Freemium comes to enterprise SaaS applications

In his daily email digest, Richard Holway today pointed to an interesting new development in enterprise SaaS applications: Freemium-based lead generation.  UK-based vendor of accounting software IRIS announced it is giving away a basic version of its payroll software product (in partnership with HMRC no less!).

This was inevitable, given the ongoing restructuring of sales productivity in the software industry.  But I didn't expect to see it so soon among line-of-business applications.  Giving away free versions of software to generate leads has worked in the consumer market and in tools and infrastructure for SMEs (see NTR for example).  

But this approach historically relied on the vendor handling huge volumes of 'free users' for a very small fraction of paying users.  For example, when LogMeIn filed to go public last spring, the company had 22m registered users, of which 188,000 were paying an average of $153 per year.  That's a conversion rate of 0.85%, and represents a lot of servers to keep humming for the general populace!

They key for application vendors like IRIS will be to make their free versions sticky enough to drive a high conversion rate.  Any app that pulls in corporate data and stages it for external consumption (eg reporting or analytics) is a great candidate for this.  Once the app owns the data, the inertia to keep it switched on is huge.  The consumer analogue for this is back-up and sync services like Mozy or SugarSync.  I ran each as a trial and now I'm in year 2 of paying mostly because I can't be bothered to change providers!

It will be interesting to see what other application vendors go down this route.  It's not easy to: 

1. find the right split of functionality between free and paying versions; and 
2. get the upgrade sales process right so that expensive inside sales people don't chase too many dud leads.  

Today, only a small number of app vendors have really got this worked out.  I reckon the others have the rest of 2010 to crack it before a critical mass of competitors gets the better of them.

Comments

[Emply]

If done right, freemium can bring down many of the current "call for a demo" or "fill in a form and we'll see if you're worthy of a trial" walls. Replacing manual sales for each customer with a marketing-driven automated freemium approach should also bring down prices of many SaaS products, making it also more affordable for smaller customers.

But the issue of where to draw the free/paid line is tough for both startups like us as well as more established companies.

[Thomas Oriol]

We at nimble apps have been considering freemium for our online sales analysis and forecasting application, especially since we do "stage corporate data for external consumption", as Max puts it.

But I would add to the issue mentioned by Emply the fact that, for a young company with a new product, there is much to learn through direct conversations with prospects. A large, B2Cish marketing drive would not yield the same feedback.