The Surprising Upside of Expensive Products That Don’t Sell


This post is by Thomas Allard from HBR.org

They’re still valuable — even in a recession.

What B2B Companies Get Wrong About Volume Discounts


This post is by Rafi Mohammed from HBR.org

They’re not only for customers who buy more.

29 Psychological Tricks To Make You Buy More


This post is by Carmen Ang from Visual Capitalist

29 Psychological Tricks Used To Make You Buy More

29 Psychological Tricks To Make You Buy More

Ever suffered from buyer’s remorse? You’re not alone.

According to a recent survey, only 5% of people have never felt guilty about buying something. That means the majority of us, at some point in our lives, have regretted a purchase.

But consumers aren’t necessarily only to blame for impulse buys. After all, we’re constantly bombarded with advertisements and marketing tactics specifically tailored to try and get us to spend more money.

Today’s graphic by TitleMax explains 29 different psychological tactics that marketers try to get consumers to buy more.

Tricks are for Marketers

While this list isn’t exhaustive, it provides some key examples of the ways that marketers are attempting to influence your subconscious mind.

We noticed some high-level trends among the 29 tactics, which we compiled into four overarching sections:

  • Visual Pricing Tricks
    These tricks aim to intentionally minimize the appearance of the price, so it’s more palatable to consumers. For instance, a store will price something at $9.99 instead of $10.00, or label a product as “buy-one-get-one” rather than 50% off.
  • Intentional Language Tricks
    It’s not what you say, but how you say it. Making products seem costly to manufacture, offering exclusivity, and using words associated with small amounts fall under this category. These tricks use semantics to position a product in an appealing way.
  • Brick-and-Mortar Tricks
    A store’s layout is less arbitrary than you may realize. Having a bright and colorful entrance, playing calm and slow music, and putting the essential items at the back of the store are a few tactics that fall into this section. These tricks use displays and product placement to influence consumer behavior.
  • Urgency Tricks
    A false sense of urgency and phase-out discounts are included in this category. If a consumer believes they might miss out on a deal, they’re more likely to buy.

The Theories in Practice

While most retailers are guilty of using at least a few of these tactics, several big companies are notorious for their use of psychological tricks to boost sales.

For instance, Ikea is well known for its confusing, maze-like layout. This is no accident, as an Ikea store’s architecture is designed specifically to maximize product exposure—it’s mastered what’s called the Gruen effect, a term named after architect Victor Gruen, whose elaborate displays were proven to convert browsers into buyers.

Another example is Walmart’s rollback pricing, which uses visual contrast to make the sale price more appealing. It’s clearly served the company well—in 2019, Walmart made $524 billion in revenue, making it the world’s largest retailer.

Costco uses a few tactics on the list, but one it’s notorious for is putting fresh produce in the back of the store. That means customers need to pass through the electronics, clothing, and household goods sections before they can get to the necessities.

While the above tactics are in a gray area, other tricks are flat out dishonest. Makeup brand Sunday Riley was caught writing fake Sephora reviews to boost sales. Employees were encouraged to write outstanding reviews for the company, and the CEO even provided instructions on how to avoid getting caught.

The Influencer Era

As consumers become aware of certain marketing tactics, retailers are forced to switch up their game in order to remain effective.

A relatively recent phenomenon is influencer marketing, which is when brands partner with vloggers or influencers to endorse a product. And these partnerships tend to work—a recent survey revealed that 40% of people have purchased something based on an influencer’s recommendation.

But how long will influencer marketing—or any of these tactics—stay effective? Some of the more subtle pricing tactics might stay relevant for longer, but it’s unlikely that all of these tricks will stand the test of time.

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The post 29 Psychological Tricks To Make You Buy More appeared first on Visual Capitalist.

Every Business Can Be a Subscription Business


This post is by HBR.org from HBR.org

A conversation with consultant Robbie Kellman Baxter on how your company can adopt a subscription business model.

a16z Podcast: How Transparent Pricing Drives Healthcare Change


This post is by htidnam from Andreessen Horowitz

Dr. Marty Makary—surgical oncologist at Johns Hopkins University School of Medicine, and health policy and innovation expert—has long been a passionate advocate for transparent pricing in the healthcare system. We don’t talk enough (or really at all) about price in …

The post a16z Podcast: How Transparent Pricing Drives Healthcare Change appeared first on Andreessen Horowitz.

Pricing Strategies for Uncertain Times


This post is by HBR.org from HBR.org

A conversation with pricing expert Rafi Mohammed on when and how to change prices in response to Covid-19.

9 Tricks to Experiment with your Pricing Strategy


This post is by Julian Lehr from Point Nine Land - Medium

As part of my job at Stripe, I get to work with many early-stage startups and help them figure out their monetization and pricing strategies. While most founders have a clear product vision and have thought through things like their go-to-market strategy or hiring plans, surprisingly few have an idea about what their pricing should look like.

