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Freemium 2.0: An Intriguing Software Pricing Strategy

by Adam Juda on Sunday, October 1, 2017

I recently came across an interesting software pricing strategy being used by the makers of SEO tool Serpstat.

Alongside its traditional monthly pricing options for its SaaS product, it offered accounts for a one-time fixed fee.

As a general rule, charging a one-time fixed fee for a product with ongoing costs is little more than a path toward certain bankruptcy. In almost every case, the price for lifetime service is often far too low to ensure long-term profit for the vendor due to a slew of incorrect assumptions about inflation, ongoing costs and customer usage. All too often, it's a last-ditch effort for liquidity when a company is in distress and has given up any pretense of long-term thinking. So emphatic is my distaste for this approach that I dismissed it as idiotic (or something along those lines) when I wrote my first book on software pricing a few years ago.

The management team at American Airlines would likely agree, having witnessed the effects of its Unlimited AAirpass, a program that allowed customers to purchase one-time memberships that provided unlimited travel. The AAirpass proved so expensive for the company that it began to harass and even sue its customers.

That said, sometimes selling lifetime access for a one-time fee can make sense.

Story studio Sterling and Stone offered a fixed price for its SaaS StoryShop in order to fund the product's initial development. The underlying but critical assumption made by the management team was that buyers of the lifetime plan would only make up a small percentage of its future user base. The vast majority of customers would be paying on a recurring basis. Unlike American Airlines, the marginal costs to support those lifetime users would be approximately nil, and usage by lifetime members would not exclude other customers from using the system. Sure, there was an element of risk - the company might not be able to attract enough monthly customers to cover the system's costs, but that's a risk common to any business endeavor.

Serpstat, however, jumped into the one-time fee business model with both feet. That company has already created its product and has many paying customers. Nevertheless, it intermittently offers lifetime packages for a one-time charge that is less than two months of its equivalent monthly plan.

Has its management team gone mad? Not only will the firm find itself taking on long-term liabilities via these lifetime memberships, but the company risks cannibalizing many of its existing monthly sales. Customers on the lowest tier monthly plan would-be crazy not to cancel their monthly memberships and switch to the lifetime plan.

I don't have access to any of the firm's financials or usage data, but I think that the company's leadership might be on to something.

Yes, some cannibalization is inevitable, but its damage is limited by the fact that the lifetime deal is only made available via third parties, so many of Serpstat's existing customers will be none the wiser.

Additionally, the lifetime offer does not follow in the footsteps of American Airlines' AAirPass. Serpstat's lifetime plan is not (and makes no claim to be) unlimited in nature. Various restrictions limit the number and types of tasks that can be executed by users.

As lifetime users become more experienced, receive more value and require greater functionality, many will undoubtedly feel the need to upgrade to a higher tier monthly plan. At that point in time, those power users will be so familiar with Serpstat's workflow, functionality and documentation that they will be resistant to investigating competing products. Why should a customer bother when this is the system that he's used to and (hopefully) likes?

Serpstat is essentially using a strategy that has yet to receive a name from the academics, but that I will refer to as freemium 2.0.

Freemium 2.0 has the potential to bestow great benefits upon the vendor. Not only does it collect some money upfront, but it enables the firm to narrow the top of its marketing funnel to the potential buyers who are most interested the product offered. This means lower overhead costs and a more focused user base. Not only that, but the firm builds a tighter relationship with its users than it would under traditional freemium pricing plans. Countless research studies have shown that items that have been paid for are more highly valued than those that are available for free, due to the endowment effect and a number of other cognitive biases.

So is freemium 2.0 going to become more common?

My guess would be "no" for the foreseeable future. Many marketers and managers will greatly prefer the metrics delivered from Freemium 1.0 pitches. The wider top of the funnel will make it look as though interest in their products is far higher than under freemium 2.0, even if their conversion rates and numbers of buyers wind up being significantly lower. Further, many potentially interested customers would view such plans with a high degree of skepticism. Companies that lack a strong reputation will be hard-pressed to explain their logic to would-be customers who have been trained to expect free offerings, but see one-time charges for perpetual usage right as unusual and suspicious in nature.

P.S. All of my pricing books follow a similar model. For a one-time fee, you're entitled to read them as often and for as long as you'd like!