Should Your SaaS Startup Be Free…Forever?

4 minute read

I had a quick conversation today with a new startup targeting businesses with a Service-as-a-Service product offering. Their startup solves a big need for my business. However, this company is not charging for their service. For anyone. Ever. As a business owner and former founder of two SaaS-based startups, I was shocked. But beyond that, I had to decline using their product, even though it was free. Why? Because I don’t know if they will be around long enough for me to depend on their service for my day-to-day business needs. I think it is worthwhile to examine why.

SaaS-Based Startups Must Generate Revenue

Free SaaS products don’t work. I am not speaking about free trials (a great technique) or a freemium model (though there are indications that freemium doesn’t work as well as originally thought). I’m speaking about not charging customers at all. If you have a product that does not charge customers, you are either:

  1. A philanthropist with deep pockets (or have access to a big trust fund)
  2. Misguided about how businesses work
  3. Trying to make me the product instead by marketing other services to me or selling my behavior data to third parties

Whatever the business model, SaaS-based businesses must make money to survive.

Selling Confidence In Your Business

Many consider a B2B SaaS business as the kind of business reserved for enterprise companies. You know, the kind of company that hires a very expensive sales team and charges a five-figure or more license to use their software.  Actually, B2B describes any business or startup that focuses on executing transactions with businesses as their primary source of revenue. 

Founders new to launching a SaaS-based B2B startup often try to complicate things. They try to apply the concepts of building a B2C company, targeted at the consumer market, to their B2B company that is targeting businesses. This is likely due to the heavy press that many of the popular B2C startups are getting right now (e.g. Groupon) and of the endless case studies of many popular startups that are also B2C-focused. The problem is that B2C business models usually don’t work for B2B companies.

To sell your product to businesses, you have to help them gain confidence that:

  1. Your business is an expert in solving their problem. If you don’t demonstrate that you understand how their business works and how your product benefits translate to their needs, you will lose them as a customer
  2. The return on investment (ROI) of your product is worth their trouble of considering your product. This often involves more than price, as they often have to adjust their internal workflows and/or train the appropriate people to use your software. If it looks like it won’t provide a big return on investment, you will lose them as a customer
  3. Your business will still be around in 3-5 years, since they will be as well. Why would they invest their time, money, and energy into your product, only to have to find an alternate solution when you go out of business? If you do not offer a simple pricing model that can sustain and scale your business, you will lose them as a customer

SaaS Customers Want Long-Term Buy-In

If you are building a business that has no viable way to sustain and scale itself, then you might as well not build the business. Businesses will not buy from startups that do not have a clear way to keep themselves in business. They anticipate becoming too invested in your solution and do not want to move to something new when you run out of money. This is different than a B2C business, where consumers will happily use the product, then move on to the next one when you go out of business. Don’t believe me? Consider Friendster, MySpace, and others that quickly got replaced by Facebook and Twitter.

This is why I wouldn’t become a free customer to this new startup. They currently cannot convince me that they will be around in 3 months, let alone 3 years, if they don’t start charging customers immediately. If they plan on making me the product by selling my data, that is even worse because they have a clear path to sell me their product. They don’t need to use a B2C business model for a B2B product. So, they either don’t value their product enough to charge for it, or they are scared to ask me for money and instead prefer to build a complete business infrastructure around selling me as a product to third-parties. That just doesn’t make sense.

I hope that they will reconsider their business model and come up with a nice pricing structure. If they do, I’m willing to invest my time to try their product and determine if it is a good fit for my business. Right now, I don’t know that they will.