Three big questions you need to answer before you decide to offer your SaaS as a freemium solution

picture of a fork in a country dirt road. an image of the choices facing an owner of a startup software business considering a freemium business modelBest startup business practices in 2020 for software as a service (SaaS) usually include a freemium model; this means you offer your SaaS at no charge to anybody. Usually your free SaaS doesn’t include all of the features of your premium offer hence the strategy is named “freemium”. Under this model you don’t try to collect much information in exchange for your giveaway solution–an email address is enough for the vast majority of these offers. Free customers can either submit support requests via email, or you can set up a community board where they can post their technical questions.

Before you take some steps down the freemium path, you should ask yourself why do I need to take this route?. The rationale behind SaaS freemium business strategy is you need to scale up very quickly. Is this driving you in the freemium direction? Perhaps you have queued up some startup investors for your SaaS. These folks are looking for solutions with very broad and deep markets. So to get them interested you take the SaaS you’ve built over several years, with a feature set far removed from a minimal viable product (MVP), and you offer it at no charge. You bet you can make a best effort to penetrate markets with the right characteristics — the broad and deep variety. The best outcome? You hit a bullseye. The worst? You take your years of hard work and either circularly file it in the “solution without a problem” folder, or retool at your own expense & try a pivot to win in a different market (this latter option can be, and most often is very expensive & capable of lethally hobbling your business).

When you go over this decision be sure to include an option not to go there.

Here are three big questions we recommend you answer before you decide to go down the freemium path:

1) Is my market broad and deep?

As Vineet Kumar, Assistant Professor at Yale School of Management wrote back in 2014 for the Harvard Business Review: “…freemium is still poorly understood. It has inherent challenges, as demonstrated by the many start-ups that have tried but failed to make it work…” You can read Professor Kumar’s complete article online. If you successfully dominate your target market, how big is it? Have you set premium pricing skillfully given the amount of time you will need to achieve critical mass (both in terms of free users and premium users). Does your market scale (in other words does it promise depth). Can small, medium, large & very large organizations benefit from it? Or, realistically, will it only prove to be a benefit for a subset?

2) What is my market geography?

Is my market a continent, or is my market a country within someone else’s continent? As I wrote in 2019, a freemium SaaS offer dependent on someone else’s platform (Microsoft 365, Oracle, SAP, Adobe, etc) is limited only to this platform & not likely to scale within it. Features intended for the premium side of freemium may be very difficult to port out of the encircling platform should you decide to go elsewhere at some later time. Never forget you may need a lifeboat to pivot to either someone else’s platform, or to marketing your SaaS as its own continent (software platform).

3) Will users take up my premium offer?

In his 2014 article for the Harvard Business Review, Professor Kumar states: “If you’re generating lots of traffic but few people are paying to upgrade, you may have the opposite problem: Your free offerings are too rich, and it’s time to cut back.” Do you have a plan in place before you start to avoid this problem? What would it take should you have to “cut back”? What happens if you miss the turn? How do you gracefully retract features from what you have been offering for free without turning off your market?

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If you haven’t anticipated these questions you might want to think about them before you subject your SaaS to a freemium model.

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