Interestingly, this is not just the case for early-stage startups but also more mature companies. Back when I ran pricing workshops at Google Play, many startups didn’t have an active pricing strategy — despite multi-million dollar run rates in some cases.

Pricing is not just perceived as a boring, but also as a complex subject matter that requires someone with a math PhD. Both of these assumptions aren’t true.

When I discussed the topic with Robin and Louis from Point Nine, we realized that we were seeing a lot of similar challenges. In this post we’ll show you 9 simple pricing and packaging hacks that we have seen work well – especially for early stage founders. We hope they’ll inspire you to experiment with your pricing strategy too!

Let’s get into it!

➀ ‒ You Can Probably Charge More

Christoph Janz, patio11 and others have been beating this drum for years: You can probably charge more for the product or service that you are selling. Startups often assume that their demand curve looks something like this:

Theoretically, this would mean that even a small price increase automatically leads to a pretty massive decrease in potential customers — but that is usually not the case (demand curves are generally not just simple straight lines as the examples in your economics 101 textbook might suggest). Especially in a B2B context, the willingness to pay is often significantly higher than people expect.

The other thing to keep in mind is that pricing is not just a finance exercise – it should also be part of the marketing and product strategy. High-quality products usually come with a high price tag. Conversely, price can also be an indicator of product quality. A high price point can help you build the image of a premium product.

Even if it sounds counter intuitive, a higher price tag might therefore actually lead to an increase in sales.

➁ ‒ Use Early Adopter Discounts

“But shouldn’t I focus on maximizing the amount of users first?”
This is usually the pushback I get from entrepreneurs when suggesting to charge more — and it is a good argument.

Especially when you are just getting started, it’s absolutely critical to get users to test your product and give you feedback. A high price tag will most likely be a barrier to getting those users on board.

Instead of lowering your price or giving the product away for free, however, consider using early adopter discounts. This way you still have the original price as an anchor and you clearly communicate the real value of your product offering.

This strategy does not just apply to companies who are just getting started. When experimenting with your pricing, promotions (ideally limited to a certain time period) are often better than simply A/B testing different price points.

➂ ‒ Offer Different Products for Different Audiences

Not every user has the same preferences. And not every user has the same willingness to pay. One way to increase the number of addressable users is to create different product packages for different user segments. SaaS products, for example, are usually segmented by user type (personal/hobby, SMBs, scale ups, enterprise).

While the core product is the same for everyone, premium plans come with additional features (that are more relevant for larger businesses) and thus a higher price tag (enterprise customers usually have higher willingness to pay than startups).

You’ll see this less in consumer software, but there are examples like Netflix:

The core idea behind these different packages is to find features that are proxies for willingness to pay. Screen quality is a perfect example: Users who are willing to spend $$$ on an Ultra HD TV, are probably also willing to spend more $$$ on a video streaming service.

Similarly, company size is a good proxy for willingness to pay when you are selling to other businesses. This is why many SaaS plans use the number of users as their pricing metric.

➃ ‒ Pick a price metric that scales with value

Charging on a per-user basis not only optimizes for willingness to pay, it’s also a price metric that correlates and scales nicely with the value you provide. Slack becomes more valuable the more people join an organization, so it makes sense to base the price on the number of users. As the organization grows (which, again, is a good indicator for company success and thus willingness to pay), so does Slack’s business.

It’s worth mentioning here that Slack only charges for users who are *actively* using the product: The pricing is perfectly aligned with the value it provides.

The thing to keep in mind is that your pricing needs to be predictable and simple. Slack could also base its pricing on the number of messages sent – another good proxy for the value it provides – but that would make it really difficult for new customers to predict how much the service will cost them.

Stripe, for example, doesn’t charge any setup fees or monthly subscriptions. The pricing is based on the value of each successful transaction it facilitates, which means it only wins if its customers win.

➄ ‒ Price Discrimination

Earlier, we discussed building different product packages for different customer segments, which is tends to be best practice in the B2B SaaS space. In consumer tech, we often see a slightly different version of this strategy where companies charge different prices for different audiences – even though the product is exactly the same. This is called price discrimination.

Apps like Loom and Notion have a free tier for students, for example. The main driver is, again, willingness to pay. Students tend to be less affluent, so it makes sense to offer them the product at a lower price point to lock them in — and then increase the price once they have a steady income.

What is less well-known is the variety of other proxies many consumer apps use to price discriminate. Dating apps not only charge different prices for male and female users, some also show different prices based on the type of phone you use. Similar to the Netflix example we looked at earlier, the price elasticity of an iPhone 11 Pro user will probably look more favorably than that of someone who uses an older iPhone 7.

