Kyle Poyar
As the COVID-19 lockdowns cascaded around the world last spring, companies large and small saw demand slow to a halt seemingly overnight. Enterprises weren’t comfortable making big, long-term commitments when they had no clue what the future would hold.
Innovative SaaS companies responded quickly by making their products available for free or at a steep discount to boost demand.
While Zoom gets all the attention, there were hundreds of free SaaS tools to help folks through the pandemic. Pluralsight ran a #FreeApril campaign, offering free access to its platform for all of April. Cloudflare made its Teams product free from March until September 1, 2020. GitHub went free for teams in April and slashed the price of its paid Team plan.
The free products were aimed squarely at end users — whether it be a developer, individual marketer, sales rep or someone else at the edge of an organization. These end users were stuck at home during the pandemic, yet they desperately needed software to power their working lives.
End users prefer to do the vast majority of their research online before ever talking to a sales rep, making free products the ideal way to reach them. Many end users want to jump straight into a product, no hassle or credit card or budget approval required.
After they’ve set up an account and customized it for their workflow, end users have essentially already made a purchase decision with their time — all without ever feeling like they were in an active buying cycle.
An end user-focused free offering became an essential SaaS survival strategy in 2020.
But these free offerings didn’t go away as lockdowns loosened up. SaaS companies instead doubled down on freemium because they realized that doing so had a real and positive impact on their business. In doing so, they busted the outdated myths that have held 82% of SaaS companies back from offering their own free plan.
Myth: A free offering will cannibalize paying customers
GoDaddy is a digital behemoth, known for being a ’90s-era pioneer in web domains as well as for their controversial Super Bowl ads. The company has steadily diversified into business software, now generating roughly $700 million in ARR from its business applications segment and reaching millions of paying customers. There are very few businesses that would see greater potential revenue cannibalization from launching a free product than GoDaddy.
But GoDaddy didn’t let fear stop them from testing freemium when lockdowns set in. Freemium started out as a small-scale experiment in spring 2020 for the websites and marketing product. GoDaddy has since increased the experiment to 50% of U.S. website traffic, with plans to scale to 100% of U.S. traffic and open availability to other markets in 2021.
In a Q4 2020 earnings call, GoDaddy CEO Aman Bhutani raved that this decision led to “millions of sign-ups and solid conversion rates” and that “this is an exciting outcome as we work to make freemium a tailwind to our business for years to come.” In other words, the increased customer acquisition from GoDaddy’s freemium product far outweighed any potential downgrade risk.
Myth: Free offerings don’t work for enterprise-grade products
While freemium offerings are best known for easy-to-use and SMB-oriented products such as Dropbox or Calendly, they can be an effective strategy for complex, enterprise-grade products as well.
JFrog, the Israel-based maker of advanced DevOps products, has historically focused on selling to large, sophisticated organizations. The company cited customers in 75% of the Fortune 100, with 48% of revenue coming from customers spending $100,000 or more per year, according to JFrog’s 2020 S-1 filing.
Subscription-based pricing is dead: Smart SaaS companies are shifting to usage-based models
It might then come as a surprise that JFrog launched a free community offering in October 2020. It included an unlimited number of users as well as robust product capabilities spanning artifact management, vulnerability scanning and CI/CD pipeline orchestration. As a usage-based company, JFrog capped the amount of storage, data transfer and CI/CD minutes before a free customer needs to upgrade.
By all accounts, it was a major success. JFrog CEO Shlomi Ben Haim reported in a Q4 2020 earnings call that the company has seen “thousands of new logos” starting to use this product now that they’ve reduced friction from trying it out. And, importantly, this adoption isn’t just coming from hobbyists who will never pay.
“We also see free users ultimately signing up for larger enterprise-wide subscriptions after being exposed to JFrog value,” Haim said.
Myth: Free users don’t convert to paid plans
Many companies fear that a freemium model will lead to an “Evernote problem,” in which free usage attracts lots of sign-ups who never plan to pay, but still require support, hosting and other costs to serve.
This is an outdated myth. The average freemium SaaS product now sees a 7% free to paid conversion rate, all while coaxing far more people to give the product a try since there are no barriers to entry.
One such example is PagerDuty, the real-time operations and incident response SaaS company that went public in April 2019. PagerDuty prided itself on an efficient go-to-market model pairing self-service free trials with high-velocity inside sales, according to the company S-1.
Despite its past success, PagerDuty decided to introduce a new free plan in September 2020. The free offering is fairly limited, including only three users, 100 monthly notifications, a single on-call schedule and limited integrations. It is meant to be the starting point in the customer journey, not the end.
In the words of PagerDuty CEO Jennifer Tejada during a Q3 2021 earnings call, “Freemium is intended to help customers sample what our platform can do, but then the product should allow them to expand with things like the 500 integrations or adding more teams or starting to identify new user cases.” It’s not surprising that CFO Howard Wilson reports that PagerDuty has “seen really good conversion rates so far” — better than others in the industry.
The flip side of prioritizing paid conversion, it should be noted, is that PagerDuty has not necessarily observed an overwhelming uptick in net new logo acquisition. New accounts are up 23% year over year, only a modest improvement over previous quarters.
Fact: Product-led growth is the key to freemium conversion and expansion
Launching a free product isn’t a cure-all; it needs to be a genuine part of a company’s product-led growth strategy.
A successful free offering requires a product that solves a genuine problem for an end user rather than just an executive buyer. Those users need to be able to intuitively understand how to deploy the product and see value in it quickly — ideally within the first 30 minutes of trying it out.
Experience shows that users who reach a state of activation in a free product — i.e., they achieve initial success — convert from free to paid at five to 10 times the rate of other free users. It may be prudent to delay launching a free offering until a company has figured out how to consistently activate new users without the help of salespeople.
The job isn’t done after a company activates its first free user. Freemium companies need to go from single user to team to company-wide adoption as quickly as possible. This requires baking collaboration moments into the free product so that users are encouraged to invite in others at the right time.
Driving company-wide adoption may also coincide with layering in sales and customer success personnel. These team members engage a targeted set of users at the right time to educate them about the benefits of adopting the paid product at greater scale.
Achieving the full promise of freemium may require giving away much more than companies initially expect. Many free offerings are so restrictive that a company’s target customer dismisses it entirely. These aspiring freemium companies lose the benefit of opening up top-of-the-funnel acquisition, which is the biggest benefit of free products. What they’re left with are hobbyists, non-serious users, and mom and pops.
It appears that more companies are coming to this same realization: In recent months, Okta increased the limits of its free developer plan, along with offering better docs, new SDKs and sample apps. Okta’s goal appears to be courting skeptical developers who want to genuinely try out the service before they buy. Similarly, Chargebee doubled its free launch plan to $100,000 in revenue, and Mixpanel increased the data limits of its free plan by 100 times.
It’s clear that the future of SaaS starts with free. The merits of launching a free plan should no longer need to be debated. Instead, more companies should be asking: Are we giving enough away for free?
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