SaaS Freemium Models and the Hidden Cost of Free

Tom Dibble

SaaS Freemium Models

We’ve all been lured into sexy “try before you buy” freemium models that provide just the right amount of functionality to get you started. Yet, it’s not quite enough to complete the job. “Getting the job done” often requires stepping up to a paid or premium version that provides more functionality, capabilities and rewards.

As much as we’d like to believe to the contrary, the old adage is time tested. “There is no free lunch.”

Free” more often than not implies trade-off. The trick is to balance these tradeoffs to ensure that your purchase delivers a net positive for your business. Anything less than “free” becomes a misnomer.

For the consumer, this model makes sense for apps that aren’t mission critical. You can preview and buy. If the full version doesn’t meet your needs then you shut it down and move to another application that works better. Switching costs are low. No harm. No foul. No one (but you) is the wiser.

Lately, and somewhat surprisingly, “free” or close to it, has also been applied to larger ticket items – like enterprise software solutions – that have far-reaching and deeper functional capabilities than the latest gee-whiz game or social application. To entice you, some vendors are offering a “free” one-year license or subscription. In these cases, buyer beware of a wolf dressed up in sheep’s clothing.

Do Your Diligence

Before committing to a “free” solution, it’s worth conducting some due diligence.

Here are some questions that every buyer should ask:

  • When free isn’t free: What are the additional costs involved? What are the implementation hours, integration costs, migration costs, operational costs, and opportunity costs? In a typical enterprise project, licenses or SaaS subscription cost is only a portion of the overall expense. There is implementation and integration, training and roll out. More importantly, there is opportunity cost. Will your business run better with this solution or with another that is not “free”? Finally, which solution maximizes your time to market the competitive edge you are attempting to gain?
  • There’s more than meets the eye: Ask about hidden costs like professional services charges, forced requirements that requires your business to conform to basic capabilities, lock-up, and switching costs. And, will the product still meet your needs after the initial “free” term has expired? Will you have more options and greater flexibility with another solution?
  • A look behind the strategy: When companies are selling a “free” or “free-for-a-year” solution they are planning to do one of four things:
  1. Use the “free” portion as a loss leader, banking on your long-term success for increased contract values and back-end revenue.
  2. Working to gain market momentum with a flurry of new logos and win announcements.
  3. Lock you into their solution because the implicit and/or explicit change cost makes switching a hassle or worse.
  4. Compete on things other than the solution’s benefits, quality, and value. What do these strategies say about their business and their long-term business goals? And, where does each strategy leave you?
  • Free” isn’t a guarantee of happy-ever after: Purchasing an Enterprise solution is like getting married. You want a partner who will be with you for the long term, who will support you, enable you, and grow with you as your needs change. Careful that your “free” solution isn’t a 1 night stand that leaves a six Tylenol hangover. Enterprise solutions need to work over the long term. You are investing not only in software, but in a company that needs to perform over the long haul. Make sure the company is someone you want to partner with and that the “free” product is worth the long-term investment. As Neil Sedaka reminds us, “Breaking up is hard to do.”

Free is rarely free. A “free-for-now” solution might look appealing but initial attractions can run thin after repeated attempts to fix problem areas.
The rule in painting (gardening, remodeling, and countless other DIY projects) can also be applied here: It’s 90% preparation and 10% application. Do your homework upfront. In the end, it might just save you from a costly change order.

By Tom Dibble

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