Some time ago, I was there as an onlooker when the entire team of a start-up met for the first time after the launch of their product to discuss the current status and the next steps. It’s a SaaS (Software as a Service) offering in the B2B sector, and the team is made up of more than a dozen nations from all over Europe.
Well, at this plenary meeting it becomes clear that – as is so often the case with start-ups – sales and marketing are lacking. Customers are clearly not queuing up to buy licenses for this new, innovative software. Nervousness spreads and there is intense discussion across all hierarchical levels and departments about what needs to be done.
A young programmer stands up and suggests going freemium. The company should offer a slimmed-down version of the software free of charge so that as many potential customers as possible can experience for themselves how great the product is. Business success would then be assured if only a small proportion of free users switched to the paid version in order to use the full range of functions. „If it worked for Dropbox, WordPress, Mailchimp and Slack, then we can do it too!“
Most of those present are immediately on fire. They urge the management to go down this route, even though the C-level is not at all enthusiastic. Suddenly the atmosphere is tense. But luckily the time is up and the evening program beckons, sushi and karaoke night!
At the time, it was neither my role nor my job to shed light on the problem and point out how risky and dangerous this step would be. And I knew that the management was experienced enough not to embark on such an adventure. But because the topic of freemium is always being bandied about, even in established companies, I would like to briefly develop here why free versions do not work in cases like this:
- First of all, it is extremely difficult to determine the range of functions of the freemium version. If you offer too little, it is not worthwhile for the interested user to get started; if you offer too much, most users will get by with the free version.
- B2B applications are usually relatively complex and are aimed at specialists. This is where a second dilemma comes into play: I can’t afford to train and support the free users, they have to find out for themselves how the software works („self-onboarding“). But if I can’t introduce them properly, they won’t recognize the value of the software. With Slack and Dropbox, for example, the complexity problem hardly arises, but it does with WordPress and Mailchimp.
- B2B applications value a quality image, promise constant optimization, great UX, excellent customer service and unique features. How does this fit in with a free version of the same product?
- On the one hand, „what costs nothing is worth nothing“. On the other hand, users of the free version try to make do with it for as long as possible. They are happy about the savings on subscription costs and ignore the advantages that the paid version would offer them. This „cheap is cool“ mentality has become widespreadin recent years. The hurdle for switching to the paid model therefore remains high, even if a full funnel is available thanks to the many free users.
- B2B applications are also generally not intended for use by individual users, but only develop their benefits when used by companies. This virtually rules out unofficial use as part of shadow IT. This brings data protection and cyber security issues into play. In other words, the use of the software requires management approval. And who would initiate this process for a free version?
- As the market is evolving rapidly, even a free version cannot simply be frozen at the current status, but must also be further developed and also incurs costs in operation: Dropbox’s free 2 GB is used by around 700 million people (do the math!), of which only just under 2% are paying customers.
Yes, freemium can be an effective marketing tool for filling the funnel and gaining qualified access to potential buyers. However, in Europe, with our rather small domestic markets and software companies that are mostly active in the B2B sector, we can hardly score points with it. The network effects are too small and advertising financing is also rarely possible. As a rule, it is therefore much smarter to offer a free trial subscription for a certain period of time.
So it remains the case that the company where I witnessed this internal discussion will have to try, for better or worse, to get a grip on marketing and sales without taking the quick but potentially fatal way out via freemium.