I have also seen companies who use user location as a proxy for willingness to pay and charge higher prices for people based in cities with higher GDP per capita.

It’s important to note that many of these practices aren’t legal and can easily backfire – especially when you simply display different prices to different users. A workaround I’ve seen are programmatic promotions: While the price is technically the same for everyone, users with lower expected willingness-to-pay are more likely to see a discounted offer.

➅ ‒ Signaling as a Service

As I have written extensively on before, most of our everyday actions can be traced back to some form of signaling and status seeking — especially when they involve a purchase decision. Whenever we spend money on an object or service it’s primarily because we want to signal something about our social standing.

Manufacturers of physical products already leverage signaling quite heavily. Just think about all the luxury fashion products out there. But what is the software equivalent of a Louis Vuitton handbag?

Software is at a disadvantage compared to physical products due to its intangibility. But that doesn’t mean that signaling is impossible.

  • Strava clearly signals which of their users have upgraded to a premium subscriptions with a little badge and premium-only leaderboards.
  • Superhuman is essentially a luxury email provider that charges $30 a month so you can show off with a “Sent via Superhuman” in your signature (Pro tip: You add the same text to your Gmail signature free of charge). Similarly, Hey charges $999 for scarce email addresses.

When you design your pricing packages, have a think about how you can help your customers signal their purchases to others. Not only does this help with word-of-mouth, it also increases the perceived value of your product.

➆ ‒ The Illusion of Choice

People like to have choice … but they also like to be guided towards a specific choice. Many pricing pages will showcase different packages with different price tags that aren’t based on features (we covered those earlier) but time. The product offering remains the same. The only thing that changes is the duration of the subscription the user commits to.

The merchant obviously has a preferred package they’d like to sell: The one that promises the highest LTV (this is often an annual plan).

While the pricing page suggests that the user has a lot of different options, it’s really just one option that matters. An illusion of choice.

You may have noticed that pricing pages often feature three different options. That’s not (just) to appeal to three different types of customers, but because people prefer the middle option (also called The Center Stage Effect). Unsurprisingly, the middle option is therefore the subscription plan with the highest LTV.

Making that plan the default option (less friction) and labeling it as the most popular plan (social validation) helps to further increase its conversion rates.

Make sure to make the different options comparable and highlight how much cheaper the annual plan is (the churn rates of your monthly subscription will inform how much you can discount the annual package).

Companies often include a lifetime offer as their third option. Lifetime options tend to be significantly more expensive than the other plans. That’s because the goal isn’t actually to sell many of them, but to make the other options appear cheaper. Similarly, decoy prices can help you to make the default plan look more attractive.

➇ ‒ Optimize your Payment Flow

One of the things I’ve always found most surprising is how little effort companies seem to put into their payment flows. While landing pages and apps are often pixel perfect, things get ugly once the user starts their final conversion step.

Most payment flows include way too many steps, ask for unnecessary information and are generally not well designed and visually appealing. And yet, reducing friction in your payment flow doesn’t have to be difficult:

  • Surface the most relevant payment methods
    When it comes to payments, user behavior is quite different from country to country. While US customers primarily use credit cards, local payment methods such as Ideal or P24 are the preferred mode of payment in the Netherlands and Poland, respectively.
  • Optimize for Mobile
    Similar to the previous point, the most frictionless payment path on mobile is often via Apple Pay or Google Pay. Making the form responsive and invoking the numeric keyboard were relevant also helps to speed up the payment flow on mobile devices.
  • Anticipate friction points
    Incorrect payment information is a one of the biggest reasons why users abandon the final funnel step. By automatically showing the right card logo and validating card details in real time you can minimize errors and thus reduce friction.

Of all the tips in this article, reducing friction in your payment flow is probably the easiest to implement and has the highest direct return on investment. Products like Stripe Elements and Stripe Checkout take a lot of the heavy load off of the developer.

➈ ‒ The IKEA Effect

Labor leads to love: Experiments have shown that people place a disproportionally high value on products they built themselves. A self-assembled piece of IKEA furniture has a higher perceived value than a ready-made version of the same product.

Similarly, people place a greater value on things once they own them (endowment effect). The pain of losing something you own seems to be more powerful than the pleasure of gaining it.

Why is this relevant for software monetization?

Well, it explains why free trials are so powerful. Not only do they allow you to get users on board who might not be willing to pay before giving the product a spin first (paywall friction is real!), they also increase the value (and thus willingness to pay) of your product.

This is especially true for products that require some setup efforts or user input. A knowledge management system like Notion is the perfect example for this: It’s like a set of legos that you have to put together. The product becomes more valuable the more time you spent with it.

If your marginal costs allow it, always give users the option to test your product for free. The decision you have to make (and test) is whether it’s easier to convert users from a freemium plan (how do you get users to upgrade?) or a free trial (how long should the trial be?). In case of the latter you also want to test when to ask for payment details.

