Pricing Strategy for SaaS: A Smarter Alternative to Freemium?

A decisive challenge when you sell SaaS solutions is to generate leads. Your sales team need as many qualified leads as possible. They don’t want to waste their time with visitors who will never buy. Designing the right pricing strategy can have a large impact on that.

Freemium is a popular pricing strategy to attract potential customers. Users can start using your product for free with some limitation. The company then expects that the ‘freemium’ customers will use the product more and more and start buying a premium plan.

Freemium Pricing Strategy: The Evernote Case

Freemium is the pricing strategy that SaaS companies like Evernote and Dropbox have chosen.

In the case of Evernote, its engagement strategy is to maintain a high-quality free product. Phil Libin summarized the freemium pricing strategy in one sentence.

“The easiest way to get 1 million people paying is to get 1 billion people using.”

As a benchmark, Evernote’s conversion rate to premium in 2010 was 5.6% after two years of using the product. Identifying the real conversion rate requires to run a cohort analysis. The more someone uses the product the more likely they are to become premium users.

Evernote's 2010 conversion rate (cohort analysis)
Evernote’s 2010 conversion rate to premium (cohort analysis)

 

You understand now that a freemium pricing strategy is a number game that requires patience and great customer support.

Smarter Than Freemium?

The main problem of offering a freemium plan is that you attract users that will never pay. They use your resources and increase your cost. But they will generate any revenue.

Making pay a small price could be a solution. I recently came across a rival strategy: almost-free plan. Zendesk, a customer service platform, offers a plan for $1/month—after a 30-day free trial.

By the way, if you want to learn more about SaaS and Zendesk, pick Startupland by Zendesk CEO’s Mikkel Svane.

 

Optimization tips for Pricing Page
Zendesk’s Pricing Plans

 

Filtering The Users Who Will Never Switch to Premium Plans

Zendesk’s strategy seems a good idea. By making small companies pay only 1$/month, it filters all the users that will never pay for the service. The Zendesk’s pricing strategy is likely to generate leads that are more qualified. Users who will never pay are de facto eliminated. And users, who are going to grow and who will need a more expensive plan in the future, can already use Zendesk.

Define Your Buyer Personas from the Beginning

Zendesk is useful for any tech company that needs to provide customer support, especially e-commerce websites and SaaS companies. Tech ventures often start from scratch without much capital. Since lean companies focus on validating the product-market fit, they do not generate cash. They will be upset to pay $25/month. But they can still start using Zendesk paying $1/month.

Zendesk’s pricing strategy demonstrate a perfect understanding of its adoption cycle. The product marketing team has identified 5 types of buyer personas. Each plan depends on the buyer personas’ willingness to pay.

That’s a bet on the future. Once these cheap customers start growing, they will need more features. They will switch to a more premium plan and Zendesk increase its Monthly Recurring Revenue.

In this case, a salesperson can even sell a more premium plan with a higher success rate. ‘Starter’ users are hooked. They are already paying. creates a deep relationship with these users who understand that Zendesk was here since the beginning.

A Pricing Strategy Consistent with its Buyer Personas

Zendesk’s pricing strategy seems slick. It is consistent with its buyer personas: small/medium online businesses and enterpries.

Adding the ‘starter plan’ to its pricing strategy shows that Zendesk’s product marketing team is aware of issues that small tech businesses have at the beginning. The team’s jobs are to focus on understanding customer needs, segmenting the market and developing pricing plans. It seems that they are now getting all of them right.

BtoB is not BtoC

I am not advocating that a starter plan at $1/month is always better than a freemium pricing strategy. In this case, since Zendesk only targets businesses and enterprises—what individual would start using a customer support solution?—it seems relevant to ask them to pay a small fee.

I doubt that Dropbox or Evernote would ever switch to such a pricing strategy. The freemium strategy is justified because Dropbox and Evernote target also—and mostly—individuals. They are competing with similar offers to attract as many freemium users as possible. They exepect that at some point these users will need more features and switch to a premium plan.

Learning from Previous Mistakes

In 2010, Zendesk went through a difficult moment. The product marketing team decided to raise the price. That’s something that sounded fair from Zendesk’s perspective, since the price had remained unchanged for a while and Zendesk had improved a lot.

Problem: The product marketing team did not convey the message correctly. Zendesk’s customers complained about the new price because their perceived value did not change. What they were paying for before and after the price changed was the same SaaS product.

Many customers complained publicly, including in the media. You can imagine how stressful was this period for Zendesk. That’s a trauma that remains alive for while in a company’s culture. That’s why it’s particularly interesting to see how—from an external perspective—Zendesk seems to have designed a clever pricing strategy for its SaaS product. Zendesk has learnt a lot since its pricing fiasco in 2010.

Here is what Zendesk CEO’s Mikkel Svane says about the pricing fiasco in Startupland:

“You don’t raise your price for an existing product for an existing customers. That’s the relationship of a subscription service. Things get cheaper over time as you democratize the product. SaaS companies must show ingenuity to prove the value of new features and incentivize their customers to upgrade or buy add-ons to their products in a way that feels natural and organic.”

Pricing Strategy as Part of a Well-rounded Marketing Strategy

The right pricing strategy needs to fit in the overall company’s marketing strategy. It seems to be the case at Zendesk.

Bill Macaitis, the former CMO of Zendesk, outlined the 9 SaaS marketing disciplines that led to the current success of Zendesk. Pricing and segmenting are one of these 9 elements that also include: operations and analytics, website conversion, customer lifecycle, comms, content, paid…

 

Take Away

Think first about who are your target customers. Then define a pricing strategy that can optimize your leads and limit your cost.

 

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