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Freemium’s public moment

Ben Spero
Contributor

Ben Spero is managing director of Spectrum Equity. His areas of investment focus include internet, software and information services. Prior to joining Spectrum, Ben worked at Bain & Company and co-founded TouchPak, Inc.

Slack’s recent direct listing marks a momentous 15-month stretch for freemium SaaS businesses. With Slack joining the public company ranks, six companies will have tapped the public markets since Dropbox’s IPO last March. This group of companies now has a collective market value of more than $50 billion.

When Zoom filed its public S-1, the tech industry fawned over the company’s financial profile. Here was a company growing revenue over 100% that had somehow managed to be cash flow positive. Conventional wisdom among many Silicon Valley investors has recently been that profits and rapid growth are mutually exclusive.

Uber and other high-growth tech companies aspire to be the next Amazon, foregoing profits into the foreseeable future to establish a dominant market position. This land grab mentality has held sway with most of the SaaS businesses that go to market with a traditional enterprise sales force. In contrast, the recent crop of public freemium businesses show they can actually make money while sustaining attractive growth rates.

Recent IPOs

How can this flavor of enterprise software business run so much more efficiently than their traditional enterprise brethren? The answer heavily lies in their approach to sales and marketing. Despite similar growth rates, traditional enterprise SaaS businesses spend an average of 10% more of their revenue on sales and marketing than their freemium comparables.

Freemium vs. enterprise: Different paths to sales success

A common criticism of freemium businesses is that their retention rates dramatically lag those of traditional enterprise software businesses. Customer relationships for freemium businesses usually begin online. An individual employee wants to use a product for her/his own productivity and simply charges a credit card to pay for a subscription. In contrast to larger-ticket enterprise relationships with multiple stakeholders that tend to renew at 90%+ annually, the retention profile of these individual users often resembles consumer subscription businesses — usually in the 60-80% range. When it comes time to renew the subscription a year later, the person may have changed jobs, changed credit cards or only used the product episodically.

It’s less well understood that many of these business models are evolving in real time as they leverage widespread individual adoption …read more

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