It’s worth mentioning that there’s no one-size-fits-all approach when it comes to pricing. Some of these tricks will work for you, some won’t. But the upside of the ones that will make experimenting with your pricing worth the effort.

Do you have thoughts or feedback on this article?
Give me a shout on Twitter.

All opinions expressed are solely my own and do not express the views or opinions of my employer.


9 Tricks to Experiment with your Pricing Strategy was originally published in Point Nine Land on Medium, where people are continuing the conversation by highlighting and responding to this story.

Vroom’s new IPO pricing is great news for unicorns


This post is by Alex Wilhelm from Fundings & Exits – TechCrunch

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Last week we noted that the IPO window was open, a seemingly incongruous reality when compared to stark unemployment figures in the country and what they would seem to bode for business health. But as the markets rise to near-record highs, it has become clear that investors are open to buying new, growth-oriented shares.

Our concluding point last week was simple: the open IPO window and its implied investor sentiment was good news for unicorns. The richly-valued, private companies tend to lose more money than they would if they wanted to go public in normal times. But with the IPO window open today for more than merely profitable companies, surely it’s open for unicorns as well?

New evidence suggests so. This morning, let’s explore Vroom’s new IPO pricing and why the digital used car marketplace’s ability to charge more for its equity than the company initially expected bodes well for itself and other money-losing unicorns that may have feared the IPO window was shut for the rest of 2020.

New pricing, same margins

On Friday, Vroom changed its expected IPO price range from $15 to $17 per share and raised it to $18 to $20 per share. The number of shares the firm intends to sell in its debut — 21,562,500 — remained unchanged. The pricing changed pushed Vroom’s maximum gross raise from $366.6 million to $431.3 million, a huge increase for the unprofitable business.

Upgrade Your Pricing Strategy to Match Consumer Behavior


This post is by David J. Hardisty from HBR.org

Three hacks based on behavioral science.

How Restaurants Can Survive Right Now


This post is by Rafi Mohammed from HBR.org

It’s simple: Lower prices.

The Future of Movie Theaters, and Radical Salary Transparency


This post is by HBR.org from HBR.org

Youngme, Felix, and Mihir discuss the future of movie theaters and radical salary transparency.

The Future of Movie Theaters, and Radical Salary Transparency


This post is by HBR.org from HBR.org

Youngme, Felix, and Mihir discuss the future of movie theaters and radical salary transparency.

5 Fast Ways To Know You’re Underpriced & How To Fix It

I see this far too often: earnest company joins me on an introductory call seeking advice on how to grow revenue and profit quickly. I ask them how they arrived at their current price for their product/service. Some fuzzy answer emerges. This gives me the opportunity to share my favorite “growth hack”—increase prices.  As long as the company is open-minded enough to fully hear me out and willing to develop a game plan with me, prices can be increased shortly with no downside risk. I’ll say that again: no downside risk. Look, I’m really lucky to be a part-time Entrepreneur-In-Residence (EIR) at 500 Startups, one of the most active seed-stage investors on planet earth. From my vantage point as their …

The post 5 Fast Ways To Know You’re Underpriced & How To Fix It appeared first on 500 Startups.

The Market is Huge! Revisiting the Big Market Delusion

For the high-profile IPOs that have reached the market in 2019, with apologies to Charles Dickens for stealing and mangling his words, it has been the best and the worst of years. On the one hand, you have seen companies like Uber and Slack, each less than a decade old, trading at market capitalizations in the tens of billions of dollars, while working on unformed business models and reporting losses. On the other, many of these new listings have not only had disappointing openings, but have seen their market prices drop in the months after. In September 2019, we did see an implosion in the value of WeWork, another company that started the listing process with lots of promise and a pricing to match, but melted down from a combination of self-inflicted wounds and public market scrutiny. While these companies were very different in their business models (or lack of

Continue reading “The Market is Huge! Revisiting the Big Market Delusion”

The Market is Huge! Revisiting the Big Market Delusion


This post is by Aswath Damodaran from Musings on Markets

For the high-profile IPOs that have reached the market in 2019, with apologies to Charles Dickens for stealing and mangling his words, it has been the best and the worst of years. On the one hand, you have seen companies like Uber and Slack, each less than a decade old, trading at market capitalizations in the tens of billions of dollars, while working on unformed business models and reporting losses. On the other, many of these new listings have not only had disappointing openings, but have seen their market prices drop in the months after. In September 2019, we did see an implosion in the value of WeWork, another company that started the listing process with lots of promise and a pricing to match, but melted down from a combination of self-inflicted wounds and public market scrutiny. While these companies were very different in their business models (or lack of them), they shared one thing in common. When asked to justify their high pricing, they all pointed to how big the potential markets for their products/services were, captured in their assessments of market size. Uber estimated its total accessible market (TAM) to be in excess of $ 6 trillion, Slack’s judgment was that it had 5 million plus prospective clients across the world and WeWork’s argument was that the commercial real estate market was massive. In short, they were telling big market stories, just as PC makers were in the 1980s, dot com firms in the 1990s and social media Continue reading “The Market is Huge! Revisiting the Big Market Delusion”

