Deconstructing & Mapping B2B SaaS Business Models
Freemium vs. Free Trial vs. Enterprise: how they monetize, acquire customers & activate/engage users. (#52)
When Alistair and I published Lean Analytics, we introduced the idea of mapping your business (as a systems diagram) in order to understand where to focus and what to track. We put together six business models, one of which was B2B SaaS. Here’s a copy of what we published:
This represents a high-level visualization of a B2B Freemium/Trial SaaS business. But there are a bunch of B2B SaaS business models. In fact, “B2B SaaS” means very little. If someone tells you, “My startup is a B2B SaaS,” what does that mean? Are they selling enterprise software top-down, or are they providing free software to small businesses hoping to upsell something? Are they focused on a vertical or going horizontal? Freemium? Free trial? Usage-based? Seat-based?
The above diagram can help you understand your business at a high-level. I encourage every founder (and startup team) to go through this exercise because it reveals important things:
Clarity on where to focus: What part of the diagram do you really care about right now? It depends on what stage you’re at. For example, if you’re early stage, you care less about paying customers or upselling, you focus almost exclusively on getting people to sign up and activate.
The right metrics to track: If you know the business you’re in and the stage you’re at, you can define the key metrics that matter today. You might track “all the things” but you can’t focus on everything at once.
Any misalignment with the team: Every startup, whether it’s 5-10 people or 50-100 people (or more) will, occasionally (OK, often), pull in different directions. Mapping your business allows you to identify the hot spots that need attention and make sure (a) everyone understands the business (not just the part they work on); and (b) knows what they’re doing as a team.
Freemium vs. Free Trial vs. Enterprise
First, some quick definitions:
Freemium: A user signs up to use your product for free (forever). They’re encouraged to upgrade, but generally only a small % will. You shouldn’t consider these customers (they’re not paying). Most people think of freemium as a “marketing tactic” designed to drive word-of-mouth and brand.
Free Trial: A user signs up to become a customer, and they use your product freely for a period of time. Free trials range from 7 to 60 days (in my quick research). The most common trial length is 14 days according to research by Tomasz Tunguz, General Partner at Theory Ventures. You need to figure out the right trial period for your business (although according to Tomasz’s research the time period doesn’t impact conversion; everything converts equally!) You may decide to take a credit card upfront and then convert them automatically, or get them into the trial with less friction. (Here’s one data point on free trial conversion with credit card upfront. And Tomasz’s research suggests only 14% of companies ask for credit card upfront, but it might be beneficial to conversion.)
Enterprise: You sell software for money. Often this is thought of as a top-down sale to an executive or senior leader who is probably not the end user. In this situation there’s no free use of anything, the customer pays.
In reality many companies use multiple methods at the same time. Jira is a great example:
You can use Jira for free, in limited fashion, forever
Or you can start a 7-day free trial (no credit card required; 7 days seems short to me 🤷🏻♂️—but Tomasz research would suggest it’s ideal!)
Or you can contact sales to buy the product right away
Canva, which you might not think of as B2B software (people would call this “prosumer”), has a similar approach:
You can use Canva for free, in a limited way, forever
Or start a 30-day free trial
Or contact sales
The more you explore what others are doing, the more you realize that it’s complicated and there’s a lot of experimentation. Be prepared to test different business models, including freemium, free trial and enterprise (perhaps all at the same time!)
With that in mind, it’s interesting to turn each model into a systems diagram. The key question is this: how do you make money?
1. Here’s a simple Freemium Sales approach
I’ve added a bit more detail and context compared to the original Lean Analytics version.
Since most freemium businesses offer a paid plan at the outset, I’ve added that in.
It’s possible after a user converts to paid, or a visitor becomes a paid customer, that they upgrade and pay more. This will depend on the business model. In some cases, customers may move up from one plan to another (i.e. Jira Standard to Premium) or there might be add-ons or additional upsell opportunities (including new products).
2. Here’s a simple Free Trial approach
This is a simpler model, because you’re funnelling everyone into a free trial path; although most of these companies also have a “contact sales” enterprise approach and they often have a freemium version too!
The advantage of the free trial is that you get a customer right away—now your job is to keep them.
