My take on Freemium
I spent 3.5 years (23rd employee) at what became a billion dollar (Unicorn) Freemium enterprise software company. Here are four benefits I found with Freemium:
1.Instant impact on sales pipeline
2.Close big companies early on versus traditional path of small > med > big
3.Quickly acquire early adopter thought leaders
4.Large scale real-time user feedback data from day 1
Pipeline
This is an obvious one. In the absence of marketing and a lead-gen machine, you can still gain significant early traction if you have a viral product with network effects. Consistent PR buzz early on will make a huge difference as well. Yammer, for example, won the TechCrunch 50 award in 2008 and signed up thousands of users early on. Pitting yourself as the "little guy" who is taking on and "disrupting" a large incumbent will help with your PR story. Journalists love "David vs Goliath."
All of these free users act as leads for your sales team to call on. Because these prospects are already familiar with your product, it is easy to schedule an introductory call and progress the sale. One of the drawbacks to the Freemium pipeline however is that many of the free users will not be your executive decision makers like CXOs or VPs. The Freemium users will most often be potential Champions who will push a decision through or Coaches who will provide you with a playbook on how to sell to their company.
This inexpensive pipeline can help a start-up run very lean as they prove out their revenue model. Long-term you will need to bake in marketing and lead-gen to scale past early stages, as freemium will only take you so far.
Go big early
The typical customer acquisition path for enterprise start-ups is to gain traction bottom-up. Start with small companies and gradually work your way to the Fortune 500. Typically large companies are hesitant to invest in a start-up's software because of the risk, and you will need referencable logos to make them comfortable. This path means closing big seven figure deals that really move the needle will take significant time.
With freemium, you can "cheat" this traditional path to some extent and secure large customers early. If you have thousands of users at a Fortune 500 company, you can leverage the champions and use cases to circumvent the hurdles of being a start-up with no existing named client base. I've seen this happen with the largest companies in the world. These key logos can then be parlayed across the board.
Early Adopters
The types of people who sign up for Freemium start-up software are typically the forward thinking influencers. These valuable users will spread the word about your product internally and externally. They will share the story with their personal network around the globe and drive virality of your service. Often these forward thinking people are influential inside their own company, which means they can help you convert them to paid. Because they are innovators, they will typically have the ear of their CXOs. If your early adopter happens to be a CIO (this is becoming more common due to the transformational change occurring in Enterprise IT described here by Aaron Levie CEO of Box ), you will have a strong advantage but still need line of business support. I have seen large deals fall through when CIO was fully on board but flying solo with no biz side sponsors.
These early adopters will also host your prospect webinars and tell an amazing story about the value you provide. Take very, very good care of them. Fly them out to your HQ, send them iPads. They will also speak at your tour events and function as customer referrals. All of these benefits are accelerated by Freemium and will boost early sales.
User Feedback
In light of the new revolution in the Enterprise where end users are driving IT Procurement decisions, usability is and will increasingly be a key component of success for enterprise software companies. Gone are the days of collusion between IT and old school enterprise software where the goal was to create the most complex product possible for IT job stability. There literally was no incentive whatsoever for software companies to focus on the end user because IT controlled everything, but that has changed. See Box, Salesforce, Yammer, Hubspot, Echosign, etc...
If you don't have Freemium users, in the early days you are developing in the dark with no end user data feedback on your service. Freemium clearly aids in this area and can provide some key insights into what components of your service are working and which aren't. This is especially critical in the early days when there is little room for a miss on product. This feedback can also assist in pace of innovation to keep you ahead of competition.
How to Sell Freemium (no shortcuts)
While freemium provides quick pipeline generation for sales, it won't typically get you to the decision maker right away. What it does provide is a quick foot in the door and access to 1) champions and coaches to leverage 2) documented proven use cases. If you have a great product, you get the benefit of a free trial before you've even called on them! If leveraged correctly, these two advantages will arm you with everything you need to create a business case with your decision maker.
But Freemium does not allow for a short cut. Once you are in front of the right people, it is still key to help them arrive at a vision of how your service will change their business for the better. The short cut approach would be "hey all these people are already using it so you should pay for admin tools to get control." This won't work, but it's a tempting approach for some sales reps to close deals quickly. You will develop a reputation for holding companies hostage. Not good.
Freemium will accelerate your sales rep's ability to gather champions and use cases to collaborate with Executives and develop a business case. Freemium will also grant reps entry into accounts who wouldn't have reciprocated otherwise.
Downsides to Freemium
Freemium does contain significant risks if not executed effectively. The biggest risk being too much free and not enough in the paid version to attract customers towards converting. If your product requires changes management, your thought leadership in your space can help you convert paying customers who don't want to attempt to roll out your service on their own.
A large unpaid user base also poses a risk of baiting executives into scaling your sales/marketing/service group too fast and outpacing revenue growth. If a company prefers to stay independent, it is critical to pay close attention to how scalable and efficient the sales process is before "throwing bodies at a number."