The Three Rules of Freemium

At the SaaStr Europa conference in Paris a couple of weeks ago I sat down with Joaquim Lecha, the CEO of our portfolio company Typeform, to talk about “Freemium at Scale”. Founded and headquartered in Barcelona, the company launched a free version of its service seven years ago. During our conversation Joaquim revealed that this free service helps drive 180,000 monthly signups, and about 3% of those signups convert into paying users who are billed anywhere from €25 to €70 per month, depending on the plan they choose. In other words, Typeform is effectively leveraging a free version of its product to drive paid subscriptions at scale.

I have a bit of a love/hate relationship with the freemium model. Done right, freemium can lead to amazing success. One of the best examples is Dropbox, which Tomasz Tunguz called the “King of Freemium”. What makes the company unique, he argues, Continue reading “The Three Rules of Freemium”

The Three Rules of Freemium


This post is by Christoph Janz from The Angel VC

At the SaaStr Europa conference in Paris a couple of weeks ago I sat down with Joaquim Lecha, the CEO of our portfolio company Typeform, to talk about “Freemium at Scale”. Founded and headquartered in Barcelona, the company launched a free version of its service seven years ago. During our conversation Joaquim revealed that this free service helps drive 180,000 monthly signups, and about 3% of those signups convert into paying users who are billed anywhere from €25 to €70 per month, depending on the plan they choose. In other words, Typeform is effectively leveraging a free version of its product to drive paid subscriptions at scale.

I have a bit of a love/hate relationship with the freemium model. Done right, freemium can lead to amazing success. One of the best examples is Dropbox, which Tomasz Tunguz called the “King of Freemium”. What makes the company unique, he argues, is how it transformed its free users into evangelists. “Unlike other SaaS companies, Dropbox spends more of its revenue on engineering than sales and marketing,” Tomasz wrote. “Typically, businesses spend twice as much on S&M.” In a piece I wrote when Dropbox went public last year, I pointed to the section of the company’s S1 that detailed how Dropbox drove sales of its enterprise solutions. Unlike most other enterprise software, which traditionally used to be chosen by the IT department, Dropbox is typically adopted by individual employees from various departments, who then lobby management into switching. As I noted in my piece, Dropbox was one of the early champions of the ‘consumerization of enterprise software’ movement, which was one of the strongest drivers of SaaS success in the last ten years.

But not every SaaS company can be a Dropbox or a Typeform. Done wrong, freemium can end up cannibalizing your paid user base while also draining your company’s precious engineering and customer support resources. So how do you know if launching a freemium product is the right move for your company?

Let’s discuss some of the pros and cons of the freemium model.

The downsides of freemium

I think many SaaS companies are too optimistic in thinking that they can just offer a free, pared-down version of their software and that this will result in a wave of user signups followed by increased revenue once those users make their way down the purchase funnel. But there are a number of factors you should consider first:

Added costs: Given that SaaS is an extremely high-gross-margin business, one might think that you can easily support free users. However, even if your gross margin from paying customers is 80% to 90% (i.e. your CoGS are only 10% to 20%), those costs can become very significant if you grow a large user base that doesn’t generate any revenue.

From engineering to hosting, the freemium model will require consistent upkeep that drains resources that would be otherwise devoted to your paying customers. And even though your freemium users won’t be paying a dime, they will still expect some level of customer service. In our discussion at SaaStr Europa, Joaquim revealed that, on average, 70% of Typeform’s support tickets come from free users and that the company spends $130,000 per month supporting them.

Now, Joaquim didn’t consider this too high a price to pay for the various benefits of having a free plan (more on that below), but for other companies, the upside/downside assessment may look different. If your business has lower-than-usual gross margins (e.g. because your SaaS solution includes a service component or because your product is particularly costly in terms of infrastructure), you should think extra hard about whether freemium is right for you.

Cannibalization of paying users: For any freemium model, the running assumption is that a certain percentage of non-paying users will eventually convert into paying customers. But what should also be considered is how usage will flow the other way. In other words, some people, who without a free plan would have become paying customers, will be fine with the free plan and won’t need the paid version.

An imbalance of product features: A freemium approach requires a delicate balance. Provide too many features for free and you risk cannibalizing your paid user base. Offer too few features and you eliminate the value proposition for users to sign up in the first place. Typeform walks this tightrope well, limiting its free surveys to 10 questions and 100 responses. Converting to the paid version grants the user unlimited questions and responses, as well as advanced features such as logic jumps and design personalization options. Not every SaaS company can strike that kind of balance.

