Your Contact Management Blog

Why We’re Dropping Freemium as a Business Model: Value vs. Cost

Pinterest

 

Screen Shot 2014-03-05 at 10.26.29 AM 

  

This past week our Community / Growth Manager, Brad Patterson, spoke at the European Cloud Expo in London on the topic Try Before You Buy – Successes and Misgivings in the European Cloud Ecosystem.

 

iPhoto

 

Also speaking were Jason Turner, director of Business development at Cedexis, António Ferreira, CEO at Luna CloudLee Myall General Manager at Interoute and finally Ian Masters Sales Director at Vision Solutions who kindly moderated the round table.  We shared our SaaS perspective with the audience and yet we didn’t touch on a core point— why as a part of the 2014 strategy, we have decided to move to a 100% free trial business model, dropping the freemium part of our business model completely.
 
Actually, this is nothing new at Evercontact – our B2C gmail service that analyzes email and updates your google contacts / address book is the only service that offers a freemium service after the 30-day trial.  For our other platforms, there is a 30-day trial and then a pay wall (Google Apps, Outlook, Salesforce, Highrise and chrome plugin).
 

Aside: This’ll be a slightly different post in a more “transparent” direction, as our team has really enjoyed the transparency of startup blogs like GrooveBuffer37signals, iDoneThis, and HelpScout.

 

So why the change after 2 years?

First, let’s stack up the value and cost of an average freemium user in general and specifically at Evercontact:

  1. Advertising revenue - is not a path we’ve seen value in pursuing considering the “behind the scenes” nature of Evercontact.
  2. Viral growth through word of mouth has been essential in Evercontact’s growth, though we’re wondering if there was a hard pay (or refer) wall, would this have an even stronger impact on distribution?
  3. Help scale up technically or improve product/features.  Our early adopters have been pivotal from this point of view and many of them were freemium users, so it’s been of great value, though now we’re getting to a very stable place technically / product-wise and are instead expanding into other platform.
  4. Data ie like Facebook sells its clients data for targeted advertising or other reporting to 3rd parties.  Considering the sensitive nature of our clients’ data/professional network, this has been something we’ve decided to not pursue.
  5. An eventual upgrade which of course has been the prime ROI of our freemium users ie those who decided not to stay on premium after the 1-month trial, but upgraded at a later time.

 

And what is the cost of our freemium users?

  1. Bandwidth - Even if hosting and bandwidth costs continue to decline, the analysis behind Evercontact’s engine is fairly heavy so a user who doesn’t provide value as described above is a definite cost though providing little value in return considering the 5 value points above.
  2. Support - Over half of our support is for users on free trial and freemium which amounts to a fair amount of time for our team, and if there were no freemium users, this could be invested elsewhere while also being reduced as those who sign up knowing there’s no freemium plan are more qualified users than those who sign up knowing that they could potentially stay on a free plan forever.
  3. Potentially lower conversion rate due to a lack of a HARD paywall. As mentioned in the point above, a freemium plan allows for “less qualified” sign-ups as well, in direct contrast to a “credit card required at sign-up”, where conversions to trial are very low, but conversions to paying dramatically increase.

 
As we’ve matured the Evercontact platform we’ve had the opportunity to become more and more data-driven in our decisions, and this is at the core of why we’re dropping the freemium plan.  Our 3 main reasons are:

  1. After nearly 3 years of service, we’ve found that over 80% of our paying clients convert in the first 40 days (most convert in a) the first few days, b) the last few days of their trial, or  c) the first week they encounter the limits of freemium after the 30-day trial).  The other 20% convert almost entirely due to promotions where we’ll offer 20-30% off a license for a limited time.
  2. All of our 30-day trial non-freemium offers (Google apps, Outlook, Salesforce, Highrise) convert at rates three times higher than our gmail service (8% vs above 25-30%). That being said, of course you do need to take into account the environment— as gmail is a free email service, when compared to the others, its clientele is also more free-oriented and less likely to invest in a paying 3rd party service.  (And yet, those that pay, pay.  Those that don’t, don’t, so prolonging a service for them doesn’t necessarily make sense unless you’re deriving value in another way).
  3. Our first clients were early adopters, and largely B2C, and yet now the B2B acquisition is much higher and accordingly the B2B revenue is over 50% of our month-to-month revenue.  We want to focus on this market, and as mentioned by all of the other speakers at the Cloud Expo conference, B2B and enterprise markets are a much tougher fit with freemium models.  Most enterprises would actually rather pay and have guaranteed service and support.

 

What’s next?

  1. Switch over to Free trial only, grandfathering current clients with a generous premium offer as we had originally offered them a continued free service.
  2. Continue to analyze the data and see what impact this change has on 1) average user cost 2) conversion to trial 3) conversion to paying 4) viral growth
  3. Improve the “visible” value of Evercontact.  So many clients tell us that one of their favorite things about our service is that it’s so seamless, and yet this is also our greatest marketing challenge— when the product works well, it’s nearly invisible.We  are looking at ways of expanding the product so that there are more visible ways that you can use it beyond it just being in the background, a dashboard that enables you to interact with your new contacts, connect with them in different ways and while benefitting you, of course also bring greater outside awareness to Evercontact.