You might need a bigger team to provide more handholding and engagement during free trials (versus freemium) to increase the odds of conversion. This depends on the value of customers and your target ACV.
Fewer people will signup for a free trial versus a freemium offer, but the conversion from free trial to paid should be higher. I think most companies are now offering freemium + free trial because they know this; they want to capture people’s attention in freemium, benefit from word of mouth, etc. but they don’t expect a ton of freemium conversion. The money is in the free trials.
3. Here’s a simple Enterprise Sales approach
I’ve added “outbound sales” as a specific channel, because that might bypass the website entirely (although safe to assume everyone will visit the site).
The funnel to a customer is very different—now there’s a demo + some type of sales process (which could take days, weeks or months). You have to ask yourself different questions, especially, “Is the ACV worth the sales effort?” If you’re closing $5,000 deals this way but it takes 6 months, that’s not good.
How you engage & support enterprise customers also changes. Customer Success is much more involved because the renewals are big. You also want to find ways to upsell and grow ACV per account (hopefully leading to negative Net MRR churn), which is more likely with bigger customers.
Business Models are Complicated
Quite a few businesses use all 3 approaches: freemium, free trial & enterprise sales. So their systems diagram is complex. That’s fine. You need to see all activity throughout all parts of the customer acquisition, activation and engagement funnels to have a complete picture of your business.
You can also use the systems diagram approach to identify experiments you want to run. For example, you might have launched a freemium product to start, but now want to experiment with a free trial. Don’t just design and launch a free trial, map out how it would work, how it changes the user journey and all of the user’s touch points with your business. If you do that first you’ll have a better idea of how to execute a good experiment.
What’s a good and great free-to-paid conversion rate?
This comes from Lenny’s Newsletter and I encourage you to dig into it.
Interestingly, the next chart really speaks to the co-mingling of models. It shows that you can increase conversion to paid (for freemium or free trial) if you reach out to those users/prospects. This would change the systems diagrams above. You’d have to include a step (“call leads”) between “signup” and “user/customer.”
“Gone are the days when it was self-service or sales. Today, the new frontier is combining product-led growth (PLG) and sales for efficient growth. I consider this part of a broader trend toward product-led sales.” - Kyle Poyar
Digging into Customer Acquisition
In the original systems diagram, we didn’t focus much on customer acquisition and channels. We put a few options (i.e. Direct, Paid, WOM, Search, Inherent Virality) but you should dig deeper.
Here’s a list of acquisition channels (not exhaustive), mapped against two axes: (1) Early to Late Stage & (2) Low ACV to High ACV. You probably won’t think about it this way, because you know what stage you’re at and how much you’re charging, but it was an interesting exercise to go through.
The type of business you’re in will impact the channels to use. My simple variables won’t cut it, but it’s a start. Different industries & verticals will expect to be targeted & sold in different ways.
I always prefer testing a few channels first. You can get caught boiling the ocean on go-to-market. Ideally you find one channel that really works, you leverage the hell out of it, and then move to a second and third one.
I think of this as the shift from Problem-Solution Fit to Product-Market Fit. While trying to achieve Problem-Solution Fit, don’t focus on customer acquisition channels. You need enough customers (by any means necessary) to prove you’re creating value; i.e. the solution solves a problem. Once that’s done you have to figure out if you can reach the market (at scale), which is how you get to PMF.
The next step is to take all of these possible channels, pick the ones you want to focus on, and add them to your systems diagram. It’s important that everyone (at your company) understands how you’re doing customer acquisition, and what you’re tracking/measuring to see which channels work.
1. Early vs Late Stage Targeting SMBs
These might not be the right channels for you (if you’re selling software to SMBs), but they’re the ones I commonly see. It will depend entirely on the type of customer you’re going after and how they want to be engaged.
For example, I know of an early stage company targeting SMBs that’s validated partnerships and events as their two primary channels. Those weren’t the channels I would have defaulted to, but that’s OK. If they work to drive leads, and those leads convert (i.e. they’re high quality leads), and you can make money doing it (i.e. the LTV/CAC and CAC Payback Period are strong), go for it!
Go-to-market takes a lot of experimentation. Pick a channel, test it, rinse and repeat. Keep track of the channels you’re prioritizing (the systems diagram helps!)
