Episode 754 | Broken Freemium, SaaS Plateaus, and More Listener Questions (A Rob Solo Adventure)

Rob Walling:
Welcome to another episode of Startups. For the Rest Of Us this week, I’m your host. I’m Rob Walling, and this is the podcast for folks who want to build real software businesses, real SaaS companies that sell a real product to real customers for real money, you can be bootstrapped, you can be mostly bootstrapped. Frankly, you can raise a cajillion dollars in venture capital, and I still believe that the content and the thoughts and the ideas and the strategies and the inspiration and the tactics that I present here on this show are applicable to you no matter which of those buckets you fall in. Unless you’re planning to have kid rock at your launch party and you want to stay pre-revenue forever because your valuation is more important to you than actually making money, then this podcast is not for you. But if you want to build real SaaS companies, real software companies, then this podcast is laser focused designed for you. 

Today I’m going to be answering listener questions. It’s been a minute since I’ve taken some listener questions on, and if you have a question for the show, you can email it to questions at startups For the Rest Of Us dot com or head to startups For the Rest Of Us dot com. Go to ask a question in the top nav. As always, video questions go to the top of the stack, although I have been taking text questions that are more intermediate or later stage because I’ve found that the pipeline gets pretty clogged with how do I choose an idea and I’m, what should I do and how do I launch? That’s all interesting, but I think answering question after question after question for pre-revenue folks gives an indication that is not true that this podcast is aimed at beginners, which it is not. So send your intermediate to advance to later stage questions as well as your beginner questions. 

We’ll tackle those in upcoming episodes. But before I dive into listener questions, I want to let you know that MicroConf Connect applications are open today through February 5th to create the best possible experience. We welcome new members in monthly cohorts with applications open for just 72 hours each month. Microcom Connect is our online community. It is the best online community of bootstrapped SaaS founders. Every month we put on a special live call with a new guest, and if you remember this month, you get access to a live call with Harry Lawson where he’s going to break down SaaS copywriting Essentials. Harry has written for companies like Testimonial two Sewell and ve.io, and next month I believe I am the special guest on the live call where I will do live q and a. It’s always a blast. If you’re interested in becoming part of this worldwide year-round online community of MicroConf Connect, head to MicroConf connect.com to apply. Applications are only open until February 5th. If you miss this window, you will have to wait until march MicroConf connect.com. 

So with that, let’s dive into my first question from Edan Maas. This question came to me on X Twitter where I asked about some more intermediate stage questions, and this one’s on the edge, but Idon asks, what do you do if there are many free signups but not many paid conversions, and you have already tried removing the free plan? I’m not sure I fully understand what this question, if you’ve removed the free plan, then you shouldn’t have any more free signups. Or I guess you’re saying you have free users that you haven’t kicked out of the free plan. You’ve only removed the free plan for new people. So I’m a little confused by this. I think I’m going to answer it multiple ways. I’ll start with the idea that freemium, which is of course different than a free trial freemium is often what I call forever free, where you’re only limited by the number of actions that you take, say signing a document or sending emails, or maybe it’s having a certain amount of subscribers and you’re capped. 

And if you go over that number, then it’s not free anymore, but it’s not a time-based free trial. So freemium should have not many paid conversions. That’s kind of how it works. Dropbox brags or bragged back in the day about we get all these signups and 3% convert to paid after a year. So I would call that not many paid conversions for a year. A year, you get 3%. This is why freemium, it’s not a never for bootstrappers. It’s a by default. Don’t do it. What do you do if there are many free signups, not many paid conversions. Don’t do freemium. Listen to this podcast and in general, don’t do freemium. Now, are there bootstrap, mostly bootstrap founders who are making freemium work? There are a few, right? Ruben Gomez is the famous example. When he comes on the show, we talk about Sewell and how he has made freemium work. 

