When to choose the freemium pricing model as solo founder

Pricing is a difficult topic, especially for first-time SaaS founders who don’t have experience in that area. One common question is whether the product should have a free plan. I have read many articles on that topic, and received a lot of contradictory advice. Often it’s just a “it worked for me so it’ll work for you” kinda thing. I haven’t found a good reason for including or not including a free plan. Until recently.

Before explaining my reasons I should address the elephant in the room. Why not just include a free plan in every product and be done with it?

While it can work, it may hinder growth or hurt profitability.

Free only means free for the customer, not for the product creator. Free users still generate infrastructure costs, and sometimes need support. Spending significant amounts of time assisting non-paying users can ruin businesses. As a frame of reference, some people talk about 100:1 free to paid conversion ratio. This means one paid customer needs to support 100 free ones. That can be difficult to make economically viable.

Free plans may also cannibalize paid usage. A user who would’ve paid for the product might be ok with the free version. Structuring the free plan appropriately can be challenging. It has to be good enough for people to use it, but not so much that they see no need to upgrade. Achieving that balance can be tricky. Even more so for new products which don’t have a lot of features yet.

Different archetypes of product-market fit

Sequoia recently posted an article recently about the 3 archetypes of product-market fit, which was the missing piece for me. I’ll explain them, but for more details check out the article, it’s worth it.

Hair on Fire is when you solve a problem that’s a clear and urgent need for customers. Demand is obvious, and customers are actively wrestling with the problem. They need a solution and compare products to see which is best for their situation.

Hard fact is when there’s a pain point that’s accepted as a part of life. People deal with the product in one way or another, but are not actively trying to solve it. Often because there is no clear solution. It’s annoying but not worth the effort to search everywhere to solve it.

Future vision is when the product makes something possible that wasn’t possible before. It’s a fundamental change. Customers can’t look for it because no one even knows that it’s possible.

For the discussion of freemium pricing model as solo founder, the future vision archetype is irrelevant. Such products take a lot of effort to develop, which is out of reach for solo founders. It takes many people and a lot of money to make them happen. Which means solo founders work either “Hair on fire” or “Hard fact” problems.

Differences in required customer education

A big difference between “Hair on fire” or “Hard fact” problems is the amount of customer education that’s necessary for people to understand the value of the product.

“Hair on fire” problems are intimately understood by the people having them. They know it is a problem, they know there is a solution, and they’re actively looking for a solution that fits their needs. There is no need to convince people they have a problem worth solving. The only convincing required is that your product is the best tool for the job.

In contrast, “Hard fact” problems fade into the background. Often there is no solution, or existing solutions are not well-known, so people don’t try to look for them. In other cases the problem is not important enough to solve them.

Another way to think about it is expected effort vs expected reward. The expected effort is high, because it’s unknown if a solution really exists. The expected reward is low because the current way of doing things is accepted and rarely thought about.

In these cases it’s important to educate customers that there is a better way, that it works for them, and that it’s effortless enough to switch to warrant the effort.

When to choose freemium

Free plans are a tool for customer acquisition. They let users try the product stress-free, and ideally, once they’re used to the product, they will convert to a paying customer.

Based on that I’m sure you can already see where I’m going with this argument. If a free plan makes sense depends on the kind of problem the product solves.

If you work on a Hair on fire problem, then there’s no need for a free plan. Customers understand the problem, they have it now, and need to solve it now. Which means they’re ready to choose a solution. They only need to verify that your solution is the right one. A free trial is enough for them to evaluate the product and compare it with others. If your product is the right one for them, they will pay to have their problem solved. If it’s not they will move on to another product that is.

If you offer a free plan, you’ll likely get customers who choose your product because of the free plan, and never intend to pay. With a bottom-up strategy (where you want individual contributors introducing your product to the companies they work for, often dev tools like website analytics) this is great. Without that strategy you’re doing charity.

For Hard fact problems, a free plan is very useful. Such products offer a better way to deal with a problem, but users need to be convinced. They need time to recognize the advantages of the new approach. Since it’s not a pressing problem, they won’t spend significant time to figure out how the product works and how it’s better than what they did before.

A trial is time-bound, and would stress users. It sets a time limit to figure out if the product is better. This often results in users not starting to use it at all. With a free plan they have all the time in the world, and when they see that it is better than what they do currently, they will use the product more and more.

The key here is to design the free plan in a way that, as soon as people are at that inflection point, when they realize the value of the new solution, they are required to pay.

There are gray zones in between. There can be many other factors that affect the pricing model, such as competition. But I found it a useful framework to start with.

My product decision

With Lighthouse I was unsure what path to take. The reasons I laid out in this article helped me make the decision with conviction.

Lighthouse combines the feature of RSS feed reader, newsletter reader, and read-it-later app. It focuses on fighting information overload, and as such has a different structure than traditional RSS feed readers. They show each feed as a separate list. In Lighthouse, new published content gets into the inbox, where users can select the content they are interested in and move them to the library. The rest is ignored.

Because its core structure differs from existing RSS readers, Lighthouse falls into the ‘Hard fact’ category of problems. Therefore, I decided to add a free plan.

Conclusion

For a long time I was in the “never add a free plan” camp. I read many articles about companies where adding a free plan hurt their business, sometimes significantly. And a lot of advice for solopreneurs is to not add a free plan.

Given that in the RSS reader landscape most companies have a free plan, this was always a difficult choice to make and maintain, especially without any grounding theory on why to add one or not to add one.

This way of thinking about free plans helped me a lot. It’s impossible to know if a choice is right, or if another might have been better. But this framework helps me feel good about the decision I took.

And I hope it also adds clarity to your decision making process.