Launching a new SaaS product, and not sure what you should charge? How about starting with “free”?
There’s a key word in that introduction, and it’s “starting”. Free is a great price for your earliest adopters: no payments means no wrangling over budgets or payment terms.
For you, no contract means no fewer complaints, and much less compliance work. And, uh,
no direct revenue.
Is it a trap?
This is the question both sides should be asking themselves. As a supplier, does offering your service for nothing trap you into a situation where you can’t raise prices? Your buyers (perhaps we should just say “tenants”) may be wondering if the rug will one day be pulled under them, and the free service will turn out to cost money - or stop running.
As their future SaaS provider, your challenge is to reassure both sides and still make enough revenue to cover the giveaway.
A simple split
Almost as soon as you can picture defining a service to offer, think of the boundary you’ll draw between paid and free users. Perhaps you always want to charge, so the only gratis offering you’ll make will be the limited environments you use to demonstrate the service. You can delight new customers by letting them upgrade their trial into the real thing.
Maybe you expect - or know - to have a long tail of customers whose usage is so low it’s hardly worth charging, and a smaller set of businesses who account for nearly all your actual usage.
In our experience at The Scale Factory, that’s an important split to make, however you make it. Make it early. More important than getting the pricing right is having a way to get it a bit wrong, and iterate. Yes, it’s easier to suggest it than to implement it. A key part of managing the risk early on is to find the decisions that are hard to fix if you get them wrong, and invent good ways of not committing to these decisions just yet.
Here’s an example: you’ve probably seen firms offer trial pricing, perhaps with unlimited usage for a limited time. If every customer signs up for the trial - and who wouldn’t? - you don’t need to build in metering and billing into your tenant management tools, at least not yet.
It varies by sector, but customers for services are almost universally wary of one-sided cost increases, which makes the prices you charge upwards sticky. That’s the number one reason for focusing on free services and the transition from giving it away to earning you real revenue.
An overwhelming majority of the SaaS businesses we’ve worked with provide some kind of zero-cost way for customers or sales leads to experience their service, so this is probably relevant to you too.
Free as in “tier”
Your business needs revenue. If it’s frustrating being undercut by a rival, it’s a huge problem if the competition comes from your own offering.
Here are three mechanisms you should consider for your free service:
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Free forever, with limits. Use this if you expect a substantial base of paying customers who are clearly well past that limit, whether it’s on team size or throughput or capacity units or whatever. Revenue from those bigger customers needs to be enough to subsidise the smaller ones, and the limits you impose have to be effective at managing costs.
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Free until the credit runs out. If your main driver for the free offering is to drive adoption of the real service, and especially if there’s an obvious unit of consumption, you can give some of it away for free. The more people use, the more benefits they are likely to see.
Not sure how much to offer? Consider setting a low baseline and then issue bonuses - it’s easier to withdraw a bonus than to change the baseline, even for a free service. It still amazes me what expectations people can build up around something they don’t pay for, so those expectations need managing.
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Free trial. You’ve probably seen this in a consumer context, often for SaaS. The usual model is to require a payment card up front and automatically upgrade if people keep using it. Great for conversion, but a barrier to adoption. Consider this if you’re in the B2C sector or adjacent to it.
My point really is that you’re going to have a free offering and, if you’re new to SaaS, you’ll really benefit from thinking early on about how you think it’ll end up working out. You don’t even have to get it right; what’s far more useful is getting a design that can work and a pricing model that you won’t regret.
Running a SaaS platform can be complex and costly. If you’d like some additional guidance managing the cost of running your workload so you’re confident you’re making good decisions, The Scale Factory offer a focused AWS health check.
You’ll receive a free report with a risk profile and specific technical recommendations. Book yours now.
This blog is written exclusively by The Scale Factory team. We do not accept external contributions.
