Freemium SaaS: The 4 Rules For Creating A GREAT Business Model & Product | Dan Martell

– Only use a freemium business model when the following three of four things are true (upbeat music) I don't know if you've ever thought about starting a SaaS company that uses freemium or you have a freemium product today

But I've been building companies now for over 17 years I've studied freemium in a big way I was, I'm a formal advisor to Hootsuite, one of the large freemium companies I'm friends with Drew from Dropbox So I've seen in the early days how they've built that company

I even integrated with Mailchimp in my company Flowtown So I've worked with Ben personally, the founder and CEO there and watched them go through that transition from paid only to freemium So I've studied this industry like crazy And you know recently I was on the phone with an entrepreneur and she was walking me through her business model and her pricing plan And when I looked at the market she was in, they were B2B SaaS and the pricing of the model

I mean it was $7 a, it was free to use And then $7 a month per company, unlimited users, unlimited seats I was like, "I don't want to be critical "but right off the bat, you'll never be able to scale this" And it took her by surprise She's like what do you mean? And I was like freemium and your model is not going to work

She's like why? And I said well, you're violating too many of these rules And then I walked her through these four different rules And she realized that she had made that mistake And it had been three years that she sat on this and not really seen any growth whatsoever And I think that conversation really sent her down the path

And that's what I want to share with you today So the first one is, you got to make sure that the potential number of users is in the tens of millions of users, tens of millions, right So, if you're building something for like a very super niche SaaS market like doctors that do a very specific type of operation That's not tens of millions of users And there's a reason why you need tens of millions, because of the way the economics works

So, number one is make sure the total number is in the tens of millions Second one is that free distribution is a competitive advantage You know I remember seeing Mailchimp when they did this That was their key thing, it's like look, there's all these other email providers out there But if we do a free product, especially with 2,000 emails on your list before you have to pay

That is incredible But they, you know Ben wrote this amazing blog post, I'll link it up below, that walked through his thinking and the math You know ten plus years of data doing paid only to finally say, you know what, if we can increase our marketing, it was a marketing decision to go freemium, if we can increase the amount of people in our trials, we know that they're going to convert at this level and overall it's going to net us ahead from not doing it So, it was a very deliberate business model decision And really it's free is a competitive advantage

If that's true then that is a potential for a freemium business model The third one is that your product has a very simple and straight- forward value proposition When people sign up, if it's complicated, if they need a customer success team, if they need somebody to talk to from a sales or account managers, you do not have a simple process When I'm talking about simple, value, straight-forward is like a Dropbox Think about it, I have a folder on my computer

I drop folder or files there and I can share it That is straight-forward and simple You know and that when you look at all the top, you know, Evernote, very straight-forward I put stuff in here, I can search and I can retrieve it on all of my different devices and they're synchronized Very simple and straight-forward

If that's not true, then I would challenge you that maybe freemium is not the right decision for your product And then the fourth one is the marginal cost to serve additional users is negligible It doesn't matter, like it's like fractions of a penny because the free is kind of taking the marketing spend Instead of spending it on marketing to get more users, you get free users in there using the product, getting, you know, to that moment of gratification and a-ha and they love it and the core value And then they tell other people about it

It's word-of-mouth marketing on steroids And it's a decision if it costs you $5 to support a new user and most of them are free, it will never scale And this, I see this happen so many times So, those are the four A really quick recap is the number of potential users in the tens of millions, okay, tens of millions

Two, that free distribution is a competitive advantage based on the competitive set in your market Three is that the product has a very simple, straight-forward value proposition And four that the marginal cost of serving an additional user is negligible, it's like pennies, it's fractions of a penny I mean just think about this, if all you, if you wanted to get one to four percent of your users to paid to reach a hundred million dollars in revenue Okay, so if you want to get one to four percent of your users are paid, hundred million in revenue, and charging $100 a year, you would need to get, with a four percent conversion to paid

You would need twenty-five million users using your product Just think about that Do you have the financial means to scale, to defer, to build-up, to understand, to build the capacity to scale that product in a way that you can get to twenty-five million users because only four percent are going to be paying 100 bucks a year I mean, you know there's companies like Slack and so many other incredible freemium companies that you can look to But they're the exception not the norm

And I think that freemium has caused more harm than good for a lot of SaaS companies and I would argue if at least not three of the four of these kind of filters or rules fit that you might want to consider going to a kind of a free trial to paid or paid only business model As per usual, I want to invite you to subscribe to my newsletter, just click right up there to get exclusive content and invites to private events And I want to challenge you to live a bigger life and a bigger business and I'll see you next Monday