As explained in a previous post, I am excited about the B2C opportunities that lie ahead of us in the coming years. Here some insights on how to build the foundation of a scalable SaaS freemium model.
(Featured Image: Yannick Oswald, Principal at Mangrove Capital Partners / Image Credit © Silicon Luxembourg / Anna Katina)
The following three points are the essence of any freemium model. An early stage B2C SaaS founder should be able to articulate his vision on all three of them while having the data to prove the first point:
How she/he is building an amazingly great product that user love
How the company wants to charge money
How the product will be able to deliver ongoing value
1) A hook to build a scalable platform
World class products need a ‘hook’ that forms the basis to build a sticky product, ideally with a social (or viral but that’s rare) aspect, a strong referral loop and/or a ton of user generated content to lead to massive SEO traffic. This value prop needs to have the potential to attract tens of millions of active users.
Our portfolio companies Skype (free calls), Wix (online presence/website), Flo (health and fertility tracking), Safe365 (peace of mind that your parents are safe 24/7), Sybel (daily audio entertainment recommendations) or companies such as Spotify (playlists) and Calm (stress and anxiety management) are great examples of this. Be ready to have some tangible insights and data points on this when you start raising a seed round 🤓. For example, a great early stage consumer app should be on track to reach >20% DAU/MAU, >1 session per day, >10k DAU, a long term retention of 30%+ and a month over month growth of >20% to have a shot to displace an existing home screen app or voice skill/action. We have many learnings to share here and would love to talk if you think you are onto something…
2) Convert to premium subscriptions
A freemium model wants users to realise that, although they didn’t need premium features earlier, they would gain significantly more value by paying a subscription. Initial conversion triggers are usually simple but extremely powerful, e.g. Wix – remove the Wix logo from your personal website, Spotify – listen to songs offline, aso. Good VCs do not care about subs revenues at an early stage. However, I recommend you to do some initial monetisation tests for some (future) features early on to give investors (and yourself!) the confidence that users are willing to pay for your service.
These initial tests will allow you to do some assumptions to help articule that your vision can ultimately sustain a strong business. Essentially you want to be able to say that, with an estimated CAC of $X at scale, a conversion to paying of Y% and an ARPA of $Z, each user cohort should ultimately break even after X months.
This chart (from the Q1 2018 earning slides from our portfolio company Wix) illustrates well the power of a freemium model – the ability to acquire tons of users at scale while becoming profitable by converting a certain % of users to paying over time. As you can see, user cohorts are generating more revenues as time passes… Depending on the product category, ARPA can range from $50 to $300 and a good long term conversion rate should be above 5% and can reach up to 25% for certain products.
3) Deliver value continuously
As you are trying to increase the number of paying users per cohort over time, you need to retain them by building a relationship (see chart below from the Q1 2018 earning slides from our portfolio company Wix).
Spotify is another great example. As the user listens more, Spotify’s recommendations get better and better. At the same time, Spotify starts ramping up the pressure on the user to convert to a paid subscription — through an increased ad load, pop-up messages, and other reminders throughout the experience about the advantages of Spotify Premium. Another way to start building a relationship with users is through a free trial, typically for 2 weeks or 1 month. Netflix or Linkedin are good examples here. You have to be extremely mindful of the user journey and make the process seemless to avoid churn. Let users understand what they would be getting with a subscription before making a hard sell via a paywall. At the end of the day, a subscription business will only be successful if it retains the users it acquires…