Less focus on core users: An important factor to keep in mind is that having a freemium model will almost inevitably have a strong impact on your product roadmap. If you have a free plan, chances are that for every paying customer you’ll have 10–20 (or more) non-paying users. It’s hard to ignore the feedback of a group of users that represents 90–95% of your total user base. Listening to those users doesn’t have to be a bad thing, but it may. It all depends on how similar your non-paying users and their use cases are to your paying customers. In this interesting analysis about the “rise, fall, and future of Evernote” — once the poster child of freemium — Patrick Campbell and Hiten Shah conclude that “trying to appeal to everyone and not building the functionality that core customers want to use made Evernote’s product feel stagnant, which is definitely a tradeoff they should never have made.”

Widening the top of the funnel also makes it critical that you are excellent at identifying the best leads effectively and efficiently. If you don’t do that, your valuable signups might fall through the cracks in all the noise.

The benefits of freemium

Most of the above challenges can be overcome if your free plan leads to a much larger top of the funnel and if you can convert enough free users into paid. A freemium model will likely lead to a lower conversion rate, but that’s OK if it’s more-than-offset by the increase in signups. Assuming that you can keep conversions at a sustainable level, then the freemium model can have several benefits:

More active users: One of the biggest challenges that SaaS companies face is driving adoption of their product. And while some users can be enticed by a free trial period, there’s a subset of consumers who are just more likely to keep using the product if it’s free. Others won’t even sign up in the first place if there’s no free plan.

More evangelists and a positive impact on your brand: You shouldn’t measure a user’s worth solely on whether they eventually start paying you. The larger the number of active users, the greater the pool of potential evangelists who will promote your product to new users. In my discussion with Joaquim, he told me that users who were aware of Typeform’s brand prior to signing up were twice as likely to convert into paid users than those who came in via non-organic channels. Qwilr, another Point Nine portfolio company, has made the same observation.

Amplify virality: The strongest rationale for going freemium is having a product with a built-in viral loop (like Typeform or Dropbox). If you’d like to dig deeper into viral growth in SaaS, check out this great post by my colleague, Louis. One caveat I’d add is that you can’t take it for granted that your free users will have the same viral coefficient (or k-factor) as your paid users. In many cases, your average free user will be less active than your average paying user and will therefore lead to fewer referrals. It doesn’t have to be like that, though. In an ideal world your paywall is built in such a way that users have an unlimited ability to share (or do whatever it is that makes your product viral) and monetize something else.

More user feedback: In our talk, Joaquim pointed out another advantage of having a large user base: It allows Typeform to learn from a much larger number of people. That’s a very interesting aspect that I hadn’t thought about before. Keep in mind, though, that as mentioned further up, depending on your product and industry, feedback from free users may be more or less relevant.

Re-engaging trial users: Every SaaS company will have a certain subset of users who will sign up for a free trial of the paid product and will not convert into a paying user once the trial period ends. Introducing a freemium version allows you to re-engage these users with the possibility of converting them at a later date.

Making the decision

So now that we’ve looked at the potential upsides and risks, how can you decide whether launching a freemium product is the right choice for your company?

Ultimately, only an A/B test can answer this question. However, getting reliable results will take a lot of time, especially if you want to measure the impact on virality and if you have a viral cycle time of, say, six months. If you can’t wait that long (or if you’re not equipped to do a complete-funnel A/B test), here are my “Three Rules of Freemium”:

1) Does your paid plan have a gross margin of 80–90%?
If you have a lower gross margin — for example, because your product is not fully self-service, requires extensive customer support or is extremely costly in terms of tech infrastructure — freemium will probably not work for you.

2) Does your free plan attract the right audience?
If your free users are too different from your paying users, your free-to-paying conversion will be low — and you’ll risk developing your product for the wrong audience.

3) Is your product inherently viral?
If your answer is no, that doesn’t make it a complete no-go, but it does mean that it’s much less likely that freemium is right for you.

Wrapping up

In the end, freemium only makes sense if a certain percentage of your free users do one of three things: 1) Eventually convert to paid, 2) refer paying customers, or 3) provide the kind of valuable feedback that will improve your product. A freemium product that fails to achieve any of these effects will merely saddle you with extra costs and distract you from servicing your most important users. Not every company can be a Dropbox, but the good news is that not every SaaS company needs to adopt Dropbox’s freemium model to succeed.

This post was first published on Point Nine’s Medium channel.

