Can Freemium Work for Your Enterprise Software?

October 10, 2014

12:00 pm

Why pay full price for something you can try for free?

Rather than creating an environment where users are forced to pay for a product, sight unseen, software manufacturers have rallied around the freemium model, providing users with free, unlimited access to a basic set of features.

Giving away your product can seem counterintuitive, but if done right, it can be an excellent method for bringing in new users and developing a stable and loyal paying customer base. If you’re considering the freemium model for your enterprise software, address these six questions first.

 1. Do I have a broad audience?

On average, only about two to three percent of free users convert to a premium tier. Either your product needs to be so specialized that there are virtually no other competitors in the market, or it needs to have a large enough audience to make that two percent worthwhile financially.

 2. Can I afford a longer sales cycle?

Over the long term, the freemium model can build a strong paying customer base, but in the short term, you’re going to have a lot of people using your software for free. Make sure your company is healthy enough to survive the wait.

 3. Can my service scale along with my customers?

Companies such as Brightbook can offer their basic services for free because they scale with the natural cycle of business. Brightbook’s free product works for companies with a small customer base. As they acquire more customers and their bookkeeping needs expand, they’re forced to upgrade to the premium level. If your service can do the same, it’s an ideal freemium model.

 4. Which features should be free?

If you’ve looked at your options and decided the freemium model is right for you, the next step is figuring out your first level of service. For this, there’s one major rule of thumb: Your free model needs to solve a problem for users. If it won’t work in a real-world situation, your users will likely opt for one that can.

The free model is essentially a way to get customers hooked. Products such as Evernote and Dropbox based their entire business model on becoming an indispensable part of a user’s daily routine. If you can do that, users will be much more willing to shell out when they bump up against your paywall.

 5. How can I get customers to upgrade?

You should already know your customers’ basic needs. The next step is finding out what they want. Your premium features should focus on improving the efficiency and ROI of your clients so they can not only get their jobs done, but get them done better.

To do this, track your free users and figure out which type is most likely to convert and when. Then, you can focus on marketing to the right users at the right times, putting the guesswork aside. For instance, if you’re a storage service, send out an email offering a discount to the users who are close to reaching their data cap.

6. Do I have a clear value proposition?

Telling your customers what your premium features are isn’t always enough; they need to know why they would want them. How many people do you know who have signed up for LinkedIn’s premium service? Probably not too many. This isn’t because what they’re offering isn’t valuable, but they’ve failed to make a compelling case for why it is. Your users shouldn’t have to question what they’re getting for their money.

The freemium model has the potential to build your company into an enterprise behemoth. But if you don’t devise a detailed plan and implement it correctly, your profits will flatline. Make sure you know who your users are and understand what they’re willing to pay. You may only convert a small percentage of a large free customer base, but it can turn into huge profits down the line.

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TX Zhuois a managing partner of Karlin Ventures, an L.A.-based venture capital firm that focuses on early-stage enterprise software, e-commerce, and marketplaces. Follow the company on Twitter.

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