SaaS Pricing: Our Big Free Plan Mistake

There is a strong temptation when beginning a startup to offer a generous free plan, even if you aren’t planning an SaaS pricing model. The idea is appealing, especially to young companies, because we think once people try what we built for free they’ll eventually upgrade to a paid version. These people will tell their friends and the cycle will continue until you’re making money hand over fist. This was the logic we followed at Hubstaff’s inception and it was what led to our big free plan mistake.

It’s easy to see the appeal of offering something for free, since some of the biggest tech companies in the world don’t charge users a cent. Facebook and Google offer basically everything you’d want for free. Has YouTube ever asked for money before it let you watch a video?

An important thing to note is that these companies are the exception.

Unless you continue to grow like crazy you’ll eventually need to turn a profit. Gigaom, the now-shuttered tech news site, is a recent example of the failure of the freemium model. Yes, journalism is much different from SaaS, but at the end of the day Gigaom’s revenue was too weak to continue supporting all of its free users (readers).

For SaaS companies, free plans don’t make sense (or cents). My co-founder, Jared Brown, knew this. He championed a pricing model called “cheapium” in a blog post, which basically said companies should charge minuscule amounts for what would normally be considered a free plan. Despite all of my co-founder’s blogging we eventually settled on a free plan in our SaaS pricing model that offered up to three users limited access to Hubstaff.

For SaaS companies, free plans don't make sense (or cents). Click To Tweet

The Hubstaff Free Plan Mistake

Here’s what one of our earliest pricing plans looked like:

Notice the “Free Forever” plan on the far right?

The thinking was that we could become a market leader by offering a free plan and acquiring a ton of users. Naturally, some of these users would drop off and some would continue to just use the free plan. However, some would decide to upgrade to a paid plan, either to add more accounts or access more features.

Word-of-mouth helped Hubstaff grow early on and continues to do so to this day. We thought that by having more users we would get more people talking, whether it be on blogs and social media or just friends telling their friends about us.

Why It Didn’t Work

We had great expectations for our free plan and the users who signed up for it, but those expectations were never realized. Our free plan ended up losing us money and stunting our growth! Here are just a few of the things we learned:

  • Paid products carry more value
  • Free users bring more free users
  • Free users eat up support
  • People take advantage of free accounts

Paid Products Carry More Value

Think about how many free apps or services would you stop using if a paywall appeared overnight. The reason you would drop them isn’t because you’re cheap, but because there’s likely another free option out there. Free stuff just doesn’t carry as much value as something you paid for.

A great example is Pandora, which follows the freemium model.

Pandora offers a free plan with unlimited streaming music, albeit interrupted by ads. Pandora One goes for $4.99/month and offers higher-quality audio without ads. However, I’m happy with my free version of Pandora, as it offers all I need and I don’t mind the ads too much. If Pandora were to force a paid plan upon me I could switch to Spotify or any other music streaming service that follows the freemium model. Those who’ve been with Pandora for a while remember when listening was capped via a monthly hours limit.

When you hit your limit, did you upgrade or just go to YouTube or somewhere else and wait until the month ended? When we modified our free plan, many users left because they didn’t value Hubstaff enough to pay for it or because they found another free alternative.

Free Users Bring More Free Users

It’s great when people talk about your startup because you built something with great features, user-friendly interface, multiple integrations, and other positive aspects. It isn’t great when people talk about your product just because it’s free.

When a user on a free plan tells someone about that product, their biggest selling point is most likely the cost. If you gain new users this way, you gain them because of the promise of something “free,” not something useful and awesome.

Another thing worth mentioning is that in our case, those using the free account didn’t really register as influencers. Granted, the remote teams industry that we’re in is fairly small and we cater to a niche. Regardless, it’s unlikely that someone who only wants/needs three (free) accounts is going to have a high-profile blog or be big on social media.

Free Users Eat Up Support

If a large amount of your users have free accounts, that means you’re probably spending a lot of time helping them instead of your paying customers. Someone who is willing to pay for your product shouldn’t have to wait for help behind an army of people who use it for free.

