The freemium model paradox

And how you should spend your money on freemium products

(15 min read)

Photo by Markus Spiske on Unsplash

As a (wise) consumer, you probably have compared a product’s price with a hypothetical cost of how it was made, to determine if it’s a good bargain.

However, have you ever wondered if the price you’re paying for a digital product is the same as the value you’d get? 

As someone who has worked at 2 SaaS companies for the past 3 years, I couldn’t even give you a straightforward “yes” or “no”. However, I could give you a peek behind the curtain to see how the product developers actually view and treat you.

Note: By product developers, I mean all the team behind the app, not just those who codes. And this discussion only revolves around freemium digital products. 

You are overpaying for what you get

When you purchase a freemium product, you are not only paying for all the premium features, but you are also paying for other users.

Weird as it may sound, every penny that went from your pocket to the developers’ will be used to maintain the infrastructure and manpower of the company, the value of which is shared equally with everyone else, including free users.

Take Spotify for example. You might be one of 130 million users (Q1, 2020) paying to get the additional “skip” or the joy of undisrupted listening. However, there are around 156 monthly active users who are using Spotify for free (uh uh, if you’re thinking their conversion rate is a wowy 45%, you’re wrong!)

Free users are listening to the same songs as you, and their record takes up a row in the database, which exerts the same stress on servers – again, the same as you. 

There is only one exception in this case: products that make money out of free users. Hyper-casual games – seeing huge growth despite the devastating COVID-19 – is a great example. 

They leverage the massive daily active users (DAU) by placing ads all over the game (when you’re dead mid-game, or when you transition from one stage to another). The payment they got from CPM model is enough to sustain the whole business while the revenue from in-app purchases accounts for a tiny fraction. 

How many of these games have you played? Image source: Hyper Casual Games

Maybe you’re not familiar with hyper-casual game, but you should know Duolingo. Duolingo is a shining model of monetizing their free users without charging them a penny, which made them a $1.5B company at the end of 2019.  

Image source: Campaign Live

What Duolingo did in their early days was selling the translated content that their users generated during the app usage. 

Despite having had a considerable income stream from their partnership with BBC and CNN (!), Duolingo went further to renovate their product and introduced new sub-products to monetize the current user base, such as Test Center. 

It’s only until 2017 that this company began its subscription system, where users can upgrade to remove ads and download lessons for offline use. 

You are not “VIP”-er than free users 

I often see B2B SaaS companies promise better support for people who pay more. This makes sense on both sides. 

As Premium users, you deserve more premium services simply because you paid more for the same product. Remember paying for the Deluxe room in a hotel and feeling so much different when walking in the hotel?

As developers, you need to have a way to stay in touch with your most valuable customers, because they are both a great source of revenue and branding for your company (see how companies blindly put popular logos on their landing page?) Moreover, highly-paid users often have demanding requests, which require a special channel of communication with the developers. 

Image source: MailChimp

See how Premium users in MailChimp gets phone support (the most costly type of support) while Essentials users only get “24/7 award-winning support”? (Don’t be fooled, the whole team being present 24/7 does not mean you will be replied instantly!) 

See how “closer” you are to the developers from tier to tier? Image Source: My favorite note-taking app Obsidian

But that’s that. Really.

You will have to accept a reality that not every B2B SaaS companies have a global support team that spans across all timezones. Therefore, even if you are their most valuable customer, you’ll face the reality that they are sound asleep when you’re having critical bugs or 503 Service Unavailable. 

This is a problem that a lot of companies in South East Asia (including mine) are having when expanding their customer base to US or EU (~ 12-hour difference) They have no choice but to outsource someone from the same locality, or set up their branch overseas. Either way is non-preferable. 

Practically, you will be prioritized to serve when you have problems, even if you become Premium later than most. 

But when it comes to renovating the product , you’ll have to queue like everyone else. 

Developers don’t think about you first

Building a new feature always comes with costs. Companies do not have enough resources to build everything. Also, their vision only allows for a certain set of features. Therefore, developers will constantly face a typical problem of balancing between meeting Pro users’ requests and adding more values for free users.

They can’t do both, obviously. Even big players like Hubspot still have a hard time solving the puzzle. It’s not about a lack of resources any more. It’s about maintaining scalability.

As DHH (creator of Ruby on Rails and Basecamp) says in his awesome book REWORK, companies should create a product for a type of customer rather than a specific individual customer, because when that specific customer leaves them, they’re left with a product that no one wants. 

For software to be commercially successful, there’s some fundamental requirement of shittiness.

Des Traynor, Co-founder of Intercom

That means unless you are the only paid user of their product, your voice is no more important than that of free users. Of course, reducing the retention rate is an indispensable part of any company (in some, the most important) since the cost of acquiring a “new you” far outweighs that of “keeping you around”.

