SaaS Pricing Blunder: The Sizable Flaw in Our Complimentary Plan
Running a startup requires investment, and valuing one's work is crucial. This is a lesson that SaaS company Hubstaff learned the hard way when they initially offered a free plan upon their inception.
Hubstaff, known for its time-tracking and productivity software, found that free users tend to require more support, which can divert resources away from paying customers. This diversion of resources was a major factor in the failure of their initial free plan.
The logic behind the free plan was to acquire a large user base, with the expectation that some would eventually upgrade to a paid plan. However, the free plan ended up losing Hubstaff money and stunting its growth. The free plan for an unlimited number of users was discontinued, and the lite free plan, offering limited access to three users, was introduced as a replacement.
The lite free plan is the fourth-most popular in terms of total sign-ups, indicating that some users value Hubstaff enough to pay $5 for the full version. Paid products carry more value than free ones, as users are less likely to abandon them.
The free plan for one user, labeled as "lite," offers limited screenshot storage and user settings. The top plan is the three users for $15/month option, and another popular plan is the one user for $5/month and three for $149/year.
Offering a free plan in a SaaS startup comes with several disadvantages. These include low conversion rates, risk of giving away too much value, high operational and support costs, user confusion and experience issues, difficulty in feature allocation, and impact on perceived value.
A free plan can attract users and increase brand awareness, but it must be carefully managed to avoid excessive costs, low conversion, and diminished revenue potential. Feature selection and user conversion strategies are critical to mitigate these disadvantages.
Hubstaff's co-founder proposed a pricing model called "cheapium," suggesting charging minuscule amounts for what would normally be considered a free plan. This strategy aims to attract users while ensuring that the startup generates enough revenue to cover expenses.
However, people tend to take advantage of free accounts, which can lead to a lower quality of service for paying customers. The lesson learned from Hubstaff's free plan experiment is that if someone values a product, they'll pay for it.
A recent example of the failure of the freemium model can be seen in Gigaom, a tech news site. The site closed down in 2018, citing financial difficulties as a major factor. The freemium model, while effective in attracting a large user base, failed to generate enough revenue to sustain the business.
In conclusion, while offering a free plan can be an effective strategy for attracting users and increasing brand awareness, it must be carefully managed to ensure that it does not lead to excessive costs, low conversion rates, and diminished revenue potential. Feature selection and user conversion strategies are critical to mitigate these disadvantages.
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