Brian Balfour On Effectiveness Of Freemium Model For SaaS

brian balfour on freemium model for saas

October 28, 2015 • #BiteSize

Joining us today in the latest episode of #BiteSize is Brian Balfour, talking about whether freemium is an effective model for SaaS businesses.

Brian Balfour

Brian Balfour is VP Growth at HubSpot. Formerly EIR @ Trinity Ventures, Co-Founder of Boundless, Co-Founder of Viximo, Co-Founder reCatalyze and PopSignal. Growth advisor to Boundless, Gametime, and Namo Media. Brian is also an investor in GrabCad, Helpscout, and Shareaholic. He blogs at Coelevate.

Transcript of the Video

Freemium is not easy, but when you get it right, it is awesome! And it is partially why I came to HubSpot because most of the products that I’m working on are of the freemium model. I think a lot of the frustration comes in for a lot of people are doing it just because others are doing it. It feels sexy in some shape or form. But there’s mismatch – the freemium model works only for very specific types of audiences and so you have to make sure you have those specific elements.

There are four specific elements that make freemium model work really well for SaaS. The first is that you’re targeting an individual. So I see a lot of people who have a B2B company team driven products trying freemium, but the key is that you’re targeting an individual and that individual can get value out of it. You can plant that seed with that individual and it sort of spreads.

The second thing is that it’s a really quick time to value. So, if your product requires a lot of education and a lot of setup, to get to that value it’s not going to work. You’re better off raising your prices and having a more hands on approach to it.

The third is that you have to have some form of referral and virality. The value of that free user base that never converts basically needs to work for you in another way, which is bringing in more users. So plenty of people you know on Evernote or Dropbox don’t pay for those products. But they help them acquire a bunch of other users. So they are delivering value to the business but just not directly with their credit cards and dollars. I see a lot of people going after the freemium model that don’t have that built in into the model so of course in the end it’s going to fail and it’s going to be more expensive.

And the last but not least, over the long term, you need a path to go from the individual account to the team account. Because that’s where this model freakin’ takes off. And so you see this with Dropbox and Evernote – they start with the individual, they got power user plans and now they’re expanding into the organization and they can get those organizations much more efficiently because they have a bunch of individuals already on that product.

And so you have to have those four elements to make the freemium model work extremely well. There are some exceptions to all those things. But those are the really big killer model. Beyond that, is that getting the freemium model to work requires a ton of investment into product, technology and data doing the work for you, and not humans.

And that goes for acquiring users, activating them, retaining them as well as upgrading users on to even higher tiers and the end of the spectrum. You can’t have humans solving all of those problems because it just gets way too expensive. And so a lot of times we engineers and product managers think about their job as basically crafting this feature to solve a problem, but the problem in this freemium model isn’t just about ‘I need to get this task done as a user’, but part of the problem is knowing about the feature, understanding the feature, being able to easily adopt the feature, remembering to use the features.

Because if we fail on those fronts, are we really solving the user problem in the end – NO. And we have to be able to do that with the product and technology and that’s very very different then how a lot of people are used to operating. So, freemium model is really hard, but if you nail those things, it’s a really exciting model to work on and can be a really powerful business.

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  • Great post. One thing that makes it hard for SaaS platforms to give away their product for ‘free’ is funding. Both Dropbox and Evernote accessed funding early (mind you they both built awesome products). To date Evernote has raised 290 million with 11 rounds & Dropbox has raised a total of 1.11B (source Crunchbase).

    For a SaaS platform to go freemium they have to have a few things set up in order to make it worthwhile:

    1) Access to capital.

    2) A high valuation.

    3) Easy to install.

    4) It has to be easy-to-use.

    5) A way to invite people.

  • Grainne Barron

    Good, so in summary:
    1. Freemium targets individuals not B2B. Understand that.
    2. Make the value obvious, early.
    3. Have some virility aspect. Some users won’t pay but can help you acquire more users.
    4. Long Term: Have a path to get from Individual Account (free) to Team Accounts.
    5. Use Tech & Data to scale/measure/do the work. Engineers build with this in mind.