-up rates on paid, then you have to expect that cancelations rates will go up as a result of people converting to paid that otherwise would not if presented with a prominent free option.

This leads to the next topic I want to discuss, which is the methodology you embrace for the trial process. In the interest of being honest and transparent, the way we do it at Get Satisfaction is not the optimal way to do trials because we provision trials as a time based variant of a specific product instead of having a single trial where everything is turned on and then have the prospect select the product they want to convert into at the end of the trial process.

The second problem we created for ourselves is that we require the web visitor to create an account and give us their credit card information in order to create a trial account. This is an obstacle for trial creation first and foremost but also orients the trial experience to people who are pre-disposed to buying you before they even enter the trial process… so in effect you are giving them a free period of service for something they would pay for.

We are going to make changes to the trial process to address the two issues I raise, however I can’t do much about the account creation requirement simply because my product requires a named user to be the administrator of it… no user registration would mean I would have no account to attach the administrator rights to. My recommendation to you is that you create a free trial process that downgrades to a free product at the end of the trial period if someone doesn’t enter their credit card details and select a plan, instead of offering a trial experience in addition to a free product.

Annual billing options are a game changer in the freemium model, arguably the single most effective strategy for reducing your churn rate. Typically the way that annual billing is presented is 12 months of service for the price of 10, a 16% discount.

You can also use a buy-it-now option to bypass the trial process, offering something like a discount or promotional offering in order to pull forward demand that exists in the trial pipeline, and in the process isolating true prospects who are won or lost in the trial. I’d like to do this at Get Satisfaction as part of our structural changes to the trial process.

Having a freemium business model is dependent on a number of strategies but one that often gets overlooked is how well you identify potential demand and feature marketing inside the free product for free to paid conversion and inside the various monthly subscription products for paid-to-higher-paid conversion.

Ultimately the freemium model is a strategy that increases the catchment of leads as a result of using your product as the primary marketing vehicle through which you deliver a funnel to. Take care to structure your website so that every aspect of the content you are creating is designed to deliver a site visitor into a product experience or isolate them for followup through a traditional enterprise sales process.

It’s also worth pointing out that if you have a product that you are primarily selling to businesses, and the product itself has a multistep onboarding process, then you really have to have a higher touch sales process where you are nurturing the free and trial accounts at a higher level than if you were, for example, Evernote.

For me the mechanics of a freemium business are some of the most interesting to be involved with in a modern software as a service company. The implications of billing and provisioning system dynamics, how you structure your website content, surface funnel analytics, build upselling cues into your application, and manage high volume sales nurturing processes are incredibly complex but increasingly normal for the B2C and even B2B markets.

Freemium 101: Customer Conversion

At Get Satisfaction we have had a freemium model from day 1, when it was just free, no premium offerings existed so we’ve lived through a couple of key transition points and now are optimizing a model we know works.

We have 2 primary channels to market, an enterprise business that mimics what every other enterprise business sells, which is a contract sale with a named customer built around high value product offerings and bound by legal agreement which stipulates a heavy support model and SLA for non-performance. The other half of the business is web-direct, we call them Standard Plans, that are marketed and purchased directly through the site and have a month-to-month model where customers can discontinue at any time without financial penalty. The latter part of the business is what I am responsible for.

The basic challenge with a freemium business is twofold, first providing enough incentive for free customers to convert to paying and for paying customers to not downgrade to free, and secondly to deliver effective product marketing on the site and through an inside sales capability to keep the sales funnel flowing.

The product marketing is a real challenge because if you assume your product is reliable and is without major deficiency, and that you provide good customer support for all stages of the customer lifecycle (in other words, your customers aren’t leaving you because you are pissing them off whenever they interact with you), then the only other reason you will lose customers is because you are misrepresenting the utility and value of the product which when discovered causes mass customer defection.

Churn (aka turnover) will kill you in this business and it’s not as simple how many customers you lose in one period compared to the previous but rather the relationship between attrition and customer acquisition over time. This is why it is so important to target the “right” kind of customer in your marketing because in order to recover the cost of customer acquisition you need to keep them long enough to go positive on revenue relative to customer acquisition and ongoing operation.

If you do a cohort analysis which maps out the survivability of customer groups according to what month they were acquired you will see the effect of churn on your customer base and get a foundation for determining what the lifetime value is of a single customer at any plan level, assuming you have multiple pricing plans. This is critical because it gives you a basis for determining the efficiency of your sales and marketing expenditures for achieving revenue and more important, profitability.

I have written about pricing issues before and while I do want to cover that again in more detail I will defer to a later post because pricing is a topic which deserves a much deeper dive than is possible here.

The last thing I want to cover is trial processes and customer conversion. There is no process more critical to your success than optimizing the free-to-paid conversion and the web-to-trial process. We have done a lot of work to address improvements in how we move web visitors into a trial process and then convert them to paying customers.

About 22% of the communities that are created on the Get Satisfaction network are accomplished through a trial-to-pay process and this is a phenomenal result that any business would be proud to disclose… which is exactly why I am disclosing this. We understand how to do this well but it’s only half of the equation because once you get them to opt-in to a trial process you have to do everything possible to make them successful with the trial and move through to regular monthly billing.

Accomplishing successful trial conversions is a process that incorporates a strong dose of online trial enablement combined with effective inside sales capabilities. At $19 a month I can’t afford to have high touch inside sales people working the trial customers but at $289 a month I cannot afford to not have them working on those prospects.

Our trial process is 15 days and that is not arbitrary. Basically it comes down to a simple dynamic which is that if a trial customer does not start using the product in the first hour after creating the trial account we know the probability of converting them goes down exponentially with each passing day, therefore a 30 day trial process is not going to contribute to a higher conversion percentage.

A 7 day trial process is far too short for us because we have a product that requires several discrete steps to be taken in order for the value to be realized. We have recently instituted a series of emails backed up with landing pages that go out to a trial customer when they sign up, this is commonly called “onboarding”. Over a 15 day period we can, depending on when the trial was initiated, have 5 weekend days in that time period so getting 5 emails out when the trial customer is most likely to respond to them requires more than 7 days but they can’t be sent out too closely together and risk over-communicating to a trial customer which causes them to opt-out and you have lost your ability to communicate at all with them.

I hope this is useful information, it’s actually quite a fascinating departure for a guy like me to be involved with when compared to the world of traditional enterprise software that I grew up in. I would like to make this a series of posts that cover conversion, retention, free community migration, and operational metrics but I will resist creating the impression that I will knock these posts out in the next week. Stay tuned.

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