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The Reality ofFreemium in SaaS
By Lincoln Murphy,Managing Director
Copyright© 2010 Sixteen Ventures. All Rights Reserved
http://sixteenventures.com
Updates to this paper are currently beingdistributed to the Sixteen Ventures mailing list.Join the mailing list todayso you will not missany of these major updates:•Freemium is not just for 'Startups withNothing to Lose'•Classical Freemium doesn't exist at scale•Freemium is a Pervasive, Fully-IntegratedMarketing Strategy•The 5 Freemium Models•The increasing use of both Free Trials &Freemium by the same companies•Overview of Requirements for Success inB2B SaaS Freemium
Freemium is Not a Business Model
3Baseline Understanding of Free
4Freemium Success Requires Internal Reflection
5What
ʼ
s the Quid Pro Quo?
6Distribution and Customer Acquisition
Page 2 of 25Copyright© 2010 Sixteen Ventures. All Rights Reserved
http://sixteenventures.com
Freemium is Not a Business Model
The “Freemium Model,” a
marketing tactic
where a Software-as-a-Service (SaaS) vendor has both a free and paid version of their product, has gained substantial traction in recent years.Freemium in SaaS can be used as an effective go-to-market strategy, but it is the rare case wherethis method leads to a
substantial increase in paying customers
; it more often leads to increasedoverhead, negative product positioning, and can lead to overall failure.Freemium has significant risks associated with it and without fully understanding these risks, andwithout fully examining the market, their product, and their company, SaaS vendors using the“Freemium model” almost always fail; this paper is designed to stop that.In 2009, Sixteen Ventures published our “7 SaaS Revenue Streams” report
1
. Thisreport detailed for the first time all possible revenue streams a SaaS companycan leverage. The goal was to urge SaaSvendors to look beyond the de factostandard “monthly subscriptions” revenuestream to ensure they are not leavingmoney on the table and doing a disserviceto their stakeholders.SaaS vendors, especially those in theearly stages, must be aware of the sevenrevenue streams while architecting their product or selecting revenue cyclemanagement vendors
2
to work with. Thisensures they will be able to suppor t theappropriate revenue models within theapplication and back office when the timecomes.What we at Sixteen Ventures did not expect was our promotion of the multiple-revenue streamapproach to the SaaS Business Architecture being so misaligned with a portion of the industrywho was buzzing about giving use of applications away for free. This paper is designed tocompel SaaS companies to take a second look at their plans to use Freemium as their go-to-market strategy and to help them understand what they are getting into.
Page 3 of 25Copyright© 2010 Sixteen Ventures. All Rights Reserved
http://sixteenventures.com
1
SeeAppendix D - The Seven SaaS Revenue Streamsfor more details
2
Revenue Cycle Management refers to the set of processes involved in generating and recognizingrevenue: pricing, quoting, subscription management, metering, billing and other back office functions
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