Freemium as a Pricing Strategy is DISASTROUS (unless...)

0:00if you're a bootstrap SAS founder the pricing strategy you choose can make or break your business freemium might seem like a smart way to attract users but for self-funded startups it can be a ticking time bomb that crushes your chances of finding product Market fit in this video I'll break down What premium really is how it differs from a free trial and why it's so risky for a company like yours as a default stance I believe bootstrappers should generally avoid using premium as a marketing strategy and yes I said marketing strategy and I'll explain why in just a minute if you stick around to the end of

0:33this video I'll share the four key ingredients you absolutely need if you want to make premium work for your SAS but first let's talk about what premium actually is most Founders think of Premium as a pricing strategy but it's actually a marketing strategy and I believe Patrick Campbell of profit well was the first to come to that realization the reason it's a marketing strategy is your price is zero you're not making any money and pricing strategy is around value metrics and how to get the most from people who get the most value realistically premium is a way for you to get more leads into your funnel and that's why it is much more of

1:09a marketing strategy than pricing you might be wondering what's the difference between premium and a free trial a free trial is when there is some limit usually a time limit for how long someone can use your product often times you get a seven a 14 a 30-day free trial there are also free trials where let's say you have an app that converts documents from PDF to another format maybe your free trial is you can do that a total of five times that also can be thought of as a free trial I often describe premium as forever free meaning you can use this forever at a very

1:41limited capacity so in the example of uploading PDF docs and converting them maybe you get one conversion per month every month forever it's forever free but with that tight limit on it or if you were an email service provider helping people send marketing emails perhaps you let them have up to 100 subscribers to their email list and that's forever free versus again a 14-day trial or hey you can do 100 email sends total before your trial runs out so those are the basics of how to think about fremium or forever free versus a free trial fremium seems to be mistaken as a good marketing strategy because

2:18there are some really big successful Venture funded companies that have used it well and so you look at slack or figma or notion or a lot of no code tools there's even Dropbox you know it goes all the way back 10 15 years to when fremium became almost the default for any type of BTO cish SAS app and so the thing is is if you're going to bootstrap and you come on the scene and you look around at all the apps you use and they all offer premium you think well maybe this is a good strategy the problem is those companies have hundreds of employees tens of millions if not

2:52hundreds of millions of dollars raised many of them are actually public now you don't have that you're a bootstrapper with a team of one two three people trying to make premium work by modeling it after these massive companies with massive funding when you don't really know what makes it work it does it's not just implementing premium it's when do you implement premium how do you implement premium and so adopting premium just cuz you see someone else doing it is a real problem and I think that's why so many entrepreneurs mistake fremium as a good strategy the reason fremium is pretty dangerous or risky for bootstrappers is that it kicks your

3:26Revenue down the line so Dropbox is famous for saying of all of our tens of thousands hundreds of thousands of free users approximately 3% of them become paying customers within a year so imagine you're a bootstrapper I know it's a stretch right you're trying to quit your day job do you have the time to wait 12 months to get 3% of your free users to give you revenue or do you need to force those who are willing to pay to pay you sooner so that you can get to that 5K or 10K a month line such that you can quit your job so kicking Revenue down the line is one danger another

3:58thing is Founders seem to think that just markets itself when in fact it doesn't you have to Market premium I interviewed Marie at T.O on my podcast and they've used premium to grow to 300,000 users and Marie started by making thousands of cold DMS to get people to use their free plan just having a free plan isn't enough you also then have to Market it it doesn't Market itself and the last reason it's it's dangerous or risky is you need huge numbers to convert enough people to pay you having 10,000 free users usually isn't going to get you very far you need 50,000 100,000 or more it depends on

4:33your conversion rate obviously but just launching a free plan getting some people to use it is not going to help you grow any type of meaningful Revenue quickly because of the massive volume that you need in order to generate enough paid plans now you might be wondering well once I introduce premium if it flops which if you don't know what you're doing the odds are it's going to you might be wondering can I pull back on fremium uh decrease the limits or even eliminate the free plan alt together once I've rolled it out and the answer is yes you'll probably get some push back um there there's a couple

5:02different ideas right one is you have a free plan and then you just remove it from the sign up page but you kind of Grandfather folks who are already on it that's one way to do it I actually acquired an app called Hit tail back in 2011 that had a free plan that was costing me quite a bit in support and headache and even server resources and so I not only shut down the free plan on the website but I told people they had to start paying and of I think it was a thousand people maybe were on the free plan it was like a dozen or two dozen

5:29that actually wound up hanging it was a little painful there were a lot of complaints but you absolutely can back away from a free plan if you do launch one and decide it's not a fit often times when an entrepreneur approaches me and tells me they want to start a free plan I usually ask the question what would it be like as a thought experiment to go the opposite direction not have a free plan but to 10x your pricing instead to increase prices to try to lower turn and go up market and the question I ask is what would you have to build to make it worth charging that 10x

5:55price what would your product have to do it's a really interesting thought experiment that I often ask found ERS to Embark upon and I talk a lot more about fremium with Reuben Gomez we go in depth in episode 725 of startups for the rest of us which you can find in apple podcast Spotify and even here on YouTube so in a minute I'm going to give you the four criteria the four ingredients that need to be in place if you going to consider rolling out premium but before I dive into that I've worked with thousands of Founders over the last almost 20 years and I've seen so many

6:26startups fail before they even get ready to launch premium as a pricing strategy isn't the only mistake I see in fact I recently launched a course called the SAS Launchpad it covers everything I know about finding great SAS ideas creating effective MVPs getting your first customers and of course pricing models that actually work for bootstrap SAS in this course there are 27 different modules each one is a video plus some worksheets and a quiz N9 and 1 half hours of video content it's very dense it's as dense or more dense than this YouTube channel so imagine 9 and 1 half hours of it packed into a really

6:59solid curriculum there are quizzes there are worksheets and there's a community of Founders who are going through the same content you can check it out at SAS launch pad. and if you buy the course before September 30th of 2024 which is about 2 weeks after this video goes live you can get access to a live Q&A call with me to get your burning questions answered so back to fremium is there ever a time that fremium is a good idea I have four criteria that I borrow from Ruben Gomez who in my opinion is one of the world's experts on premium as a boot bootstrap founder and these four

7:31ingredients for premium to work are having almost zero support for each customer having almost zero incremental cost for additional users so if they're sending AI requests to to an API or if they're sending SMS messages this doesn't work usually because it's very expensive if users can self onboard and they're super quick to get value from your app and if you have some measure of virality really strong word of mouth but honestly virality is if I don't if I didn't have it I wouldn't use freemium so if you have all four of those in place then my answer is still maybe it's maybe you should consider using premium

8:06if your business doesn't have those four ingredients I personally would avoid freemium at all costs with that in mind how should you price your SAS in this video I lay out my practical guide to All Things SAS pricing including the cheat code that will help you unlock crazy Revenue growth for your startup thank you for watching make sure you like And subscribe for more videos like this and I'll see you next time