If you take too long to answer a ticket that should be priority, then you risk losing a paying customer. On top of that, free users generally require more help; remember that they likely value your product for its price (or lack thereof) and may need more hand-holding.

As an SaaS company, we spend a lot of time and money on support, and we want to be sure our paying customers are being helped as quickly as possible. You just can’t be sure that’s happening when free accounts make up so much of your user base.

People Take Advantage of Free Accounts

This was the biggest “I told you so” moment from our big free plan mistake.

Our first free account was limited to three users, but you could add more users by signing up for a second (or third) free plan with different email addresses. We were hoping that people would upgrade when they needed more users, but why would they pay when there were fairly easy ways around it?

This happened enough that it caught our eye, and it was just another reason for us to back away from the freemium model.

What We Learned

Our plan to offer free accounts for three users didn’t work out, but we did learn a lot from our failed experiment. Here’s what our free plan taught us:

  • If someone values a product they’ll pay for it
  • Plans for three users are our highest draw
  • You need to value your work

If Someone Values a Product They’ll Pay for It

The sky didn’t suddenly fall when we axed the three users free plan.

We still offer a three user plan, but now it goes for $15/month. We’re continually working to improve Hubstaff, and from where we stand this plan adds much more than $15 bucks in value.

If you’re in the SaaS industry, you shouldn’t feel the need to offer your product for free simply because you’re worried that no one will try it otherwise. You also shouldn’t see user acquisition as a money making arms race.

Liam Gooding, founder of Trakio, said it best when he wrote that “free is not a competitive advantage.”

Experience Increased Productivity from Anywhere

Free for 14 Days

Plans for 3 Users Are Our Highest Draw

At Hubstaff we like to be transparent with our growth and numbers, which is why you can find our stats on Baremetrics. While you’re browsing, you may notice this:

As you can see, our top plan is our three users for $15/month option. Another plan that attracts a lot of sign-ups is our one user for $5/month and three for $149/year. All of this is revenue we would have been missing out on if we continued to offer a free plan for three users or less. Remember that people were also signing up for multiple free accounts, so we would have missed out on getting people to choose our monthly and yearly five user plans.

You Need to Value Your Work

This was the most important lesson we learned from our big free plan mistake.

Running a startup costs money, just like any other business. You put cash into developing your product, marketing it, supporting your users, and so much more. You need to value what you’ve created, and if you want to keep building it, then you’re going to need to start charging users.

A $15/month paid plan didn’t put us in the red, but it did bring more paying customers to Hubstaff, which helped us cut our monthly expenses. It wasn’t much, but any money we saved could be reinvested into the business.

You need to value your work, and a big part of that is putting a price on it.

Where We Are Now

This may sound hypocritical, but (plot twist) we still offer a free plan!

Today’s free plan is good for only one user and is labeled “lite” for a reason. You get limited screenshot storage and user settings. This plan allows someone to try a limited version of Hubstaff for free, and if they like it the jump to a full solo plan is only $5/month. In fact, this plan clocks in as our fourth-most popular in terms of total sign-ups. This shows us that there are people who value Hubstaff enough that they are willing to pay $5 more to have access to the full version.

Oh, and our 14-day free trial doesn’t hurt either!

Track and Manage Remote Time with Hubstaff

Free for 14 Days

General Advice

Our big free plan mistake is not unique.

For SaaS startups, and for many other tech companies, free just doesn’t work. Yes, getting people to sign up is great, but all the free users in the world won’t help pay the bills.

If you really want to give away what you've made, then you'd better have a lot of money to spend. Click To Tweet

The majority of your free users exist because they don’t have to spend money to use your product/service or access your site. This means you’ll spend a ton of money building something for people who don’t value your work enough to pay for it. This is fine if your company is well-funded or if you plan on being bought. But how many companies actually get enough funding, or make enough through ads or paid user subscriptions, to support a glut of free users? If your business plan is to be bought or acquired then you might want to rethink things.

For us, a lite free plan and free trials have worked best. We’ve also played around with our pricing plans to see what works best. You shouldn’t worry about driving away users by asking them to pay for what you’ve built. If you’ve built something useful and unique, put a fair price on it and people will pay.

