Building functioning software alone is hard enough. Getting other people to pay for that software is another challenge entirely. So what does it take to make your software profitable?
Fortunately, there’s more than one way to monetize a software product. For this article, I interviewed a handful of successful entrepreneurs and one investor to learn how they helped turn ideas into profitable SaaS businesses.
Obviously, how you choose to monetize your software—freemium, free trial, etc.—isn’t the only factor that leads to sales. That’s why I chose to include diverse stories so you can gain insights into marketing, sales, and the underlying thinking behind various monetization strategies.
Each person I interviewed had a unique approach to monetization. We’ll cover four strategies in total:
- Free trial
- Proprietary value proposition
Grab a pen (or a note file). Here are some best practices and hacks from real entrepreneurs to help you convert curious website visitors into paying customers.
Pricing Strategy 1: Monetizing by Free Trial
Christina Bechhold Russ is the Director at Samsung NEXT, the innovation and investment arm at Samsung. “My role involves scoping out early stage startups (from seed to Series B) that fall within our key verticals for investment and acquisition,” Russ says. Last year, she led an investment in a SaaS company called Beekeeper.
“We were drawn to Beekeeper because they were doing something that had never been done before,” Russ says. Beekeeper has developed a mobile-first platform for helping non-desk employees collaborate and communicate.
Most digital services cater to desk workers. Many “non-desk” employees and managers still rely heavily on paper for basic daily communication and coordination, the same tasks that have been digitized for years in desk-related roles.
“We were also very impressed by the co-founders’ passion, focus, and level of technical expertise. We knew this was a team we could work well with and achieve something great.”
That’s when Samsung NEXT and Beekeeper partnered up. According to Russ:
We take a very hands-on approach when investing in startups—in addition to the funding, we provide the necessary resources and support to help these startups thrive. I led Samsung NEXT’s investment in Beekeeper’s Series A extension in September of 2018, and have worked closely with the Beekeeper team, advising and collaborating with them on clear strategies for building and scaling their business model.
The Beekeeper Pricing Model
When it comes to deciding on pricing and monetization, “step one is figuring out your value metric, meaning what you’re charging for, and how you’re charging for it,” Russ says. “This should be driven by how your customers use the product, and what value they’re deriving (cost savings, revenue generation, etc.).”
Another crucial monetization component comes down to one question: Who is my ideal customer?
Once you know which customers are most likely to buy your product, monetizing a software business comes down to simply fulfilling customer expectations.
For example, Beekeeper opted for the free trial monetization model, “because the type of customer that purchases a service like theirs would usually prefer to test it out before entering into a contract, rather than going for a freemium solution. In contrast, the freemium model is better suited to small enterprises where software solutions are purchased via credit card,” Russ says.
Beekeeper doesn’t display its pricing online, a common move among enterprise software companies, Russ says. “Because each client tends to have specific needs, the price of the service will vary according to these.”
Common Mistakes in Pricing
Finally, since Russ works with so many startups, I wanted to ask about common threads. What are the most common mistakes SaaS startups make regarding monetization?
Perhaps the most common mistake is pricing the product too low. When just starting out, the tendency is to choose a price point that’s impossible to say no to, but you’re likely to end up with the customers that see the least value in your offering. If you’re solving a real business problem, customers should be happy to pay you the appropriate perceived value—and ideally more over time as you’re able to penetrate the organization further.
The second most common mistake is defaulting to a “per user per month” model, which is often not the most appropriate structure. Freemium models can also be tricky (and often promoted too heavily vs. the paid tiers) and simply don’t work in the mobile SaaS space. For instance, for non-desk workers, decisions are generally made from the top down, so getting a small team interested and then expanding seats from there isn’t effective.
Pricing Strategy 2: Freemium
AJ Bruno has founded two SaaS companies. The first is a PR software called TrendKite, where he led the sales team from $0-$25 million in annual recurring revenue in just six years. Last year, Trendkite sold to Cision for $225 million. Since his exit, Bruno launched his second SaaS venture, Quotapath.