The Three Rules of Freemium


This post is by Christoph Janz from The Angel VC

At the SaaStr Europa conference in Paris a couple of weeks ago I sat down with Joaquim Lecha, the CEO of our portfolio company Typeform, to talk about “Freemium at Scale”. Founded and headquartered in Barcelona, the company launched a free version of its service seven years ago. During our conversation Joaquim revealed that this free service helps drive 180,000 monthly signups, and about 3% of those signups convert into paying users who are billed anywhere from €25 to €70 per month, depending on the plan they choose. In other words, Typeform is effectively leveraging a free version of its product to drive paid subscriptions at scale.

I have a bit of a love/hate relationship with the freemium model. Done right, freemium can lead to amazing success. One of the best examples is Dropbox, which Tomasz Tunguz called the “King of Freemium”. What makes the company unique, he argues, is how it transformed its free users into evangelists. “Unlike other SaaS companies, Dropbox spends more of its revenue on engineering than sales and marketing,” Tomasz wrote. “Typically, businesses spend twice as much on S&M.” In a piece I wrote when Dropbox went public last year, I pointed to the section of the company’s S1 that detailed how Dropbox drove sales of its enterprise solutions. Unlike most other enterprise software, which traditionally used to be chosen by the IT department, Dropbox is typically adopted by individual employees from various departments, who then lobby management into switching. As I noted Continue reading “The Three Rules of Freemium”

The Three Rules of Freemium


This post is by Christoph Janz from The Angel VC

At the SaaStr Europa conference in Paris a couple of weeks ago I sat down with Joaquim Lecha, the CEO of our portfolio company Typeform, to talk about “Freemium at Scale”. Founded and headquartered in Barcelona, the company launched a free version of its service seven years ago. During our conversation Joaquim revealed that this free service helps drive 180,000 monthly signups, and about 3% of those signups convert into paying users who are billed anywhere from €25 to €70 per month, depending on the plan they choose. In other words, Typeform is effectively leveraging a free version of its product to drive paid subscriptions at scale.

I have a bit of a love/hate relationship with the freemium model. Done right, freemium can lead to amazing success. One of the best examples is Dropbox, which Tomasz Tunguz called the “King of Freemium”. What makes the company unique, he argues, is how it transformed its free users into evangelists. “Unlike other SaaS companies, Dropbox spends more of its revenue on engineering than sales and marketing,” Tomasz wrote. “Typically, businesses spend twice as much on S&M.” In a piece I wrote when Dropbox went public last year, I pointed to the section of the company’s S1 that detailed how Dropbox drove sales of its enterprise solutions. Unlike most other enterprise software, which traditionally used to be chosen by the IT department, Dropbox is typically adopted by individual employees from various departments, who then lobby management into switching. As I noted in my piece, Dropbox was one of the early champions of the ‘consumerization of enterprise software’ movement, which was one of the strongest drivers of SaaS success in the last ten years.

But not every SaaS company can be a Dropbox or a Typeform. Done wrong, freemium can end up cannibalizing your paid user base while also draining your company’s precious engineering and customer support resources. So how do you know if launching a freemium product is the right move for your company?

Let’s discuss some of the pros and cons of the freemium model.

The downsides of freemium

I think many SaaS companies are too optimistic in thinking that they can just offer a free, pared-down version of their software and that this will result in a wave of user signups followed by increased revenue once those users make their way down the purchase funnel. But there are a number of factors you should consider first:

Added costs: Given that SaaS is an extremely high-gross-margin business, one might think that you can easily support free users. However, even if your gross margin from paying customers is 80% to 90% (i.e. your CoGS are only 10% to 20%), those costs can become very significant if you grow a large user base that doesn’t generate any revenue.

From engineering to hosting, the freemium model will require consistent upkeep that drains resources that would be otherwise devoted to your paying customers. And even though your freemium users won’t be paying a dime, they will still expect some level of customer service. In our discussion at SaaStr Europa, Joaquim revealed that, on average, 70% of Typeform’s support tickets come from free users and that the company spends $130,000 per month supporting them.

Now, Joaquim didn’t consider this too high a price to pay for the various benefits of having a free plan (more on that below), but for other companies, the upside/downside assessment may look different. If your business has lower-than-usual gross margins (e.g. because your SaaS solution includes a service component or because your product is particularly costly in terms of infrastructure), you should think extra hard about whether freemium is right for you.

Cannibalization of paying users: For any freemium model, the running assumption is that a certain percentage of non-paying users will eventually convert into paying customers. But what should also be considered is how usage will flow the other way. In other words, some people, who without a free plan would have become paying customers, will be fine with the free plan and won’t need the paid version.

An imbalance of product features: A freemium approach requires a delicate balance. Provide too many features for free and you risk cannibalizing your paid user base. Offer too few features and you eliminate the value proposition for users to sign up in the first place. Typeform walks this tightrope well, limiting its free surveys to 10 questions and 100 responses. Converting to the paid version grants the user unlimited questions and responses, as well as advanced features such as logic jumps and design personalization options. Not every SaaS company can strike that kind of balance.

