Is Freemium SaaS a Viable Business Model?
No. I get asked this question often by folks looking to build B2B oriented SaaS businesses leveraging a freemium model, and normally I dither in response. Mostly it is because there is always the possibility that it could happen given the right set of circumstances. Dropbox and Evernote are probably the best examples of SaaS businesses* that reached massive scale and significant revenues yet are still mostly freemium.
However, if I am being honest with folks, I would tell them they have about as good a shot as winning one of those mega payout Powerball lotteries. Why? Because the numbers simply do not add up. When you figure in active user counts, paid conversation rates, pricing tiers, and churn rates, you quickly realize that the number of businesses you would need to sign up is over one million. That is “paid” business users I might add.
Last week I came across this blurb by Jason Lemkin that best explains the daunting numbers of a freemium based SaaS business:
To build a $100,000,000 business on Freemium alone, think about the math. Assume you can get $10/mo per paid user (many times, you can’t). You’d need almost 1,000,000 paid seats to hit that. Assume a 2% conversion rate, for simplicity’s sake. You’d need 50,000,000 active users. Not pretend users. Not users who registered and never came back. Not even users than use you once a year. 50,000,000 active, passionate, engaged users.
That is extremely tough in consumer internet, but it can happen. Facebook is almost at 1,000,000,000. Twitter is past that, Pinterest may be, etc. In SOHO or SMB business apps, one million paying customers – it almost never happens. Intuit, Microsoft, Adobe, PayPal. But not too many with 1,000,000 paid business customers.
Not an easy climb at all, which is why so many SaaS businesses quickly move up the value chain towards enterprise customers. That is what Box did. Salesforce was never “freemium”, but they were focused on the SMB market initially before going on to close nine figure enterprise deals as they hurtle towards $4 billion in revenues by year end. Freemium at best is a stepping stone to build a sizable user base, but not something that a SaaS business can afford to ride for the long term.
* Note: Even still, much of their revenue is coming from consumers rather than businesses and is more akin to a consumer paid apps model than a true B2B SaaS business.
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- gbattle said: I don’t agree with you or Jason on math explanation. You don’t need 50mm “active, passionate, engaged users” to get 1mm paying users. Better to think of it as 1-3% of MAU, which takes into account all user activity, light to heavy.
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- joeconyers said: SMB is a slog.
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