There’s a proliferation of noise in the media proclaiming the death of the freemium model. While it’s failed many organizations, this model has also given birth to some of the most successful SaaS companies today. The businesses that win at freemium are harnessing their rich data sets to pioneer a new piece of the sales funnel that reduces waste, boosts efficiency and accelerates the sales cycle- the Product Qualified Lead (PQL).
By tracking the product engagement data of freemium customers, teams can identify a user’s propensity to purchase and find powerful opportunities to upsell. In fact, companies who develop an integrated PQL engine see the conversion rate of these leads surpass 50 percent!
We sat down with Segment’s VP of Growth, Guillaume Cabane, the CEO of CloudApp, Tyler Koblasa and Ross Reynolds, the Head of Product and Operations at Marketly, to learn how today’s hottest SaaS companies have taken a holistic, integrated approach with data to drive a sales accelerating PQL engine within their organizations. Here’s what we learned:
When does freemium work?
- When there is a low barrier to entry
- When you’re able to prove value quickly
- If there is a large enough market size
The freemium model works well when your product has a low barrier to entry and you’re able to prove value quickly.
“If you can offer initial value and attract a large number of users, you then get the opportunity to prove that value later,” said Guillaume Cabane, Segment’s VP of Growth.
Once the business has that attraction, you can begin to increase your asking price. But, a freemium product must be quick to prove immediate value and gain traction.
“It depends on the type of product,” said Tyler Koblasa, CEO of CloudApp. “Think about it. Mailchimp has over 12 million small businesses and they were pressured to go up market for years, but because they didn’t, they grew silently into this beast.”
When does freemium not work?
- If implementation costs are high
- If your product onboarding process is high touch
- If you have a very niche product or market
- If there is a high barrier to entry
Freemium is extremely difficult if there’s a strong competitor already in the market, implementation costs are high or consulting needs to be done before a user can see value.
“If you don’t have a solid, addressable market to build a large customer base on, it’s difficult to make freemium successful,” said Guillaume. This means that businesses trying to build out a freemium model in a super niche market will struggle.
As the business grows and you begin to move up market toward enterprise customers, you’re going to need people behind the phones to onboard customers.
“At the beginning, you want to understand your customers and you can’t afford to have humans behind the phones lines to call on them,” said Guillaume.
But, once you’ve proven the value and have determined product market fit, you can begin to move up the market higher and higher.
Moving Upmarket versus Downmarket
- A land and expand strategy allows you to move from SMB to Enterprise
- A new product added to your portfolio that is self-service will push you from Enterprise to SMB
- A business can grow organically in either direction based on product market fit and customer needs
Ross Reynolds, Head of Product and Operations at Marketly, explained moving downmarket during his time at RiskIQ.
“In our case this evolved organically,” he said. “The company was bootstrapped and had evolved portfolio products with proven product market fit. As we grew, we acquired a company that was a great fit within our portfolio. When that product took off, it was a completely self-service product. Very different from the enterprise solution we were selling before. We realized that this product was gaining traction faster but at a lower price point, so we embraced it,” he said.
“The goal is to get your product in as many hands as possible,” said Tyler. Often referred to as “land and expand,” Cloudapp, originated as a B2C product but evolved when customers began asking for a business offering.
“We had dozens of users paying individually for our product within larger companies,” he said. “Then, companies began coming up to us, such as Foursquare, and we realized that we could offer more convenience to our users if we created business plans. If you can get a product into the user’s hands, you lower the barrier and there is less friction. For us, it was seeing that there were hundreds of CloudApp users within these companies. Then, bringing it all together within a business edition and meeting the needs on the security side for those larger organizations.”
Who is responsible for identifying the PQL data and what are the metrics?
- Typically it’s the Product Manager or Director, working with the CFO on metrics
- Metrics should include customer acquisition cost (CAC) and lifetime value of the customer (LTV) along with product engagement data
- Specific metrics will vary by product, but you should identify what good engagement looks for each individual persona to accurately measure
“The product manager is essentially the CEO of the product,” said Ross. “It’s your role to ensure that the product drives revenue.”
It’s also important to realize that every persona will have different engagement metrics to measure.
For example, “the CEO of SaaS company will have very different usage as the brand manager,” said Guillaume. “Create profiles of what each specific user experience should look like, per persona, and then dive deeper by individual. If you’re monitoring the “health” per individual, you can begin to measure what “good” looks like.”
“We know that we need to get people to their ‘aha’ moment as soon as possible,” said Tyler. “For CloudApp, we look for people who have gone through specific goals or events in a sequence. We monitor those signals and that behavior pattern to identify engaged users.”
The panelists described their unique experiences, challenges and obstacles throughout the session. Check out the below video to watch the full panel recording and learn how you can build a product qualified lead engine: