If you’re a founder building a new software product, chances are that it will be a challenge to get paying customers. ‘Build it and they will come’ is not a valid go to market strategy. You’re gonna have to come up with a way to incentivize customers to use your product. You will most probably also want to incentivize them to actually pay you and purchase your product.
Unfortunately, there is no ‘right answer’ - every business and industry is different and there are exceptions to every rule. To paraphrase Ben Horowitz, there is no silver bullet. We’re gonna need a whole lot of lead bullets.
As an aside, it is possible to have customers pay before allowing them to use your product. However this requires one of two things:
- A highly trusted, established brand name and value proposition, for example, Netflix famously does not offer free trials. Or,
- A monopoly or effective monopoly and customers with an urgent, possibly desperate, need. For example, emergency rooms or internet service providers in the US. This is generally more difficult to do with software.
We’re gonna assume that, since you’re an early stage founder, you don’t have an internationally acclaimed brand nor are you a monopoly. Hence, we’re not gonna be covering this strategy in any more detail.
The other assumption we’ll make is that you have some kind of inorganic strategy used to to drive eyeballs to your business, be it paid search, paid social media, influencer marketing or billboards on a highway.
Let’s start with establishing the most popular customer acquisition strategy and talking through what they mean. These are:
- Free Platform
- Free Trial
Unsurprisingly, they all involve giving away value for free in exchange for users’ attention.
This is probably the most popular acquisition strategy for consumer goods. The facebooks and instagrams of the world use this model, as do most digital newspapers and content creators, from the New York Times to BuzzFeed.
This pattern establishes a multi sided marketplace, with one side of the business designed to create content to attract users’ attention. Monetize on that attention by
- tracking user interests and selling that data to advertisers
- selling ad real estate on the platform
- You have the opportunity to create network effects. Users will share content and pull their network to the platform. They may also generate their own content.
- You don’t necessarily need a ‘lot’ of users if you can successfully capture a niche. Advertisers will pay a premium for a highly targeted advertising opportunity.
- You need to control and stretch the costs of generating new content
- It’s very expensive to start - it’s possible you will have no revenue for the first few years.
- A strong distribution team is necessary to effectively sell ads.
The free trial pattern typically gives users full access to the product for a limited amount of time after which the user is forced to either subscribe or leave the platform. This is pretty popular for most enterprise tools, for example Shopify, BigCommerce and other e-commerce infrastructure providers utilize this. Other enterprise tools like the Adobe suite also use this kind of acquisition strategy.
AWS, Google Cloud, Azure and other IAAS providers offer a variation of this model by offering free credits for a years - full access with a budget.
This strategy tends to work well for products that can deliver results within the period of the trial. The purpose of the trial is to de-risk the investment and show users how the product is going to deliver value. If it’s not possible to do that within the trial period, or if the product requires complicated setup or sensitive information, it’s typically not going to be an effective way to convert users. In fact, if it’s not immediately clear in the trial how value is going to be delivered, it’s going to hamper your growth efforts.
- For software businesses, offering a free trial has almost negligible costs. It’s the cost of adding one new user to the platform.
- You de-risk the user’s investment and can quickly demonstrate the value of your product. Do this quick enough and you’ll get cash upfront.
- Once the trial is over, the business no longer has the customers attention. While it’s possible to retarget users via email or social, it’s a harder sell.
- You need a some brand recognition to convince users to put down their CC when they sign up for the trial. Users will be reluctant if they’ve never heard of you before.
- If you’re solving critical problems but those are infrequent (once a month or less frequent) then users will subscribe to the free trial but will not covert to paying customers.
- All your free trial users are effectively worthless if they don’t cover to paying customers.
The freemium pattern gives users access to a limited number of features and data indefinitely. This tends to be a popular for user-centric consumer goods that don’t typically cannot generate network effects. For example, Spotify offer a limited product for free users. Skype is also completely free if you want to use it to make Skype to Skype calls. Users pay to call cellphones or landlines.
It’s an incredibly powerful marketing tool to say a user-centric product is ‘free forever’. This pattern tends to work well for products which deliver value over a period of time and can create lock-in habits.
On the consumer side, this tends to work well with health and wellness apps. Those businesses use this model to hook the user and capture data while charging a premium for advanced features.
- Couch to 5K, a marathon training app, offers the first 4 weeks of training for free.
- My fitness pal, a diet tracking and weight loss app, lets users track their consumption for free but make premium features like meal plans and recipes exclusive for paying users.
- Waking up, a meditation app by Sam Harris, offers beginner lessons for free and charges a premium for advanced content.
This patter is pretty common on the enterprise side as well. Dropbox, a data storage solution, offers a limited amount of storage (3 GB) for all free users while charging more for more storage. iCloud and Google Drive have imitated this pattern.
- The demand at the price of zero is many times higher than the demand at a very low price.
- The business has multiple possible avenues to monetize free users, from advertising, ‘pay per view’ type events or content and one-time digital purchases
- As with the free trial, the cost of adding a new user is almost negligible.
- As with the free trial, you de-risk the investment for the user and give them a powerful demonstration of the value you deliver.
- Unlike with the free trial, your freemium users are not worthless and can be monetized even if they’re not paying you directly.
- Conversion is difficult if too much value is being delivered in the free tier. A careful balance needs to be found.
- It will be ineffective if you are able to solve user’s most critical problems on the free tier. They will have no incentive to convert.
- The costs of servicing free users has to be controlled and subsidized by the premium users.
At the end of the day, your business’s value will depend on how much free cash flow you can generate. Trial users and freemium users are vanity metrics that don’t mean anything if you can’t attach an average dollar value to them.
To start with, you need to make a decision based on your assumed user journey and the value you’re trying to deliver. However, that’s not the end of the conversation by far. As your start acquiring your first users and getting feedback, you need to experiment with different patters and variations to see which shows the most promise. Make sure the metrics you are measuring are as close to the money as possible. For example, the number of users who signed up for your trial don’t matter nearly as much as the percentage of users who are paying you and your CAC, LTV and free cash flow.
Most importantly, talk to your customers. Find out why your customers are your customers and modify your content, freemium and free trials accordingly to capitalize on what really matters to your target market. Don’t confuse correlation with causation and don’t make assumptions. Ask your customers what made them convert and emphasize that on your platform. When your users unsubscribe, ask them what made them churn and try to solve those problems.
Byldd helps founders build profitable, investor-ready software businesses. Reach out to us here to chat.