Why free product wins!

  1. Pricing & Packaging and the developer buyer — 4 insights from SaaS IPOs
  2. Benchmarks for Key SaaS metrics from SaaS IPOs of 2018–2020
  1. Insight #1: The average total revenue YoY growth rate at IPO for companies with free LFP is 65% vs. 35% for companies with demo LFP. This 30 points difference is statistically significant
  2. Insight #2: Free LFP gives a higher revenue growth rate despite higher revenue at IPO. Free LFP companies’ ARR at IPO is, on average, $44m higher than sales demo LFP companies.
  3. Conclusion: there is a correlation between free and high revenue growth rate, not causation. I offer a few possible explanations for this correlation.
  4. A word of caution: it is hard to add free if you didn’t start with one.

Insight #1: Total revenue growth rate at IPO

Average YoY Total Revenue Growth atIPO

Insight #2: Free LFP gives a higher revenue growth rate despite a lower base revenue at IPO

Average Implied ARR ($ millions) at IPO

Explanations

  1. What is the value of one person trained on a product, even if they are not paying for it? Logically, it is high! Such a person may refer a friend, praise you on Twitter, or take the product with her as she switches jobs. With a large number of free users, your product becomes the market standard. Takeaway: free gives a sustained advantage by creating a large pool of trained users which results in a higher revenue growth rate.
  2. A free product forces the product team to build best-in-class onboarding. If the product is simple to use it positively impacts close rates, and hence, revenue growth.
  3. Developers are the perfect audience for free. The average developer distrusts sales; every developer company in this data set offers free or trial. Selling to developers is also a great business independent of free; the average revenue growth rate of this cohort is 60%! Thus, sales demo LFP may exhibit a lower revenue growth rate because there are no developer-oriented companies in that cohort. I do not love this explanation because it downplays the value of other buyer types. Takeaway: if you are selling to a developer audience (including VPE), only offering sales demos is a non-starter.
  4. A free package may protect a company from attacks from below market. Especially if you are #1, #2, or #3 in the market, you can shut out the #4 and #5 players by offering a compelling free package. This protects your TAM and helps you grow faster. Zoom is a great example of a company that stormed its market with a compelling free package and displaced #1-#4 players.
  5. Lastly, it is not necessary that free lifts growth rate as a revenue stream. It could simply be a great lead generation option. A great example of this is how downloads of Apache Kafka serve as leads for Confluent.

A note of caution: it is hard to add a free package later on

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Adil Aijaz

Adil Aijaz

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