"Revenue Insecurity" and the Freemium Death Spiral
A funny thing happens on the way to building a successful business. At a certain point, you actually need customers who can pay you for the product or service that you offer.
It seems so obvious — you need someone to pay for your business efforts if you plan to continue to happily work there. And very likely you will need a lot of paying customers to build a growing business.
This fact is sometimes forgotten in tech hubs like Silicon Valley, where all flavors of investors are willing to plow billions into promising companies. They do so because it is a numbers game to them. They know that for every 10 losers, one of their investments will take off. And if you believe conventional wisdom, you need to spend money to make money.
But those are not great odds if you actually work in one of those companies.
Too many companies lose money and keep right on losing it, right to the dead pool. They never deliver enough real value to enough customers to sustain a business. And you simply cannot make that up on volume.
As the CEO of Aha! I was recently reminded of the pressure that struggling companies are under. A friend shared that he was asked to increase hiring and marketing spending before his company’s business model was really locked in. And definitely long before he really knew which customers were going to be his best.
Since the company is venture-funded, the investors wanted him to spend more money faster to get to “scale” and build a “presence” in market. But this lack of product/market fit leaves them vulnerable to what I call “revenue insecurity.”
“Revenue insecurity” is when you have uncertainty or anxiety about your ability to sell your product. It leaves you open to the danger of pricing your offering for customers who cannot afford it, or worse, should not be using it.
I coined the phrase “revenue insecurity” after we received the following email from one of our own free 30-day trial customers:
“I am trying to get my mind wrapped around creating a technology roadmap, but can’t spend money, so I was wondering if I can get a one-seat license for free.”
Now, I have no ill feelings towards the person who wrote us that email. He was being perfectly honest. But I also have no interest in spending any of my time — or the company’s precious resources — engaging with him either. There is very little chance that there would be a meaningful exchange of value. And I am not just talking about us getting paid. It is not clear that the customer would benefit from using our service, even if it were free.
In most situations, you should not try to sell your product to a customer who does not understand its value or know how to take advantage of it.
If you want to avoid “revenue insecurity,” ask these questions before you start selling:
What market are we serving? Explore the size of the opportunity before you get rolling. Identify the types of buyers you are targeting for your business. Who are you hoping to reach? What types of alternatives do they have to choose from in the market?
What kind of business are we building? What is the cost structure of your offering? How will you sell your products? How will you reach your customers? Knowing the answers to these questions will ensure you find your brand identity, which is crucial to how you position your company (see next paragraph).
How is the company positioned? Who are you and what do you want to be? Think about the value that you are creating. How do you want to be perceived — as a value, aspirational, or premium brand, for example? How would you describe your brand essence in a few words?
Do we have alignment? Decide whether the market, your offering, value, and brand are all in agreement. You need to consider what your customer can afford to solve their problem and whether your pricing lines up with the perceived value you are offering. Your pricing must not only make sense but be part of a larger strategy and aligned with your business goals.
Too many companies avoid asking these tough questions. And then when they cannot create enough customer value or find any buyers, the “revenue insecurity” sets in and they really panic. Instead of working harder on delivering more value, they decide to give away their product for free.
Going freemium after failing to gain any customer traction is the leading indicator that you have “revenue anxiety” and are headed for more pain.
Just because something is free does not mean that it is valuable. It also does not mean that someone will pay you for it in the future. It’s likely that they will never even use the product because your pricing has told them it is worthless. And worse, it delays you from actually figuring out what they would have paid for.
But hope should not be lost. Here is how you can recover from “revenue insecurity:” Carefully set a vision, create a business model that describes the problem you are solving, and clearly articulate the value you are going to deliver. This will help you identify the types of customers that you will work best with and what they need to pay for you to continue to serve them well.
What have you done to fight off “revenue insecurity?”