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In recent weeks, several companies tweaked the free tiers of their products, from Slack and Otter.ai to Google Meet and Heroku. This ties back into a crucial question for freemium businesses: When should you start charging? And does that look different in a downturn? Let’s explore. — Anna
No time for freebies?
Oh, how things have changed.
You are already used to reading this on The Exchange, whether we are talking about public markets, venture capital or macroeconomic indicators. But now there’s another sign of the times: Free tiers are becoming less generous.
An email I received from Google made it clear that we are in a very different mindset than when the pandemic started. “To help us all stay connected,” the email read, “two years ago we offered the premium version of Google Meet to everyone and announced that we would temporarily not enforce the 1-hour time limit for group meetings. Beginning this month, group meetings with three or more participants will revert to having a 1-hour limit.”
If you’d like to host longer group meetings on Google Meet, you will have to sign up for a paid plan. In other words, Google is cutting down on its largesse.
News is more mixed at Otter.ai, which also recently made changes to its offering. On one hand, users on its free tier will get 300 transcription minutes per month instead of 600. On the other, its Otter Assistant, an automated meeting recording bot, will now be available to all. Still, my former colleague Martin SFP Bryant described this as a “massive reduction in overall value for some users.”
Many also complained about decreased value when Slack changed the threshold of messages that can be accessed on its free tier. “Previously, free Slacks would show the last 10,000 messages and 5 GB worth of uploads. Moving forward it’ll be based on time rather than amount, with Slack showing the last 90 days of messages/uploads regardless of how much or how little is sent,” TechCrunch’s Greg Kumparak summed up.
The Salesforce-owned company argued that its new approach isn’t less generous. “The majority of our active free teams will have access to more of their message history with the new 90-day limit compared to the previous limit,” Slack said. But a quick Twitter search shows that not everyone is happy with the change.
As for Heroku, there’s no arguing that it just became less liberal in its offering: It simply removed all of its free plans. And while it blamed fraud and abuse for driving this decision, it is hard not to think that its move is also about optimizing profitability.
Both Slack and Heroku belong to Salesforce, but it would be wrong to think that deciding to become less magnanimous with free tiers is a decision that only old-school, enterprise-focused tech companies would make. Among product-led companies, too, finding the right point to monetize is key — and even more so in current times.
User engagement is not enough
After talking to VC firm OpenView about its product benchmarks report, which focuses on the business model known as product-led growth (PLG), I decided to follow up with the report’s co-author, VP of growth Sam Richard. (Product-led growth is a method of attracting new business in which using a company’s product, not its sales team, leads to more usage, and therefore low-cost revenue expansion when done right.)
My question centered on the paradox that product-led companies need to deliver value early on to drive users to the paid tier, even though the current downturn makes it tempting to monetize sooner rather than later. Richard’s reply seems quite relevant for founders, so in a break from our usual format, I will share it in full:
Understand that using techniques to preempt conversion before value COULD potentially backfire — resulting in lower conversion rates than expected, or significant churn down the line, a number that all investors pay close attention to.
That being said, the bar is higher than it was for drawing a closer line between user engagement and potential revenue. Founders can be proactive in fundraising conversations by surveying users about how disappointed they would be if they could no longer use the product, and offering up customer introductions to prospective VCs.
As investors focus more on profitability, product-led startups may be sitting pretty
Case in point: Buildkite
I was still curious to know how the decision of changing one’s pricing looked from a founder perspective, so I sent questions to an OpenView portfolio company that had done just that. The startup is called Buildkite, and its CEO, Keith Pitt, shared the following thoughts with me in July:
We started to fully transition to PLG as a way to address low conversion rates. Developers would create a Buildkite account, get distracted by other priorities, and before they knew it, their two-week trial would end. This created a scenario where we required payment before they could continue to trial our product.
We added a free plan so we could demonstrate value before capturing revenue — one of the pillars of product-led growth. We also implemented a reverse trial model so users can have access to pro features in their initial exploration and can fall back to a free plan generous enough to demonstrate value for proof-of-concepts and users with lighter resource needs.
Additionally, as we looked at our data, we noticed that product usage growth was growing faster than how many users we had on the platform. In some cases we had customers using our system to extreme limits without proportionate compensation for the value we were delivering. We started adding usage-based pricing to better align our costs with how our customers pay for the product.
I asked Pitt if the downturn made things any different, and he said that “in current economic conditions, price sensitivity is becoming an increasingly important factor in purchasing decisions. This means it’s more important than ever to provide a free way for users to experience a product and its value before expecting a purchase.”
Finding the right monetization point is never easy, but I hope this gives you food for thought. And if you are a founder with thoughts on pricing strategies, please feel free to reach out and comment.
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