2. Early vs Late Stage Targeting Enterprise
Again, the channels you select may vary, but in my experience when targeting the enterprise, you quickly go direct through outbound sales. “Dialing for dollars!” 💰
I didn’t have the stomach to put OOH (Out of Home) on there, but companies do it. Next time you’re driving somewhere, look at the billboards.
Digging into Activation & Engagement
Everyone that builds software wants people to use their software. In the original Lean Analytics systems diagram, we kept it at a high level, and simply said “Engaged User” with a few examples of metrics you might track (i.e. DAU/WAU/MAU). It’s much more complicated than that. 😀
I’ve broken things down into 3 models:
“They’re no good alone” applications: These are products that won’t create value unless there’s more than 1 user. Think: Slack, Asana (although some might use Asana independently!) In a B2B context, these are your collaboration, communication & social applications. These products have to get 2+ users onboarded ASAP.
“Better together” applications: These are products that you can use independently, but are often more valuable with a team. Most B2B applications fall into this bucket. Many of them don’t create exponential value with more users but they still want them (b/c it drives their business model!) For example, Hunter.io is something you can use as an individual, but they still encourage you to setup a team. Webflow fits into this category, not because you need 2+ people to setup a website using it, but naturally they want more users. More users = more Webflow sites created (likely) = more money in their pocket. A tool like Miro, which you can use on your own, is much more valuable with a team.
“You’re all using this now” applications: These are products that are sold top-down and implemented company-wide. Often we think of these as being “big enterprise products” but that’s not always the case. At Highline Beta we use Humi for HR-related stuff, and we’re not big. Another example is Expensify for expense management. That’s a C-level operational decision. You’re not tolerating (or endorsing) multiple expense tracking tools within your organization.
Each of these models will onboard, activate and engage users differently.
1. “They’re no good alone” Applications
Classic Product-Led Growth, albeit still fairly simple.
Sometimes they delay inviting other users for a bit more setup, but most will try to get you adding users right away. You’ll track invite rate (frequency, volume) and activation carefully.
A key aspect is understanding “the core product”—i.e. What is really at the heart of your product that makes it tick? What’s the core behaviour loop for value creation that you’re building? You really need to nail this for PLG to work.
2. “Better Together” Applications
Start by ensuring that you create value for User #1. If you miss the mark, there’s no chance they’re telling or inviting others. Think of this as a single-player game that can also be a multiplayer game (but doesn’t need to be).
In some cases, these products do not actually create exponential value as more people are added, but that’s OK. For example: Zapier. My colleagues and I can all use Zapier and benefit independently. Zapier wants everyone on it because more people likely means more Zaps, which means more usage, and that’s more money. While the value may not increase exponentially by my colleagues and I using Zapier, it’s reasonable for us to align on one automation tool versus five of them in the org causing havoc.
3. “You’re all using this now” Applications
This is a pretty simple model. It can be used for collaborative software or not.
A lot of software gets sold this way. Despite the excitement around PLG, more money is made selling top-down than bottom-up. (I’m not suggesting you take this approach, but I wouldn’t ignore it, or the tactics of outbound + sales calls to leads, etc.)
If you sell this way you need to track the cost of onboarding and activating a customer because it could be quite high (in terms of training & support).
What is a good activation rate?
Again, I’m going to Lenny’s Newsletter because there’s a great post co-authored with Yuriy Timen on this very topic.
First, take a look at these examples of activation milestones (i.e. how are you identifying the core things you want users to do in your product to get value):
Based on a survey they did, the average activation rate for SaaS products is 36%, and the median is 30%.
The Right Systems Diagram for Your Business
Every business is a bit different. But there are common patterns to leverage. A systems diagram of your business will give you a complete picture of what’s going on, and even what you might do in the future. It’ll help you identify hot spots that need attention, track the right metrics and figure out the experiments to run.
You can start with something zoomed out, similar to what Alistair & I did for Lean Analytics. Then you can zoom in, similar to the examples I’ve presented here. You can go even further (and I would!) mapping every aspect of the customer journey. That’s going to give you incredible insight into your business and help drive alignment across your team.