Freemium SaaS: The Future of Software as a Service

The Impact of COVID-19 on SaaS Demand

When global COVID-19 lockdowns began in the spring, businesses of all sizes experienced a sudden and significant decrease in demand. Organizations were hesitant to commit to substantial, long-term investments given the uncertainty surrounding the future.

SaaS Companies Respond with Free Access

SaaS companies that were forward-thinking reacted swiftly by providing their products either free of charge or at considerably reduced prices to stimulate demand. This strategy aimed to maintain engagement during a period of economic instability.

Examples of Free SaaS Offerings

While Zoom received considerable attention, numerous other SaaS tools were made available for free during the pandemic. Pluralsight, for example, launched a #FreeApril campaign, granting full platform access throughout April.

Cloudflare extended free access to its Teams product from March to September 1, 2020. GitHub also offered free team access in April and reduced the pricing of its paid Team plan.

Targeting the End User

These free products were specifically designed for end users – including developers, marketers, sales representatives, and other individuals within organizations. These users, often working remotely, required software solutions to maintain productivity.

The Rise of Self-Service Research

The majority of end users now conduct their initial product research online, prior to engaging with a sales representative. Free products provide an ideal avenue for reaching these users directly.

Many users prefer immediate access to a product without the need for complex processes, credit card details, or budgetary approvals.

Time as a Commitment

Once an end user establishes an account and tailors the product to their specific needs, they have effectively made a purchasing decision through their time investment. This occurs without necessarily experiencing a traditional sales cycle.

A Survival Strategy in 2020

Offering a free, end user-focused product became a crucial SaaS survival tactic throughout 2020.

Freemium as a Long-Term Strategy

However, these free offerings did not disappear as restrictions eased. Instead, SaaS companies reinforced their commitment to the freemium model, recognizing its positive impact on their business performance.

This shift challenged and debunked long-held misconceptions that previously prevented 82% of SaaS companies from implementing their own free plans.

Addressing the Concern: Will a Free Offering Undermine Paid Subscriptions?

GoDaddy, a prominent name in the digital landscape, initially gained recognition in the 1990s for its domain registration services and memorable Super Bowl commercials. The company has since expanded its portfolio to include a range of business software solutions.

Currently, GoDaddy’s business applications generate approximately $700 million in Annual Recurring Revenue (ARR) and serve a substantial base of paying users. Few companies face a greater risk of revenue loss due to potential customer downgrades than GoDaddy when introducing a free product.

GoDaddy's Freemium Experiment

Despite this potential risk, GoDaddy proceeded with a freemium model during the pandemic-induced lockdowns. This initiative began as a limited test in the spring of 2020, focusing on their websites and marketing tools.

The scope of this experiment has since been broadened to encompass 50% of website traffic within the United States. GoDaddy intends to extend this to 100% of U.S. traffic and eventually make the offering available globally in 2021.

Positive Results and Future Outlook

During the Q4 2020 earnings conference call, GoDaddy’s CEO, Aman Bhutani, highlighted the success of the freemium strategy. He reported “millions of sign-ups” and strong conversion rates.

Bhutani stated that the results were “an exciting outcome” and anticipated that freemium would positively impact the company’s performance for years to come. Essentially, the gains in customer acquisition through the freemium offering surpassed any potential losses from users opting for the free version instead of paid plans.

• The freemium model proved to be a successful strategy for GoDaddy.
• Increased customer acquisition outweighed potential downgrade risks.
• GoDaddy plans to expand the freemium offering to a global scale.

Debunking the Myth: Free Tiers Can Benefit Enterprise Solutions

The perception that free product offerings are only suitable for simple, small-to-medium business (SMB) tools – like Dropbox or Calendly – is inaccurate. A freemium model can prove highly effective even for sophisticated, enterprise-level products.

JFrog, a company specializing in advanced DevOps solutions and headquartered in Israel, has traditionally concentrated its sales efforts on large, technically advanced organizations. Their 2020 S-1 filing indicated a substantial client base, including customers within 75% of the Fortune 100.

Furthermore, 48% of their revenue originated from clients with annual expenditures exceeding $100,000.

Despite this focus on large enterprises, JFrog introduced a free community version in October 2020. This offering included unlimited user access and a comprehensive suite of features, encompassing artifact management, vulnerability analysis, and CI/CD pipeline orchestration.