Less focus on core users: An important factor to keep in mind is that having a freemium model will almost inevitably have a strong impact on your product roadmap. If you have a free plan, chances are that for every paying customer you’ll have 10–20 (or more) non-paying users. It’s hard to ignore the feedback of a group of users that represents 90–95% of your total user base. Listening to those users doesn’t have to be a bad thing, but it may. It all depends on how similar your non-paying users and their use cases are to your paying customers. In this interesting analysis about the “rise, fall, and future of Evernote” — once the poster child of freemium — Patrick Campbell and Hiten Shah conclude that “trying to appeal to everyone and not building the functionality that core customers want to use made Evernote’s product feel stagnant, which is definitely a tradeoff they should never have made.”

Widening the top of the funnel also makes it critical that you are excellent at identifying the best leads effectively and efficiently. If you don’t do that, your valuable signups might fall through the cracks in all the noise.

The benefits of freemium

Most of the above challenges can be overcome if your free plan leads to a much larger top of the funnel and if you can convert enough free users into paid. A freemium model will likely lead to a lower conversion rate, but that’s OK if it’s more-than-offset by the increase in signups. Assuming that you can keep conversions at a sustainable level, then the freemium model can have several benefits:

More active users: One of the biggest challenges that SaaS companies face is driving adoption of their product. And while some users can be enticed by a free trial period, there’s a subset of consumers who are just more likely to keep using the product if it’s free. Others won’t even sign up in the first place if there’s no free plan.

More evangelists and a positive impact on your brand: You shouldn’t measure a user’s worth solely on whether they eventually start paying you. The larger the number of active users, the greater the pool of potential evangelists who will promote your product to new users. In my discussion with Joaquim, he told me that users who were aware of Typeform’s brand prior to signing up were twice as likely to convert into paid users than those who came in via non-organic channels. Qwilr, another Point Nine portfolio company, has made the same observation.

Amplify virality: The strongest rationale for going freemium is having a product with a built-in viral loop (like Typeform or Dropbox). If you’d like to dig deeper into viral growth in SaaS, check out this great post by my colleague, Louis. One caveat I’d add is that you can’t take it for granted that your free users will have the same viral coefficient (or k-factor) as your paid users. In many cases, your average free user will be less active than your average paying user and will therefore lead to fewer referrals. It doesn’t have to be like that, though. In an ideal world your paywall is built in such a way that users have an unlimited ability to share (or do whatever it is that makes your product viral) and monetize something else.

More user feedback: In our talk, Joaquim pointed out another advantage of having a large user base: It allows Typeform to learn from a much larger number of people. That’s a very interesting aspect that I hadn’t thought about before. Keep in mind, though, that as mentioned further up, depending on your product and industry, feedback from free users may be more or less relevant.

Re-engaging trial users: Every SaaS company will have a certain subset of users who will sign up for a free trial of the paid product and will not convert into a paying user once the trial period ends. Introducing a freemium version allows you to re-engage these users with the possibility of converting them at a later date.

Making the decision

So now that we’ve looked at the potential upsides and risks, how can you decide whether launching a freemium product is the right choice for your company?

Ultimately, only an A/B test can answer this question. However, getting reliable results will take a lot of time, especially if you want to measure the impact on virality and if you have a viral cycle time of, say, six months. If you can’t wait that long (or if you’re not equipped to do a complete-funnel A/B test), here are my “Three Rules of Freemium”:

1) Does your paid plan have a gross margin of 80–90%?
If you have a lower gross margin — for example, because your product is not fully self-service, requires extensive customer support or is extremely costly in terms of tech infrastructure — freemium will probably not work for you.

2) Does your free plan attract the right audience?
If your free users are too different from your paying users, your free-to-paying conversion will be low — and you’ll risk developing your product for the wrong audience.

3) Is your product inherently viral?
If your answer is no, that doesn’t make it a complete no-go, but it does mean that it’s much less likely that freemium is right for you.

Wrapping up

In the end, freemium only makes sense if a certain percentage of your free users do one of three things: 1) Eventually convert to paid, 2) refer paying customers, or 3) provide the kind of valuable feedback that will improve your product. A freemium product that fails to achieve any of these effects will merely saddle you with extra costs and distract you from servicing your most important users. Not every company can be a Dropbox, but the good news is that not every SaaS company needs to adopt Dropbox’s freemium model to succeed.

This post was first published on Point Nine’s Medium channel.

From Technical to Product to Sales CEO: Hard-Earned Lessons Learned

Editor’s note: This article is based on an episode of the a16z Podcast, which you can listen to here.

Hi everyone welcome to the a16z Podcast, I’m Sonal; and I’m here today with David Ulevitch, one of our new