***Bonus: a large user base with a respectable paid conversion ratio can significantly drive up the multiple you can attract during an acquisition or fundraising
1.Instant impact on sales pipeline
2.Close big companies early on versus traditional path of small > med > big
3.Quickly acquire early adopter thought leaders
4.Large scale real-time user feedback data from day 1
Pipeline
This is an obvious one. In the absence of marketing and a lead-gen machine, you can still gain significant early traction if you have a viral product with network effects. Consistent PR buzz early on will make a huge difference as well. Yammer, for example, won the TechCrunch 50 award in 2008 and signed up thousands of users early on. Pitting yourself as the "little guy" who is taking on and "disrupting" a large incumbent will help with your PR story. Journalists love "David vs Goliath."
All of these free users act as leads for your sales team to call on. Because these prospects are already familiar with your product, it is easy to schedule an introductory call and progress the sale. One of the drawbacks to the Freemium pipeline however is that many of the free users will not be your executive decision makers like CXOs or VPs. The Freemium users will most often be potential Champions who will push a decision through or Coaches who will provide you with a playbook on how to sell to their company.
This inexpensive pipeline can help a start-up run very lean as they prove out their revenue model. Long-term you will need to bake in marketing and lead-gen to scale past early stages, as freemium will only take you so far.
Go big early
The typical customer acquisition path for enterprise start-ups is to gain traction bottom-up. Start with small companies and gradually work your way to the Fortune 500. Typically large companies are hesitant to invest in a start-up's software because of the risk, and you will need referencable logos to make them comfortable. This path means closing big seven figure deals that really move the needle will take significant time.
With freemium, you can "cheat" this traditional path to some extent and secure large customers early. If you have thousands of users at a Fortune 500 company, you can leverage the champions and use cases to circumvent the hurdles of being a start-up with no existing named client base. I've seen this happen with the largest companies in the world. These key logos can then be parlayed across the board.
Early Adopters
The types of people who sign up for Freemium start-up software are typically the forward thinking influencers. These valuable users will spread the word about your product internally and externally. They will share the story with their personal network around the globe and drive virality of your service. Often these forward thinking people are influential inside their own company, which means they can help you convert them to paid. Because they are innovators, they will typically have the ear of their CXOs. If your early adopter happens to be a CIO (this is becoming more common due to the transformational change occurring in Enterprise IT described here by Aaron Levie CEO of Box ), you will have a strong advantage but still need line of business support. I have seen large deals fall through when CIO was fully on board but flying solo with no biz side sponsors.
These early adopters will also host your prospect webinars and tell an amazing story about the value you provide. Take very, very good care of them. Fly them out to your HQ, send them iPads. They will also speak at your tour events and function as customer referrals. All of these benefits are accelerated by Freemium and will boost early sales.
User Feedback
In light of the new revolution in the Enterprise where end users are driving IT Procurement decisions, usability is and will increasingly be a key component of success for enterprise software companies. Gone are the days of collusion between IT and old school enterprise software where the goal was to create the most complex product possible for IT job stability. There literally was no incentive whatsoever for software companies to focus on the end user because IT controlled everything, but that has changed. See Box, Salesforce, Yammer, Hubspot, Echosign, etc...
If you don't have Freemium users, in the early days you are developing in the dark with no end user data feedback on your service. Freemium clearly aids in this area and can provide some key insights into what components of your service are working and which aren't. This is especially critical in the early days when there is little room for a miss on product. This feedback can also assist in pace of innovation to keep you ahead of competition.
How to Sell Freemium (no shortcuts)
While freemium provides quick pipeline generation for sales, it won't typically get you to the decision maker right away. What it does provide is a quick foot in the door and access to 1) champions and coaches to leverage 2) documented proven use cases. If you have a great product, you get the benefit of a free trial before you've even called on them! If leveraged correctly, these two advantages will arm you with everything you need to create a business case with your decision maker.
But Freemium does not allow for a short cut. Once you are in front of the right people, it is still key to help them arrive at a vision of how your service will change their business for the better. The short cut approach would be "hey all these people are already using it so you should pay for admin tools to get control." This won't work, but it's a tempting approach for some sales reps to close deals quickly. You will develop a reputation for holding companies hostage. Not good.
Freemium will accelerate your sales rep's ability to gather champions and use cases to collaborate with Executives and develop a business case. Freemium will also grant reps entry into accounts who wouldn't have reciprocated otherwise.
Downsides to Freemium
Freemium does contain significant risks if not executed effectively. The biggest risk being too much free and not enough in the paid version to attract customers towards converting. If your product requires changes management, your thought leadership in your space can help you convert paying customers who don't want to attempt to roll out your service on their own.
A large unpaid user base also poses a risk of baiting executives into scaling your sales/marketing/service group too fast and outpacing revenue growth. If a company prefers to stay independent, it is critical to pay close attention to how scalable and efficient the sales process is before "throwing bodies at a number."
***Bonus: a large user base with a respectable paid conversion ratio can significantly drive up the multiple you can attract during an acquisition or fundraising
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