The cost of retaining a customer vs acquiring a new one. Data source: Havard Business School

But the 10-year-or-more-vision of ambitious founders do not allow them to think of you only, but of a product that can serve millions. In that sense, even adding a tiny button for you can cause headaches.

If the product is a perfect fit for you, it will be imperfect for somebody else. In that sense, there’s always a part of the product that either Premium or Free users don’t like. Or as Des Trayner, Co-founder of Intercom used to say in one of his podcasts: “For software to be commercially successful, there’s some fundamental requirement of shittiness.”

If we think of it that way, building more Premium-requested features ensures that the product will only be valuable for Premium users, thus free people will have no reason to stick around. And if free users are gone, who can developers convert?

Lesson learned: When paying for freemium products, look at the company 

Think of it as choosing your spouse

When choosing your life-long partner, what do you always look at? A future with them. One with mental reliability, financial stability, and a mindset for growth is more likely to make you feel safer. You want to see what the future looks like with them.

It’s the same as choosing a freemium product. 

If they are small and they guarantee no future, don’t pay. It’s likely that they’re struggling with acquiring as many free users as possible (or optimizing their current conversion rate, or raising funds to pay the bills – who knows!?)

They are not to blame. But you have to accept the fact that you’ll be quickly overlooked once you become premium. It’s not that they don’t care about you anymore (they will, trust me, if you request them to cancel your subscription). It’s just that they are too busy building their own future, one that you’ll be among many equally-valuable other users. 

Heading for paid (digital) products only is not that wise, either

It seems all my argument boils down to paid products as the best bang for the buck. 

Not really.

If we put ourselves into the developers’ shoes, buying up-front paid products do not guarantee that we will be served properly. Why?

Paid-product companies have spent a lot on Omni-channels marketing to (impress, then) acquire you, and when you’ve paid, the cost is alleviated. 

Furthermore, paid products often promise a wholesome experience, based on which developers are unable to up-sell anything. They don’t have the motivation to serve you because they’ve got what they need. 

Meanwhile, freemium products will keep “pampering” you until you become a paid user. That’s the unwritten law. 

The easiest way to get 1 million people paying is to get 1 billion people using.

Phil Libin, CEO of Evernote

My point here is, since your existence as a free user already exerts infrastructural and service costs to developers, you will have to give something in return to cancel out such cost.

It could be your personal data. For example, free email unsubscription tool like Cleanfox will scrape your payment details from email, omit sensitive details, then sell them to analytics/eCommerce companies, who in turn will use them to generate purchasing patterns.

It could be that you will sooner or later pay. Google understands this so well that they decided to play a long-term game with us. They offer us 15GB of free Drive storage, which we will exhaust sooner or later. As such storage includes our email, photos and important documents, we cannot delete them when our storage runs out. The mental burden of creating and keeping another account far outweighs a few dollars each month for an additional 100GB. The final answer is predictably simple. 

How do you feel when you cannot receive new emails because your Drive storage runs out? Image source: Google Community

When it comes to the ruthless monetization game, free users come first. We – as free users – should feel assured that at least developers are paying attention to ourselves. Although such “attention” is just sugar-coating their capitalist greediness, at least we are cared for.

Image source: Chargebee Medium

This is not the end for startups

As I mentioned above, freemium products do have an advantage over paid ones. 

I believe knowing that customers will become more aware of how their money is spent and how they’re treated is an incentive for startups to invest in maintaining a tight connection with them.  

In the early days, building trust by carefully listening and helping users is the key to having a crazy (little) fanbase and word-of-mouth effect. 

Sometimes, you only need 1000 true fans to get started. 

@Roamresearch for example has done an exceptional job at this. They not only built a super cool note tool for networked thoughts, they have built a mystical cult (yep, their users call it a  #roamcult themselves) 

Here’s how they keep their “cult” updated even with the smallest glitch:

And here’s when they go a step further: Name their own product by the suggestion of ONE customer.

The more demanding the customers, the more startups need to show how dedicated they are. Public roadmaps, changelogs, sharing public opinions to attract like-minded potential users (like what @dhh successfully did before launching his controversial yet widespread email app Hey.com). These are all great weapons to keep your community engaged. 

And guess what?

These weapons cost nothing.

A Trello public roadmap costs nothing. 

A changelog takes 10 minutes to write (+a beer if you’re trying to be funny).

Sharing opinions every day on Twitter takes 1 minute.

Thus, it’s not too much to ask startups to do this. After all:

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty

Eric Ries, The Lean Startup

There’s a “human” in every startup. And that’s the part that customers like you and I – us – want to feel.

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