There are tens of others that I couldn’t even name ’em all. There are very, very few. I’m not saying it doesn’t work. I’m saying in general, it is way harder to get it to work than you think. It’s so if you are in doubt, don’t try freemium just you can have a free trial. You don’t need to ask for credit card upfront. You need to find out if you build something people want and are willing to pay for. If you have removed the free plan for new signups and you still have a bunch of people hanging out in a free plan that are not converting, you can end your free plan for current users. They’re not customers because they’re not paying you anything but free users. And I have done this myself with a product I acquired 15 years ago, and several TinySeed companies have done this, and I say TinySeed companies because I have pretty detailed insight into what they’re doing and how they’re doing it and the results of it. 

And any of them that remove their free plan, even for existing users, have never gone back. I didn’t go back either. So usually that’s what I would do is I’d reach out to, if there are power users that are on the free plan, I’d reach out to them directly. I remember when I removed the free plan, there were a few people that had really helped promote the app over the years, and one of them was like a college professor, for example, a university professor and asked if he could get a discount or a comp, and I just comped him because he had recommended it to a bunch of people. And you can make exceptions here, but the idea that you have 500 or 5,000 free users and almost none of them are converting implies that either your yardstick is in the wrong place, meaning you’re giving away too much in your free plan. 

So people never need to convert. So you might need to think about moving that or you just kill the free plan altogether and build a more traditional bootstrap, mostly bootstrap business with a free trial where people have a time constraint to convert, and if you create enough value for them, then they pay you. There are a lot of levers to pull with freemium, and it is one of those, I think it’s harder to make a broad generalization of like, well, here’s how I would design a free plan, right? I can tell you basically with SaaS pricing, some rules of thumb that I have about each one doubles in price, but you give away more in the value metric. There’s all this stuff. I’ve given talks about this. I’ve talked about this on this podcast, but freemium is to me much more a one since it’s so complicated. 

It’s much more kind of a one-off really understanding your customers and really understanding where that line is, where you’re giving away enough in the free plan to get them to use it, but not so much that they never upgrade. Now, if you are talking about, when you say free signups, if you’re talking about free trial signups, but not many paid conversions, that’s a question about the funnel. It’s like, well, is anyone getting onboarded? What does onboarded even mean? Is there 1, 2, 3 steps that people need to take in order to get value from the product? Are they doing that well? If not, you need to reach out to them via email, via in-app message, potentially. If they’re paying you enough or going to pay you enough, you reach out manually. You hire a customer success person who basically is in charge of that because if people don’t get onboarded, then there will be no paid conversions beyond that, even if people do get onboarded, if you still aren’t solving a desperate aspirin pain point for them, the odds of them converting are low. 

And so there’s a bunch of questions to ask throughout your funnel. There’s no one thing of like, oh, you just flip this switch. Obviously you just put a credit card up front and that fixes everything. It’s not like that, right? Funnels are always about which step are the most people dropping off and why? And the first one you can answer with analytics, and the second one you answer usually with conversations, why are they dropping off? That’s often the hard part because you can look at as many screen recordings as you want. You can look at as many heap or mixedpanel dashboards as you want, but you will not know why they’re dropping off till you talk to your customers and potential customers. So thanks for that question. I hope it was helpful. My next question comes from a BOMA and ab BOMA asks, with the exponential advancements in ai, how do you think the world of building SaaS products will be affected, if at all in the next few years? 

It will. And this question was asked what? Six, seven months ago? You can tell the backlog of questions. We have an our role said, and I recorded an entire episode dedicated to AI and how to think about it in terms of your SaaS. The episode is 663 from May of 2023. It’s five insights SaaS founders should know about ai ignore at your peril. That is still as valid today as it was of the day we recorded it. Although AI has changed. We talk in that episode about why you shouldn’t ignore it. The four categories. I put categories to these because you know them. I’m a framework thinker, right? There was sorting in categorization, there was generative ai, of course, that generates things, images, texts, and others, and a couple others. We talk about how AI is not actually a product differentiator. Should bootstrap companies try to build their own LLMs using AI internally in your company? 