Usage limits were implemented on storage, data transfer, and CI/CD minutes, triggering an upgrade requirement for users exceeding these thresholds.

The launch proved remarkably successful. According to JFrog CEO Shlomi Ben Haim, the company experienced a significant influx of “thousands of new logos” – new users – after lowering the barrier to entry for product evaluation, as reported during the Q4 2020 earnings call.

Crucially, this increased adoption wasn’t limited to casual users unlikely to convert to paying customers.

Haim emphasized that many free users eventually transitioned to larger, company-wide subscriptions after experiencing the value provided by JFrog’s platform.

The Benefits of Reduced Friction

• Increased product exposure to a wider audience.
• Generation of new leads and potential customers.
• Demonstration of product value leading to conversions.

This demonstrates that a well-structured free offering can serve as a powerful acquisition tool, even within the enterprise software market.

The Misconception Regarding Free Users and Paid Conversions

A common concern among businesses is the potential for a "freemium failure," reminiscent of the challenges faced by Evernote. This fear centers around attracting a large number of free users who show no intention of subscribing to paid plans, yet still generate support requests and incur hosting expenses.

However, this belief is increasingly inaccurate. Contemporary freemium SaaS products typically achieve a 7% conversion rate from free to paid users. This is achieved while simultaneously broadening the user base, as the absence of initial costs encourages wider product adoption.

PagerDuty as a Case Study

PagerDuty, a leading provider of real-time operations and incident response solutions, serves as a compelling example. The company launched its initial public offering in April 2019, having established a successful go-to-market strategy that combined self-service free trials with a proactive inside sales team, as detailed in their S-1 filing.

Despite this existing success, PagerDuty implemented a new free plan in September 2020. This offering is intentionally restricted, providing access for only three users, 100 monthly notifications, a single on-call schedule, and a limited number of integrations.

The purpose of this plan, as articulated by PagerDuty CEO Jennifer Tejada during the Q3 2021 earnings call, is to allow potential customers to experience the platform's capabilities. The product is then designed to facilitate expansion through features like 500 integrations, increased team sizes, and the identification of new use cases.

Howard Wilson, PagerDuty’s CFO, has reported “strong conversion rates” with the new freemium model – exceeding industry averages.

Conversion vs. New User Acquisition

It’s important to note that prioritizing paid conversions hasn’t necessarily resulted in a dramatic surge in new customer acquisition for PagerDuty. While new account growth is up 23% year-over-year, this represents only a slight improvement compared to previous periods.

The Central Role of Product-Led Growth in Freemium Success

Simply launching a free product isn't a guaranteed solution; it must be strategically integrated into a company’s broader product-led growth strategy.

A truly effective free offering necessitates a product that directly addresses a real need for the end user, rather than solely catering to executive-level purchasers. Users should be able to easily understand the product’s implementation and quickly realize its value – ideally within the initial 30 minutes of use.

Activation Drives Conversion

Data indicates that users who experience initial success – achieving activation within a free product – demonstrate a conversion rate to paid subscriptions that is five to ten times higher than that of other free users. It may be wise to postpone a free product launch until consistent user activation can be achieved without relying on sales teams.

Activating the first free user is only the beginning. Freemium businesses must facilitate a rapid transition from individual user to team-wide, and ultimately company-wide, adoption. This is accomplished by incorporating collaborative features into the free product, prompting users to invite colleagues at opportune moments.

Scaling Adoption with Targeted Support

Expanding to company-wide adoption often aligns with the introduction of sales and customer success teams. These personnel can then engage specific users at the appropriate time, educating them on the advantages of a larger-scale, paid product implementation.

Realizing the full potential of a freemium model may require offering more than initially anticipated. Many free versions are overly restrictive, leading potential customers to dismiss them entirely. This results in a loss of the top-of-funnel acquisition benefits that free products provide, leaving companies with only casual users.

Recent Trends in Generous Free Plans

Increasingly, companies are recognizing this need for more generous free offerings. For example, Okta recently expanded the capabilities of its free developer plan, including improved documentation, new SDKs, and sample applications. Their aim is to attract developers who want a thorough trial before committing to a purchase. Similarly, Chargebee doubled the revenue limit of its free launch plan to $100,000, and Mixpanel increased the data allowance of its free plan by a factor of 100.

The future of SaaS is undeniably linked to free offerings. The value of launching a free plan is no longer a point of contention. Instead, companies should be evaluating whether they are providing sufficient value within their free tiers.