Why Free Users Can Kill Your Business

Plus: SaaS for frontline workers is the gold mine of the next decade

Good morning MRR lovers,

If you are struggling to monetize your startup, or you are looking for ideas on what to build next — this newsletter is for you 🤙.

🍿 Quick Snack

  • 💔 You should probably delete your “free plan”. Unless you can serve a large market or you compete against a premium solution, make your customers pay.

  • 🦺 80% of the global workforce does not sit behind a desk. That does not mean they don’t want to buy your technology.

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🍔 The Full Meal

Why "Freemium" Could Be Hurting Your Startup More Than You Think

Slack, Zoom, Canva, Dropbox, and LinkedIn are all SaaS superstars that have built gigantic businesses thanks to their freemium models.

However, this doesn't mean your startup should opt for the same strategy.

Here are two reasons why:

#1 - Only viral products can afford to be free

A Freemium model is, without a doubt, an effective onboarding strategy. Still, unless your product is viral, it won't attract the number of users you need to build a sustainable business.

Viral products possess several qualities that contribute to their widespread popularity and rapid adoption:

  • 🌎 They solve a common problem. Slack disrupted workplace communication by offering an intuitive platform that organizes messages, files, and conversation topics, addressing the pain of fragmented team communication.

  • 🍼 They are easy to use. With its simple interface and reliable performance, Zoom made video conferencing accessible to everyone, from businesses to schools to families, contributing to its rapid adoption.

  • 🍻 They are highly shareable. Canva allows users to create professional designs easily. Its shareable content formats and collaborative features encourage users to share their creations and invite others to the platform.

  • ⚡️ They offer immediate value. Dropbox provides instant value by offering cloud storage and file sharing in just a few clicks.

  • 🛜 They rely on network effects. LinkedIn becomes more valuable as more professionals join the network. The same can be said of products like Tinder. More users = more value for users.

#2- You might lose sight of what actually matters

Under a Freemium model, you get two types of feedback: paid and unpaid.

  • Paid users are, more often than not, your product's power users. Their feedback is typically more constructive as it aims to improve the product, optimizing or enhancing specific features that affect their daily use. This can help you work on things that deliver more value.

  • A free user's experience with your product is usually more casual and exploratory. As such, their feedback tends to be broader and often concentrates on the product's suitability for them ("Can it do X? Am I able to use it for Y?"). While this type of feedback might allow you to identify trends in habits and preferences, it requires more depth and specificity for you to build a compelling offer that could eventually convert them.

  • Unpaid feedback may distract you and your team from building features that will mode the needle for your company.

If you are unsure how to prioritize customer feedback, here is a simple framework you can use 👇

There are two core benefits to killing your "free plan."

  1. You are forced to build a valuable product. If your target customer is unwilling to pay for your offer, the product is not good enough.

  2. You free up resources for your company (time + money). No money is spent on maintaining free users, and you reduce time spent on customer support.

How do you know which pricing model your startup should implement?

Go Premium if:

  • Your product offers something unique and valuable. For example, Netflix and its competitors (e.g., Disney+, Hulu, Prime Video, HBO Max) all offer streaming video, but they each possess exclusive catalogs.

  • You operate in a high-value and niche market. Most B2B solutions fall under this category. For example, Palantir specializes in big data analytics, with products like Gotham targeting government and defense applications. Other companies in this category include Salesforce, Zendesk, and Workday.

  • Your product's scalability is limited. When your addressable market is narrow or costly to serve, you have no choice but to monetize every user to make your business sustainable. For example, Masterclass is an education platform that offers pre-recorded lectures by famous experts. Its target market is likely people with disposable income looking to expand their knowledge while being taught by the very best (narrow market). To appeal to this market, the company requires high-quality production and highly sought-after experts (both costly to provide).

Go Freemium if:

  • You offer a scaled-down version of a premium solution. For example, Canva is much inferior to Adobe Illustrator regarding features. Still, it is easy to use, and appeals to a market segment that values speed, efficiency, and low pricing is effortless.

  • Your product becomes more valuable if more people use it people use it. (e.g., Slack, Discord, LinkedIn, Tinder)

  • You can serve a large market. If you assume a $10/mo per user and a 2% conversion rate, here's how many users you would need to achieve the following ARRs:

    • $100m ARR (Total Users: 42m, Paid Users: 830K)

    • $50m ARR (Total Users: 21m, Paid Users: 415K)

    • $25m ARR (Total Users: 11m, Paid Users: 210K)

    • $10m ARR (Total Users: 4m, Paid Users: 83K)

In the end, whatever you do, remember the following 👇

Empowering Unsung Heroes: SaaS Solutions for Frontline Workers

80% of the global workforce does not sit behind a desk.

Yet, most of the technology we see around us today has centered on building tools for desk workers.

In the coming decade, SaaS solutions for frontline workers could be a lucrative opportunity for entrepreneurs and investors.

Here are some examples of solutions for this market segment:

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See you next week!