I wanted to learn about both journeys. He started by giving a bit of the Trendkite accelerator backstory.
“Within the first three months of founding TrendKite, we went through an accelerator called Dreamit Ventures. It took us from a napkin idea to building a product to monetizing. We had three paying customers by the end of the program.”
Bruno relied upon his strengths to gain early customers:
My background is in B2B cold call sales, so I continued doing what I knew best. Our sales methodology involved cold prospecting, emailing, calling, setting up a demo and finally a close. Out of 100 prospects, we typically closed two to three in a two-month sales cycle.
As a product in the Cision tool suite, TrendKite is still marketed on a free trial/demo strategy. But Bruno’s latest software, QuotaPath, will use a different monetization model.
Shifting to Freemium
With a product-led mentality, Bruno chose to go the freemium route.
“Individual sales reps and managers can use QuotaPath for free,” he says. “Before we start charging for the product, we need to make sure it delights users and is a tool they want to use.”
This fall, they plan to roll out expanded paid options with reporting and admin functionality.
“Because we’re putting product at the forefront, we need to make sure we are fulfilling our customers’ needs first. We launched an early access program in the fall that we’ve continued to iterate off of and will be going live with the product in August.”
Bruno’s plan to focus on product and customer retention stems from experiences building TrendKite. For the first handful of years, TrendKite doubled-down on efforts to gain new customers. They invested less heavily on keeping their existing customers.
“Our customer retention suffered because of that, and I am making a concerted effort to change that on my second startup.”
At the heart of the freemium pricing model is a high-quality product. Users must fall in love with the core functionality so that they see value in upgrading to the premium service (think Slack).
Pricing Strategy 3: Pay-As-You-Grow
In 2011, Itai Lahan (CEO), Tal Lev-Ami (CTO), and Nadav Soferman (CPO) launched Cloudinary—a cloud-based image and video management platform. The inspiration for Cloudinary is a story familiar to many developers: they needed a technical solution to a problem that kept coming up, so they built it for internal use.
Turns out, other developers had been struggling with the same problem. The Cloudinary team realized that they could repackage their internal solution for other teams. And thus, Cloudinary was born, completely bootstrapped.
Within months, Cloudinary had several paying customers and momentum was strong. Today, Cloudinary sells three tiers (Plus, Advanced, and Custom) of subscription-based SaaS software, along with a basic “freemium” service.
Customers include CNN, TED, Just Eat, Trivago, WeWork and many other local and globally recognized brands.
“That developer-centric approach in our earliest days helped us grow organically—because the developer community will share positive experiences about the tools that are helping them succeed,” Lahan says.
“They’ll also share feedback about what doesn’t work or what could be better, which allows us to improve. While we’ve now extended our software and services to support marketing and creative stakeholders, we’ll always be developers building for developers at our core.”
Cloudinary’s Pay-As-You-Grow Approach
Cloudinary’s cloud-based platform and multi-tiered pricing structure, which includes a free plan, allows people to use their platform for as long as they want before they have to invest or commit. The different subscription tiers reflect their experience of what they know developers need to get started, allowing them to scale up as they grow, aka the “pay-as-you-grow” model.
“Crucially, without the external pressure from VCs, we are in the rare position of being able to continue to focus on the needs and priorities of developers as we continue to evolve and grow our platform,” Lahan says.
“From day one, we knew we wanted to offer more than just a free trial, but a free tier that would allow developers to try and then use the solution for as long as they wanted.”
He knows this customer profile well.
“As developers ourselves, we know that developers like to try things out and see how they work. The tiered pricing model allows users to have a product that suits their needs today and scales with them as their needs grow.”
The cool thing about this model is that it means that your company’s success is directly tied to customers success. As your customer’s needs (and business) grow—you grow. It puts you in full solidarity with your user base.
