2018-2025: The Golden Age of SaaS Freemium

Way back in 2012, in the early days of SaaStr, we wrote a piece challenging everyone out there who dreamed of going freemium in SaaS.  That’d you’d need at least 50 million users to build a Unicorn, or at least, to build something big.  To challenge you to make sure you can really get at least 10m+ users if you want to truly go the freemium / self-service / no sales route.  More of that math here.

Freemium is nothing new.  In fact, it’s where most of us start, or close to it.  And fast forward to today, now there are many SaaS freemium Unicorns and freemium pre-nicorns, from DropBox to Slack to Mailchimp to Squarespace and Wix and so many more.

But for most of us, we’re going to make it by going a bit upmarket.  In fact, a good percentage of the 2,500+ posts and answers on SaaStr can sort of be distilled into two points:

  • How to hire a great VP of Sales, Marketing, etc.
  • And do a bunch of other proven tactics,

so …

This is how I did it, how Salesforce did, Box did it, Twilio did it, New Relic did it, etc. etc. Start at the bottom of the market, but drive up market, at least partially.  Scroll through the BVP cloud index — 90% of the cloud companies that have IPO’d are sales-driven.  So far at least.  But the companies that have IPO’s already are the past.  Not the future.

But a funny thing happened the last half decade.  The Cloud got so, so, so much bigger.  The shocking explosion of AWS is case study #1 of the jaw dropping movement to the cloud.

And as part of that, every SMB has moved to the cloud.

DropBox crossed 500,000,000 users in fact last year.  So if DropBox can get to 500m+ users … is there room for 10-100 other starts to get just 10% as many users — 50m?  Of course there is.  For every 10 Dropbox users, at least 1 (10%) can use a Trello, a Pipedrive, a Mixmax, etc.  That’s 100 SaaS freemium unicorns right there.  And even today, Dropbox is $12.50 / user a month (up from $5 before).  Most of you will be able to charge more, at least ultimately.

100x more applications should be able to get to $100m+ using a freemium / low-touch model that in the past 10 years. And API and B2D applications have accelerated this trend.  Stripe, Sendgrid and others redefined what “freemium” is by putting the decision right in the hand of the developer.  This should create 100 more $100m+ freemium or at least freemium-ish B2B/API applications as well.

Most of us will probably still get to $10m+ ARR with a traditional sales team, driving up ACVs, becoming richer and richer solutions.  If that’s your fastest path to $100m, go there, and go there fast.  If 30% or more of your revenue is from bigger deals, the easiest thing is to build a great revenue team and drive that percentage up.  That’s where you’ll get your growth leverage.

But if you have even a hint of freemium success, just a few pieces of advice:

  • Your long tail, if these customers are happy, is your secret marketing weapon.  Even if freemium is only 20% of your revenue, if it represents 2,000 customers that are happy, spreading the word, tweeting, telling their friends … this is powerful.  All the best software companies are built on word-of-mouth.  The more happy customers you have, the faster that positive word-of-mouth spreads.
  • It’s OK if churn is higher in self-service, freemium and very small businesses.  It should be.  Don’t run away from the low-end of your base just because the churn is higher.  Of course it is.  Big companies buy on multi-year cycles, and have more departments and groups to buy your product.  1 person businesses don’t.  It’s OK.  And they’ll make up for that higher churn with a much faster viral word-of-mouth cycle.
  • Don’t assume there is a ceiling for freemium.  Many CEOs (including me, back in the day) panic a bit about freemium and self-service because they worry they will tap that market out too quickly.  Math and a Google sheet may well tell you that is the case.  But at least 6 times out of 10, it turns out the ceiling is much higher than you think.  You learn to raise prices as your product gets richer.  You add a team edition.  You expand the product’s definition.  If you can get to $2m in freemium revenue, there is no way you have exhausted the 28,000,000 SMBs in the U.S. alone.  Push harder.  SMBs have gone all-in on the cloud.  There are always more of them.  There are 28 million.
  • Expect more competition.  Generally speaking, there is more competition in freemium than enterprise.  Almost always.  It’s OK.  Because again, there are 28 million customers.  Not just the 500 of the Fortune 500.

This is and will be the Golden Age of Freemium in SaaS.  The Dropbox IPO will kick it off for us.  Just a few years ago, only a handful of applications could get to $100m+ in ARR via freemium and self-service.  Now, likely, there will be 100 low-touch and freemium unicorns by 2025-2028.

Because the SMB cloud has grown 100x.

Published on January 15, 2018

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