Freemium pricing, and cannibalizing your existing customer base

I love the idea of freemium for a SaaS app like ours (Less Annoying CRM). People can sign up and use the product for free, and if they end up becoming heavy users, they can upgrade to a paid plan when the time is right. This accomplishes two things:

  1. It aligns the incentives between us and our customers. Instead of an arbitrary limit on when they need to pay (we currently offer a 30-day free trial), paying happens whenever they start receiving an appropriate amount of value.
  2. It potentially makes distribution easier because there’s much less friction to try out the app, and there’s a larger base of free users to refer and recommend our product.

But there's a problem: Switching to a freemium model would cannibalize our current customer base.

We have about 25,000 people paying us each month to use our software. I feel confident that they’re getting a lot of value (we have a low price, high usage, etc.), but the reality is that if we had a free plan, a decent chunk of our users would probably prefer that option, even if it meant losing a bit of functionality.

I don’t think this would be an issue if we’d had a freemium plan from the start. We would have built the business differently to account for the fact that we’d have to serve a ton of free users in addition to our paid ones. In theory, freemium would have helped so much with growth, that we’d actually come out ahead financially.

But because we didn’t start out that way, switching to freemium now would be a shock to our business model.

Lifestyle inflation

This reminds me a lot of how lifestyle inflation works for an individual person’s finances. Where I live, it would be pretty easy for a single adult to live off, say, $40k per year. But as you make more money, it’s common for your expenses to increase. You buy a house, upgrade your car, get used to shopping at a more expensive grocery store, etc. All of a sudden, it becomes much harder to live off the income that used to be more than enough.

Business finances work the same way. In the early days of LACRM, the only expenses we had were the servers. But then my brother and I started paying ourselves and hiring people to help out with customer service, software engineering, marketing, etc. Now, we depend on our revenue to support our team of 19 people.

I want to be clear: I don’t see this as a bad thing. The same way buying a house you love is fine if you can afford it, I think that employing people is one of the most fulfilling things I’ve done as a business owner. But it does make the idea of switching to freemium pretty scary.

Possible solutions

To be honest, I’m not totally sure what the right approach is here, but here are some things that I’ve either considered, or seen other companies do:

Just stay away from freemium [the default option]

While I’m captivated by the potential of freemium, we’ve got a perfectly healthy business right now without it. There’s a very good chance that at the end of all of this, we decide to just keep doing what we’ve been doing: Offer a 30-day free trial, but require payment for all customers who want to use our product after that.

Have paying users subsidize the free users

I can tell you right away that this isn’t something I’m remotely interested in. A lot of companies offer a freemium plan, and they make up the lost revenue by charging their paying customers a lot. This makes a certain amount of sense. The value customers receive probably follows a power law, so charging your most engaged customers a ton is arguably appropriate. But LACRM has always been dedicated to serving small businesses that can’t afford expensive software, so I’m not interested in punishing our paying customers just to make freemium viable.

Only make new products freemium

This one interests me a lot. I explained above how it’s easier for new businesses to start out freemium, because they aren’t yet dependent on the revenue they’re potentially missing out on. That means it’s hard for LACRM to make the core product freemium for fear of losing revenue, but if we were to build new products/features into our existing platform, we could potentially make those freemium, because we aren’t dependent on that revenue yet.

For example, we plan on adding an appointment scheduling tool (something like Calendly) directly into LACRM at some point. We wouldn’t charge our current customers any extra to use this feature, so it would effectively be free for our current customers anyway. What if we made it free (within limits) even for non-customers, so someone could use our appointment scheduler even if they aren’t a CRM customer? Then, if they decide they want a CRM, or they end up being a heavy user of the scheduling tool, they could upgrade to our standard paid plan.

The upside is that we could get some semblance of the benefits of freemium (new distribution channel, low-friction signup, aligning paying with receiving value) without risking our current business model.

The main downside I see to this is that it might distract away from our focus on the core CRM. A free appointment scheduling tool would be a nice perk for our CRM customers, but we’re not really in the business of competing with Calendly, and in order to make the freemium version compelling enough for non-customers to use, we might have to put more of a focus on the appointment scheduling than we otherwise would.

So yeah, those are my thoughts. We’ll keep noodling around on this internally at LACRM, but if you have any ideas or suggestions, I’m all ears!

Have thoughts on this post? I'd love to hear from you! I'm @TylerMKing on Twitter.
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