Talked about business models, whether they’re ticking time bombs. So that is as valid today as it was a year and a half ago when we recorded it. There are a few changes to answer AB BMO’s question number one, obviously many SaaS companies will integrate it as features into their product. So if there’s any point where your customers need to create some type of content, whether what is it a blog post or a social media post of any kind, obviously AI can help them generate that or improve that. This is obvious, but that’s one place where it’s going to be applied. Second place that you should be thinking about applying is in your own internal operations. So here at MicroConf and TinySeed, although we are not SaaS company, we are certainly serving a lot of customers, a lot of prospects, a big audience. We are creating content. 

We’re doing a lot of things that you would do at a SaaS company, marketing, even some sales, all that kind of stuff. And so we use AI pretty extensively, whether it’s Gemini or Claude or Chat GPT to help us get there faster. We don’t publish AI generated content per se. I just don’t believe the quality is there. But if you’re not using AI to help make you more effective and efficient with your internal operations, your marketing or sales, you will fall behind. And then the third broad place where I really think AI is impacting things, especially with building SaaS products, is how much faster and more productive it makes developers and whether using cursor, copilot any of the other tools of the day that Devon, I think was popular, seemed for like two weeks. No one’s talking about Devon anymore, but you get the point. 

It’s not the tool. It’s the idea that it can make developers move quicker and be more efficient. And what I’ve noticed is I haven’t seen anyone, at least in the SaaS space, fire people or lay them off because, oh, we’re suddenly so much more efficient. I’ve just seen them faster. That’s the thing, it’s an accelerant, not a differentiator. Someone said this, who was it? Maybe it was Patrick Campbell, might be misattributing that, but think of AI as an accelerant. It gets you there faster. If you don’t use it, you’ll be slower than your competition. It doesn’t differentiate you because your competition can and will use it. But if I were a software developer today, as much of a pain in the butt as it would be to integrate AI into my workflow, I would 100% be considering it. I think it’s going to make all of us, it’s like a mech suit. 

It makes all of us a little better, a little stronger, a little faster, a little more effective. If you can get over kind of the learning curve, get over that hump of integrating into your workflow because it is, I know that if you’re used to writing all the code yourself, suddenly you’re using ai. It’s a little cumbersome at first, but I think it will allow us to build more SaaS products faster and build features faster and make every developer that you have more effective. Now, what that means is the pace of development and of feature development and the pace of competition will also accelerate. So do I think AI is going to have impact on SaaS products? Yeah, I think it already has, and I think it will continue to. And really the question, because Boma asked over the next few years, and it kind of depends on is AI going to continue the pace of innovation that it has because it has seemed to plateau recently. 

I know that they’re trying to get, is it chat GPT five oh or 4.5 or something? And their reports, rumor reports are that they’re really struggling to make it that much better. Don’t get me wrong, it’s good. I use chat GPT almost every day, almost every working day, and I know a lot of my team does as well. It’s just getting integrated into all our workflows. But if AI has plateaued for the time being, then that’s one outcome. We’re going to see what we see and we get what we get, and that’s where the pace of innovation stops over the next few years. If it continues to exponentially or starts to exponentially appreciate in value, then I can imagine the impact on all of us is going to be a lot more significant. So what I’m saying is that part of this relies on how fast the underlying AI models advance over the next few years. 

So thanks to that question, OMA. I hope it was helpful. My next question is from Eddie Vink. And Eddie asks, not my product, but notion is launching Notion sites. So this again, is seven months ago. Do you think this is a threat for Notion site builder products, or is it an opportunity? 100%. It’s a threat. Anytime a big player, this is platform risk. Anytime a big player launches a feature that a bunch of step one business builders have built following the stair-step method, it’s detrimental. Inevitably, even if they build kind of a version of it that is feature limited that doesn’t do anywhere near, I have a thing, but my thing is better, my thing has five times the number of features or my thing is way easier to use or look, it does all this other stuff for you. What happens is a bunch of notion people who don’t want to add another product to their chain, they don’t want to add another integration. 

