The most frequent question I get asked about a SaaS business is pricing and sales growth. With pricing the biggest question is how to covert more free customers to paying customers.
While there is no average, I have seen companies focusing on consumers having as low as 1% conversion to a max of 10%. Companies focused on pro-sumers (professional consumers like freelancers, etc) have a slightly higher rate of conversion at 2% minimum and those that focus on SMB (Small medium business) have some of the highest at close to 5%. Finally 10% converted customers is not unheard of for companies selling to enterprises.
The time taken to convert when a customer is free to paid also varies from days to months or never.
What determines when a customer moves from premium or your paid version?
I look at 89 companies in the Microsoft Ventures accelerator programs from the 370+ alumni to understand the techniques used by companies to convince customers to pay. While not comprehensive, here are the 10 most frequently used levers that companies have used to encourage their customers to a paid version.
1. Advertising: In this version, the paid version has no ads. (e.g. WordPress hosted has am option for non ad based and advertising supported blogs).
2. Time: These companies allow for a free version for a period of time (e.g. HighRise, or Trigger.IO) – a week, 15 days, 30 days, etc. This is the most frequently used model.
3. Features: The most widely used model has basic features for free (e.g. Buffer, LaunchRock)and some premium features locked unless you pay. This is the third most used model to convert.
4.Collaboration: Individual usage is free in this version (e.g. Slack) and you will pay if you wish to collaborate with others in your team. Obviously the team usage gets your more benefit.
5. Control and Security: In this version, if the IT administrator (e.g. Yammer) wants to control the usage and wants security features (e.g. Yammer, GitHub), then you will pay for it.
6. User or seat (Fresh desk): In this type of pricing, (e.g. Freshdesk) the company provides a certain number of users free (3 agents or 2 users) and charges if you have more users.
7. Analytics and Insight: The usage of the app is free, but if you wish to obtain analytics (e.g. Feedly) or insights into your usage and data, you will have to pay.
8. Integration: In this version, if you wish to integrate the SaaS app into other enterprise apps in your company (e.g. CircleCi) or internal apps you will have to pay for that.
9. Data access: In this version, you can use the app for free, but if you wish to get your data (e.g. Capricity) out of the SaaS system you will have to pay for it.
10. Usage: In this version the more you use of the product (e.g. Dropbox, MixPanel) you will pay more. You will get a free version for 2GB, but for more than that you will pay per month. This is the second most popular conversion technique.
There are many more models that you can use, but the most frequent are a) Time bound, b) Usage based and c) Feature based.