Sachin Rekhi

Lately I've been spending time thinking about freemium business models and how best to structure them to maximize conversions. I believe we are still early in our understanding of these models and to date most of the available analysis has been limited to anecdotal evidence, one-off case studies, tips & tricks, and a few early overviews of what's been tried.

Despite this I think we are starting to see some interesting emerging design patterns and best practices coming together. I wanted to discuss one such design pattern, including examples of it's usage and potential limitations.

One of the segmentations that is often talked about among Chris Anderson, Eric Ries, etc. is dividing freemium plans into 3 main tiering types: time-limited, capacity-limited, and feature-limited. Canonical examples of each include 30-day trials for 37 Signals' Basecamp, storage space limitations for Dropbox, and mobile access for Remember the Milk, respectively.

One variant of capacity-limited freemium tiering that is particularly effective for products targeted at the SMB market is to scale pricing with customer success. What I mean by this is providing various premium tiers of your product that will become appropriate for your customer as they are more successful in their own business. Typically this means tying the tiers with capacity-limits that either directly reflect or proxy the customer's growth in their own user base or revenue.

What's nice about this model is that it appropriately segments your potential customers into pricing buckets by ability and often willingness to pay. Businesses that are just getting started, pre-revenue, or early in finding product\market fit can often leverage your product as part of the free tier or low priced tiers. This provides few barriers to adoption and get's them quickly onto your product. And as their business scales, they'll think twice about switching since they've already been successfully using your solution. On the other hand, larger businesses will pay against a higher tier appropriate for their level of success.

Let's take a look at 5 different products targeted at SMBs that leverage this freemium design pattern.



Mixpanel offers a sophisticated set of analytics tools that picks up where Google Analytics leaves off. It often replaces hard-to-maintain home-brew solutions that companies put together themselves. Mixpanel works by allowing you to instrument your application to track custom data points and then does all the data crunching and segmentation to present the data in an easy-to-consume fashion.

The way their pricing structure works is by pegging the monthly subscription rate to packages of tracked data points. The free package provides up to 10,000 monthly data points. The next package allows 100,000 data points for $25/mo. And so on. While the number of data points collected does depend on how many individual event types you wish to track, the biggest determinant is total number of users using your service and you'll likely only scale to a larger plan when you reach new customer segments. Thus tiering on tracked data points provides a close proxy for their customer's own success in user growth.



Recurly is a service that makes it easy for SaaS businesses to manage their customer's monthly recurring subscriptions. Since billing is not where a service wants to innovate, Recurly provides a great solution to let them take the load off of managing this part of their business.

Recurly's fee is based on number of subscriber's to the customer's business. If your business has less than 50 customers, then Recurly is free. Above that amount, the Recurly monthly subscription ranges from $28-$2,650, depending on various bucket sizes for number of customers. So their pricing structure directly reflects the user growth of their customers.



MailChimp is an e-mail marketing solution that provides e-mail list management, an html editor for designing your e-mails, and detailed email analytics.

MailChimp offers two pricing plans, one based on total mailing list subscribers and the other based on volume of e-mails sent. While one is a direct reflection of customer user growth, the other is a close proxy, thus causing the cost of using MailChimp to increase as your customer's user base continues to grow. Their free plan allows managing and sending monthly newsletters to a list of up to 500 subscribers.



UserVoice is a customer feedback solution that allows you to easily collect, aggregate, and make your user's feedback actionable.

UserVoice allows you to setup a free forum for your customers to supply their feedback. One of the biggest values that UserVoice provides is allowing users to vote on the various feature requests. And it's the number of potential voters that UserVoice divides it's various freemium plans along. Your forum gets 100 voters for free. The premium tiers then allow various numbers of additional voters. The number of voters you will need at any given time is designed to be a function of the customer's own user growth, with UserVoice even detailing that they expect on average 3-7% of your user base to become voters.



FreshBooks provides an invoicing solution for consultants, contractors, freelancers, etc. to make it simple for them to generate, send, receive payment for, and track the entire invoicing process.

FreshBooks tiers it's offering along the obvious scheme of number of clients. You get to invoice up to 3 clients for free and additional premium tiers allow various numbers of additional clients. As your business clients grow, so does the fee you pay to FreshBooks for supporting you.

Limitations
There are a variety of reasons why such a freemium scheme may not be appropriate for your product as well as additional considerations to carefully evaluate before implementing.

Customers may not be very amenable to such a pricing scheme if they did not perceive additional costs for you to offer them support for a larger customer base. But it is often the case that your own costs scale in proximity to this tiering.

At the same time your costs may end up scaling along another axis tangential to growth in customer's own users and revenue numbers and this may make it difficult to leverage this tiering scheme. But keep in mind that you should be looking at costs in aggregate over your entire customer base and not just for individual tiers.

This freemium design pattern does not remove the essential critical question in every freemium tiering scheme, which is where to divide the free and paid plans. While this design does give guidance on along what dimension to segment, you still are free to decide what capacity each plan allows. Is MailChimp giving away too much with allowing 500 free subscribers? Is FreshBooks being too restrictive by only allowing 3 free clients? These are tough questions that remain. And despite our industry's best efforts to optimize through analytics, I've seen very little effective A/B testing done along pricing tiers. The difficulty arises from significant user backlash resulting from taking away features from a free plan.

Also along these lines, if your product ends up being applicable to a wide range of organizations and business sizes, there may not be a way to easily design a free plan that allows every organization to try it out. For many user segments they may just see your service as a SaaS offering with no free level. While this may be advantageous to you overall, it does limit many of the benefits of allowing all users to start for free.

I'd love to hear your feedback on other considerations you think are important when evaluating this freemium design pattern. As well as other patterns that you think have worked well.




I also wanted to mention that I've very excited that Charles Hudson this year is putting on The Freemium Summit. As this business model and marketing strategy reaches heightened interest across consumer and business applications, the time is ripe to bring together the early implementors and thought leaders in the space to discuss these exact design patterns and overall benefits and drawbacks of freemium models.

The Freemium Summit has already put together a great set of panels with speakers including leaders from some of the products mentioned above:

• Ben Chestnut, Mailchimp
  
• Lance Walley, Chargify
  
• Isaac Hall, Recurly
  
• Drew Houston, Dropbox
  
• Peter Harrison, TripIt

If you are interested in attending, you can use the following link with the code SACHIN to recieve a 10% discount on general admission:

http://freemiumsummit-sachin.eventbrite.com


Freemium Resources
I've also provided a list of articles that you may find helpful in thinking through your own freemium model design.

• Charles Hudson: Thoughts on Free Powered Business Models and Why Time Beats Features
  
• Eric Ries: Three Freemium Strategies
  
• Andrew Chen: How to Create a Profitable Freemium Startup
  
• 37 Signals: The Secret to Making Money Online
  
• Chris Anderson: Free: The Future of a Radical Price
  
• Fred Wilson: The Freemium Business Model