Is the freemium model still viable?

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JASON LEMKIN

The freemium model is more viable than ever.

But also … more nichey than ever.

Freemium is a great solution for about 1–5% of SaaS apps. The ones with (x) huge, mass appeal and (y) a true viral component. Without (x) and (y), you’ll never get enough free users for any of it to make sense.

  • Slack is freemium. That worked this generation. They are the fastest ever to $200m in ARR.
  • Dropbox is freemium. That worked a generation ago. They just crossed $1b in ARR.
  • Mailchimp started freemium.
  • Many developer-ish companies like Atlassian and Twilio started freemium, or have or had a semi-freemium model … although you’ll see most moved to a “free trial” model later.

Note all of these are mass scale — “everyone” can / does use them — and most have a viral component (internal at Slack mostly, external and internal at Dropbox).

Also note some companies have a seeming freemium component, but it’s mostly marketing and/or a chance to try before you buy. The vast majority of their revenue does not come from “free-to-paid” conversion is the traditional freemium sense (e.g., Box, AppDynamics).

Let’s look at the SaaS companies that have successfully IPO’d. How many are freemium?

Less than 10%.

Freemium works. But if you want it to work at scale, make sure you have the two core criteria necessary. Otherwise. You won’t get there.

You don’t see that much freemium here:

| Bessemer Venture Partners

Whatever you do — be realistic about freemium. Especially if you haven’t done your homework, or done it before. Freemium is NOT a marketing stategy, unless you otherwise have a huge source of free users. The inherent virality of your product is the marketing strategy. Freemium is the way to monetize that.

Most SaaS apps are not viral. Salesforce is not viral, Workday is not viral. So, most SaaS apps should not be freemium as the core monetization and go-to-market strategy.

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Published on March 10, 2017
  • stefann42

    I would add a third condition needed for freemium to make sense: (z) you need to be able to absorb operational and support costs. For instance, if you’re doing something with non-negligible ops costs like bandwidth for video streaming or video conferencing freemium might not work. And/Or if you’re doing something that’s not “easy” or “simple” and requires user training then it might also not be feasible to offer freemium. Many mass appeal scenarios have solutions that could be made “easy” (i.e. where all you need is great on-boarding to make the user successful) but perhaps not all.

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