Hubstaff time tracking
  • StoyanMit

    Great article Dave. Totally agree with you! Thanks for writing it!

  • Ben Ravilious

    The killer point that I’ve read many times is that Freemium is a marketing ploy *not* a business model.

  • timosolo

    Interesting..
    Unrelated, but why do you have a share icon at the top of the page that is just a link to your twitter account??

  • J. Prosaic

    You are right about the freemium model, Dave. We learned the same through our own experience. Other factors, though, can change the picture – see below.

    Back in time, everybody (in SaaS space) learned from and copied from and got inspired by 37Signals, but when we started 5pm (also a project management tool – http://www.5pmweb.com) almost eight years ago, we did not follow the freemium pricing model. We decided not to offer a free plan, just a free trial. The main reason was support – with the bootstrap approach to our business, we decided to concentrate our efforts on paid customers and development. We even reduced the trial to two weeks instead of the traditional one month for a faster trial-to-paid cycle, and it worked well for us – we are able to surprise our customers with fast and detailed emails coming straight from one of our developers. And customer service is your most basic and cheapest marketing.

    I remember the blog post you mentioned by 37Signals with the conversion rates from free to paid (not to be confused with trial-to-paid conversion). Only the numbers mentioned there were even lower. Other companies mentioned 2-3%, and 37Signals (now Basecamp) stated that their conversion is UNDER 5%. It means, in theory, that every email from a paid customer is “buried” under 20-50 emails from free users. And you can’t just ignore or pay less attention to free users, as your whole point is to convert them, eventually, to paid ones. As the years passed, Basecamp made the free plan less visible on their pricing page then dropped it altogether.

    Sure, it also depends on the market you are trying to corner. Project management, time tracking, contact management – those are busy ones. With the smartQ workflow management tool (http://www.getsmartQ.com), we tried things like a longer trial and pricing per user. So there is no highest plan, a top limit. There are many opinions about that too. Those range from 37Signals’ point of view that there should be a maximum plan (as they do not want fewer expensive clients but rather have more smaller ones), to opinions by others that this is a money losing strategy on the high end. From our view – we are happy with the distribution of clients across the plans in smartQ – a higher pricing meant less clients, but also higher value from each account. We think that works for less saturated areas with products for a narrower, specialized market.

    But we did not stop experimenting over the past years. With the SpiderScribe mind mapping tool (www.SpiderScribe.net), we actually decided to give freemium a try. The idea was that since this tool creates content that can be shared with the public (public mind maps), that content could create free advertisement for the product (social marketing). It worked out, and it did not. While the number of registered users dwarfs our other products, the conversion rate to paid plans is only 0.05%. It turned out that SpiderScribe is highly popular with schools, so while we have teachers subscribing whole classes, the conversion to paid plans by 7th graders is predictable. There is a big difference between a B2B oriented product and a B2C one. Businesses prefer to pay for the products and get their value via support. Consumers pay from their own pockets and prefer free alternatives whenever possible (and there is nothing wrong with that).

    Recently we launched two more products and decided to stick with the pricing model we started initially with 5pm – a fixed set of plans without a free one and with the top unlimited one. This allows us to concentrate our resources on our customers and development. And it also offers our customers a transparent pricing model with a clear top limit for easier growth budgeting.

    Thank you for sharing your numbers. While we did not get a chance to blog about our experience with pricing for SaaS, I decided to share it in this post.

    • What a great blog comment. You just made my post twice as valuable. Thank you. I think we have looked at integrating with 5pm before but I don’t think we could make it happen for some reason. We will have another look though. We’d love to work with your apps.

      • J. Prosaic

        Thank you Dave.

        About integrations – just email us at support [at] 5pmweb.com if you have any questions/issues. We updated our API some time ago – our iOS app is using it, actually. So, maybe, the issue was with our older API.

        Keep posting :-). Even after eight years we are still learning the SaaS business.

  • awmarsha

    Dave, really appreciate you putting this down on paper (digital). For Steller.com, I needed some solid evidence to show my investors to justify not offering a free model. We do plan to use the free trial but are no longer exploring freemium. thanks!