I believe that being bootstrapped enabled Cloudinary to chart its own course. It’s hard to know for sure whether the outcome would have been different had we sought and secured VC funds. However, growing organically on a foundation built by our own paying customers, seemed to give us the freedom to create and nurture the kind of culture that we believe has been integral to our overall success and the company we are today. We’ve been lucky enough to be able to grow healthily, internally and externally, while remaining an aggressive force in the marketplace.
Freemium vs. Pay-As-You-Grow?
Pay-as-you-grow is very similar to freemium. Some might argue it’s even a subcategory of freemium pricing structure. So what’s the difference?
Freemium pricing is meant to win users over into buying a premium version of a product in order to take advantage of more add-ons and features. Pay-as-you-grow, on the other hand, is a model that anticipates increased need for a resource over time as businesses grow. In the case of Cloudinary, they anticipate that small businesses will require greater storage capacities as they grow. To unlock that greater capacity, they must pay as they grow.
Pricing Strategy 4: Software as a Lead Magnet
Marie Poulin and her partner Ben Borowski run Oki Doki, a creative digital agency. As strategists, they solve complex technical challenges, and help businesses plan, design, and market their digital products and services. Four years ago they launched Doki, a SaaS platform to help small business owners create and launch online courses and resource libraries.
“Doki really came out of the client services work we were doing that involved a lot of complex, custom design, development, and integration work for entrepreneurs who were launching online courses, coaching programs, and masterminds. It’s a tool that delivers those services more quickly and efficiently,” Poulin says.
But in this case, the software is not the main source of revenue. “We noticed a lot of people that were signing up to use our software needed much more support beyond simply the use of the technology. We were a bit naive in thinking that the challenge was simply a technical one.”
As creating online courses became more and more common, Poulin started to notice that people were trying to take the leap without doing a lot of the vital legwork to make a course successful. Doki started to open the doors to a whole new client base for Poulin and Borowski.
Our platform was attracting a much more beginner market than our client services had in the past. People were creating courses, but many didn’t know how to really create products people were willing to pay for. They hadn’t done market research, they didn’t have experience designing curriculum, and they weren’t very technically savvy.
They started getting more and more requests from people needing help launching their courses. Soon they found that product demos had become a source of lead generation for their higher-end consulting services.
“People would get a demo with Ben, but upon hearing that they weren’t quite ready and they had so many questions beyond the tech, Ben would say, ‘Ah, it sounds like you might want to have a conversation with my partner, this is what she helps people do!’”
Many of the initial demos led to new long-term clients hiring them on a retainer basis, which bring in 10 times the revenue of a monthly SaaS fee. It’s not so much that they were against doing a pure SaaS model, but they were incorrect in assuming the software would solve their audience’s problems and that would be the end of it. “The truth is, it completely transformed our business in ways we didn’t expect.”
Poulin also developed a small course of their own on their software platform, and they send out an invite code for customers who book a demo but need more support. It’s also a way to get a feel for what using their platform is like, and it all feeds into their thriving client services business.
Our experience building a SaaS of our own, working on other people’s software, creating courses of our own, working on other people’s courses, and working with clients, while helping them work with their clients…all of it gives us a really well-rounded perspective of both products and services. We’ve seen so many different types of business models, delivery models, and launch styles, that we’re able to pull together really valuable insights for our clients. We’ve really diversified our revenue, and we’ve seen that work really well for a lot of our clients too.
So Many Ways to Monetize
This is just a handful of stories of how founders have successfully monetized their software businesses. As you decide how you want to structure your pricing and marketing, there are so many different variables you can adjust. Monetization strategy will always depend on what you product does, who your users are, and what they expect to gain from your product.
Of course, there are tons of other methods you can try—good and bad. You can just run ads on every screen of your product for example, though you’ll want to be careful. Your user reviews might be garbage if you overdo it. User experience matters and will continue to matter more and more in the future.
If you’re still stuck, Foundr is launching a course designed specifically to help SaaS startups answer this question for their team. Keep an eye out for updates in the future. Subscribe to our email list to get notified when we launch.
In the meantime, are you trying to figure out how to monetize? Any struggles we can help with? Let me know in the comments below—let’s discuss!