 

As always, feel free to share your thoughts below on this new pivot, and if you want to learn more on the pros/cons of adopting a freemium or free trial business model, here are the best 3 articles we’ve found from Techrunch, Sixteen ventures, and Startup-Marketing.
 

Evercontact
Detects signatures in your incoming email and auto updates your address book or your CRM (Salesforce, HighRise, Zoho).
  • http://www.growbots.co Greg from growbots.co

    Thanks for sharing this! The fact that you’ve spent over 50% support time on freemium users should be a red flag for all of the startups considering they business model.

    • http://www.evercontact.com/ Brad Patterson @ Evercontact

      My pleasure, Greg, and great to continue the dialogue.

      Let me qualify that 50% just a bit more— it means that half of our support tickets are people in “free trial or freemium” and half are people that are paying clients. All in all, it does represent about 30-40% of my time as the community manager and maybe 20% for another colleague, and yet, I’d agree with groove’s post http://www.groovehq.com/blog/increasing-support-emails that support AT THE RIGHT TIME can very often increase conversion so we’ve set up trigger emails to reach out to our users at the right moment.

      That being said, eliminating the freemium support will knock off some time for those users that already decided not to convert.

      • http://www.growbots.co Greg from growbots.co

        Very well said. And of course the fact that you’re spending 30-40% of your time on freemium users wouldn’t be alarming, because you can treat the cost of supporting them as new CAC. There’s no problem, unless the CLV generated this way is high enough to make it a profitable acquisition channel. But it rarely works that way…

        • http://www.evercontact.com/ Brad Patterson @ Evercontact

          Cheers, Greg.

          The CLV is high enough to make support a valid acquisition channel, and actually, we’re reconsidering our pricing as well to make it even more worth our while— surprisingly A/B tests have shown that price increases haven’t drop trial conversions significantly so we’ll be testing how high that ceiling is again soon :)

  • Craig Sullivan

    Hi,

    I’ve run or designed a few tests recently around *business hypotheses*. In one case, a Freemium model had lots of great features and not much to compel people to use the paid version. We designed a test which said – “OK – If we removed features bit by bit – where would the sweet spot of premium vs. free be?” We ran a test and found we could offer significantly less features, but with nearly 200% more revenue coming in. The ‘held back’ features actually help us upsell the premium (paid) product so this business will work very well, especially working on conversion and churn simultaneously.

    In your case, you could run a cohort test. A group that you run with a different model and look at churn and conversion rates. It’s possible to run hypotheses without actually *making* the changes you are thinking about doing. In the example above, you simply tell people that ‘Wow – we decided to give you all the feature for free today – on us!” – and you’ve not had to do any backend coding.

    I like business future modelling – as it lets you try before you buy into that future. If you wanna chew over some test ideas, I’m into this area – so happy to talk.

    Craig.
    @OptimiseOrDie

    • http://www.evercontact.com/ Brad Patterson @ Evercontact

      Great thoughts, Craig!

      Love this approach, and we’ve been experimenting with the freemium limitations for the better part of two years. The strongest impact on conversion was lowering the number of free contacts per month. That being said, we found that accelerating the “Aha Moment” had a greater impact on conversion than chipping away at limitations— we think this is limited to the fact that our service is somewhat “behind the scenes” so it’s important to make the value VERY apparent earlier on.

  • Andrew Ackerman

    You may have jumped over the sweet spot here. Giving up potentially 20% of your conversions seems high. I converted on month 2 or 3 – I was simply busy the first time around. Have you considered 1 month free followed by 2-3 months on fremium before the cut off? Or how about simply not providing customer support for free users?

    • http://www.evercontact.com/ Brad Patterson @ Evercontact

      Good point, Andrew. We’ll continue to follow those 20% conversions and see if they convert through promotional offers (which they’ll still receive even if they didn’t convert in the first month).

      Your other two ideas are great too and will share with team to evaluate. We’ll definitely move quickly w/ these experiments and really appreciate the dialogue! Cheers, Brad

  • Cory

    At least a portion for the reason people with GMail are less interested in going from Free to Paid is the ease of searching their contacts. It is just fast and most of them are one offs. If you were using Gmail for business than this might be different.

    I would purchase the paid version with OSX integration into Mac Mail, but without that I don’t have enough value. I am disappointed to lose this service. Thank you for the free years.

    • http://www.evercontact.com/ Brad Patterson @ Evercontact

      Thank you for your perspective, Cory and glad to have provided you value the past few year!

      If we get enough critical mass for OSX/Mac mail integration, we’ll definitely push that dev out!