![]() ![]() Marginal cost to support free customers as a percentage of revenue - includes the infrastructure costs, customer support costs, product management and engineering time, marketing time.But here’s the rough framework for determining the value of a free tier to a startup that I’ve been using: Every business will value the free tier differently. ![]() Because the calculus of that decision for a company at a growth stage may be very different than one just starting out. The implication of that question is that the carrying costs of the free tier have become too large to sustain.īut before changing pricing, it’s worth asking the question for any startup with a free tier of the value of the free customer base compared to their cost. How do we update pricing to generate more revenue from these customers? is the question they each proposed to me. In both of these cases, the freeloaders have become a point of focus. Consequently, the businesses grew at a terrific clip.Īt this point, these startups are exploring how to grow faster. For 12-18 months, these startups reoriented their product direction and sales effort to focus on these larger customers. As word spread about these great products, larger customers started to pull the companies up-market, flourishing contracts 100 to 1000x+ larger than converted-from-free customer base. Like those above, both products launched with free tiers. In the past few weeks, I’ve been working with two growth-stage B2B freemium SaaS companies outside the Redpoint portfolio which both have significant perpetual freeloader populations. All of this is possible because in small numbers, the marginal costs to support perpetual freeloaders are insignificant. The positive goodwill engendered by a free product feeds word-of-mouth and the product achieves lift-off. At the product’s launch, free plans generate the majority of new users and eventually customers for the business and in the case of B2B companies, leads for the sales team. The same is true for GMail, Google Docs, TripIt, TypeKit, UberConference, LogMeIn, Evernote, the list goes on.įor all of these companies and products, harboring freeloaders like me is part of their growth strategy. I’ve used HelloFax to sign documents for years, but I haven’t paid them a nickel. Like a houseguest who has overstayed his welcome with hundreds of people, I depend upon the generosity of strangers - in particular, software teams. ![]()
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