They don’t want to add another 20, 30, $40 subscription. They just put up with it. And if it’s good enough, it will absolutely negatively impact notion site builder products. Now, are there a specialized tool? If you’re a super specific notion site builder for some vertical niche and you are truly not competing with notion sites that, I’m trying to think of an example. You’re for a tight vertical, you’re for notion for gyms or martial arts dojos or notion sites for software teams doing agile development, assuming that the notion sites, capital N, capital S, the product that they put out isn’t able to do the things and you are positioned correctly of like, Hey, thinking of using notes and sites, well, it doesn’t work for X, Y, Z, and we do, then do I think you’ll still be okay? Yeah, probably. But I do think that in general, platform risk is tough, and I’ve faced it myself and relying on, well, multiple platforms over the years, especially Google was always one that really hit me hard. 

And this isn’t a reason not to build step one businesses or businesses that are in these app marketplaces. These are great little businesses that can I say little, I mean, some of them, you can get to five KA month, some of you can get to 40, 50 KA month. These can be great. They can be life-changing. But would I build and would I stake my, let’s say my family’s financial wellbeing on something with a lot of platform risk? I would not expect my app to exist 10 years from now if I was heavily, heavily reliant and built on a platform. And I recorded a podcast episode just three or four months ago back in October. It’s episode 7 35, the eight levels of SaaS Platform Risk. And if you are wondering why platform risk is not just binary like a lot of people think, but that there are actually many, many levels and there are three different elements of platform risk and then eight different levels. 

You got to go listen to the episode to hear it. It was my favorite episode I recorded last year. That episode will 100% categorize this thought around notion launching their own version of sites. So is it a death noll for all third party notion site builder products? No. Will it negatively impact a lot of them? Potentially Most of them, yeah, I do think so, unfortunately. So thanks for that question, Eddie. Hope it was helpful. My next question also from x Twitter is from Tom McGee. Tom asks my app, there’s a lot of things and an unexpected auxiliary vertical that’s fundamentally different from our primary. One is getting a lot more attention than I expected. Should I put it behind a paywall to upsell, spin it out into its own thing? These are questions. I’m reading them without question marks, but spin it out into its own thing. 

The problem with including it as an upgrade is some users only want it, so it would have no use for the base product. Got it. So you have a base product, you have kind of an add-on and somehow a single vertical wants just that. This is, of course, I would really like more specifics, but realistically, spin it out into its own thing. Probably not. Usually the default for me is don’t do that. You need a new website, you need a new domain name, you need a new Stripe account, you need to do marketing and support, and you need email addresses and you need to do SEO and you need to do outbound and a support inbox. And it’s just people think that spinning something out into its own thing is, well, the code, it’s easy to spin the code, just fork the code and it’s, or even I just point to the same repo. 

And that is, I dunno, maybe 10% of the effort, it’s 20% of the effort. It’s all the other spinning something out into its own thing is just don’t underestimate how it’s launching a second product. So my answer is, unless I saw a really, really strong reason, and without all the details, it’s hard for me to know if there’s a strong reason, but unless I saw a very strong reason to do so, I would put it behind a paywall. And you can either make it a different tier of the product. I mean, you could have two products on your website, so it’s the same domain, but then there’s a dropdown and there’s X, Y, Z product for this vertical and X, Y, Z product for this other vertical or X, Y, Z product for everyone. And then if you’re specifically in this education vertical or whatever vertical it is, you can do that. 

Again, it’s hard for me to make specific recommendations without knowing the specifics, but would I put it behind a paywall to upsell? I would, if there’s a bunch of interest now there’s a conversation to be had around, ooh, is it viral? Is it driving new leads? Should it be freemium instead? And again, without info, it’s hard to talk that through. But in general, if I get a bunch of interest, I would look to keep it on the same website with all the same infrastructure I have and kind of inch my way out there to see if there’s enough interest that people will actually pay for it. So thanks for that question, Tom. Hope it was helpful. And my last question of the day also from X Twitter comes from Tony Meer. Tony asks, at certain sizes of the company, it seems to stop growing. What are these ranges and how do you break through to the next range? 