    • That’s great to hear, I’ll be updating this post as we learn more.

  • Thanks for sharing this experience Dave. We also had a free plan at our cloud accounting app – ProfitBooks.net which we had to pull off. Later we re-introduced it as a Pay-what-You-Want plan but that also didn’t work. Primary reason was, those free users were just not active. They signed up just because it was free.. similar to how we collect coupons we never use 🙂

    • Harshal – That’s good insight. Thank you for reading!

  • Tony Henrich

    Free Pandora is not about showing ads only. The list of played songs becomes repetitive after a while. All so that they encourage people to a paid subscription

  • Dave this is spot on my man!

    Our app has a free version and you’re right it takes up alot of resources. I suppose if conversion rates from free to paid users was great for a company it’s worth using this model, but I’d bet for most companies that conversion rate is dismal.

    Something to really think about here.. Thanks.

    • Thanks Scott, I appreciate you reading. Yeah, I agree, our initial theory was that free users would at some point grow and pay for the service, but then we realized that many of them were just opening up another free account when they grew.

  • S.Hossein Golhosseini

    very inspiring Dave thanks for sharing

  • Wow. Great advice exactly when I needed it.

    The first version of my startup (narrow.io) had a freemium model, but I recently switch over to a premium free-trial model. This decision made me anxious because I knew the number of active users would be lower since free accounts would be expiring. However, your final point – that you need to value your own work – really resonated with me. I’ve been working too hard to give something of value away for free.

    Do you know what a healthy conversion rate is for converting free-trial users into paid users?

    • Hey Jerad – Narrow looks cool. In terms of conversion from free to paid, ours is around 15%. I feel that 15% is low so that’s something we are working on and I will make a post about. Some companies say it’s more like 5% (I think I read that on a 37 signals post one time).

  • Dave, you’re right. We at https://ruxit.com don’t go for Freemium and it works well. See our thoughts on this here: http://blog.ruxit.com/forget-freemium-youre-building-business/
    Of course, we offer a free trial period to enable users testing our product but no free/limited version. For startups we offer special prices.

  • vishnuvvn

    Hy Dave, What I personally think is you should have free plan which creates a value. Over the long run if your users looking to repeat the value created they should pay you. So go minimalistic on free plan and repeated value generation user will pay.

  • Andrés Max Peña

    Thanks for sharing Dave. We’re still figuring out our pricing model at http://taskware.do and this makes a lot of sense, time to test!

    • That looks like a cool project. Is that startup framework as well?

      • Andrés Max Peña

        Thanks! Not really, we built it from scratch.

  • Great read Dave. We have certainly struggled with the Free plan issue at FollowUp.cc. At one point we had a very generous free plan. It was lightened up over time and eventually removed from the pricing page. That is where I think we made a mistake. We looked at stats and found that a large group of user did not engage at all in the trial process – 14 day free trial. When we surveyed them the most common response (18% of user) was “I didn’t even want to take the time to try the service because I knew I would eventually have to pay for it.” Have to tried removing the free plan from your website? Thoughts here?

    • Suz – Yeah, we kept the free plan but limited it to 1. We have not tried to remove it all together. For sure, I can see what you are saying about some users not wanting to continue on and trial the service because they’d have to pay for it eventually. I think that’s a great point, but maybe that’s part of the “numbers game” in the Saas model. You get people to sign up which is good, but then drop off for a number of reasons. Price can be one of those reasons, and by guess is that no matter how good your product is, you probably couldn’t “talk” them into the service if they came in with the mindset of looking for a free solution. I think that was our problem. Free breeds more free, and the referred people had in their minds they were about to check out a free service. So even if they had a team of 20 and couldnt have gotten a lot of value from the service, they came in with a mindset of getting something for free. Those are just my thoughts, but I can definitely see what you are saying to be true.

  • Răzvan Ciocănel

    This is interesting read Dave. We are also thinking of building a SASS business and we were thinking of offering a free plan. We’ll probably reconsider this now.

    • Thanks Razvan, much appreciated. It’s a tough call I think… In the end just didn’t work for us.