So I appreciate the question, Tony, but I do not accept the premise that at certain sizes of companies, they seem to stop growing. That’s not true. It’s not about company size. What it’s about is the famous formula for plateaus. And that formula is new MRR divided by monthly revenue churn as a percent. So if you are adding $3,000 of new MRR each month and your monthly revenue churn is 5%, that’s 0.05. You will plateau at $60,000 of MRR. And if you cut your churn in half, they’re still adding $3,000 of MRR each month and your churn is only two and a half percent. You will plateau at $120,000 of MRR. That’s it. So realize that how much MRR you’re adding in a given month is affected by your pricing. So pricing has a big impact on this. Your A CV or your average revenue per account per month. 

Churn is a huge part of this, right? So that’s how many people are canceling based on your existing customer base. And so I see companies plateauing at every stage. And frankly, I did a talk at MicroConf Europe about breaking through the seven SaaS growth plateaus, and I identified seven reasons that companies had plateaued. And I went into TinySeed and actually specifically I have all their revenue graphs, right? 192 companies. And then I specifically reached out and said, oh, you plateaued here. What happened? And so one of the causes, for example, is not enough leads and one of ’em is having a leaky funnel, and the third one is having high churn. Fourth is competition. Fifth is you’ve tapped out your market. It’s just not that big of a market. So the reasons behind why folks plateau are one thing, but the ranges, I mean, I see folks plateau at one KMRR, I see them plateau at 5K, 10 K, 15 K, 20 K 25 30, 35, I mean all the way up. 

And then I see people plateau at one or 2 million. There is no certain size of a company where they plateau. The tough part is once you plateau, getting past it is really, really tough. That was actually the kind of sad news as I look through all these graphs is that if you don’t plateau, then you keep going. You have momentum. The moment you plateau, the odds of you getting past that plateau are actually quite low, at least from the analysis that I did. So that’s why you want to always be looking ahead and when things are working, not resting on your laurels because you want to try not to plateau because getting past them and building that momentum from scratch is not quite the cold start problem. But it’s just hard. It’s hard. And it often requires a big strategic shift of like, well, I need to expand into another vertical, or we need to double our pricing, or we need an entirely new lead source because everything we’ve done just isn’t, it isn’t getting us there. 

Or we need to serve an entirely new user base because our churn is just pegged at five or 6%. And although we’ve tried a ton of stuff, nothing has reduced that. And so we are just plateauing at this mark. So what’s interesting is the answer to how do you break through to the next range? There isn’t a range, but how do you break through a plateau is you identify the problem and you fix it, right? So if you don’t have enough leads coming in each month, meaning you’re not adding enough MRR, then you add more leads, well then the question is, well, how do I do that? And that’s a whole other thing than we could write books on that. Or if it’s you have a leaky funnel, meaning your conversion rates are low in your trial to paid or whatever, then you look at that and you optimize that. 

The how do you breakthrough is actually kind of trivial. It’s trivial to know what to do. It’s often hard to know exactly how to do it. And that is why I gave that talk. That is not, I don’t believe it’s up on YouTube and I might actually be giving it in New Orleans. I haven’t decided yet. Kind of want to add a little bit to it if I’m going to do that. But that’s why I did that talk is because plateaus are pretty scary and I’ve never seen an analysis of them that tried to look at the causes, the effects, and potentially how to think about getting around them. So thanks for your question, Tony. I hope that was helpful. Thanks for hanging out with me today, this week and every week. It’s so great to be in your earbuds. I haven’t answered listener questions in quite a while, especially not a solo episode. 

So this felt good. I think I’m going to do another couple here in the next few episodes. There are a lot of questions to work through and I always enjoy hearing from you Questions at startups. For the Rest Of Us dot com, if you want to send in a question, a comment, feedback, something you need help with, and obviously head to the top nav of startups For the Rest Of Us dot com, click ask a question and you can send in a video or an audio clip. This is Rob Walling signing off from episode 754.