- Companies that make their software available for free generate more revenue over the long-term than those that do not, a survey of 1,200 SaaS executives finds.
- The differential between the two has become more pronounced since the start of the pandemic. Free-version companies, called product-led growth (PLG) companies, are trading at revenue nearly twice as high since May, while non-PLG companies are trading at the same level as pre-pandemic.
- Zoom, Slack, DocuSign and Dropbox are among PLG companies using free-software strategies to become powerhouses, according to the report by OpenView Venture Partners.
PLG company growth tends to be slower than that of other types of SaaS businesses until they reach about $10 million in annual revenue. "It takes time to build a community of free users and convert those users to paying customers," the report says.
But once that threshold is hit, the "magic of PLG kicks in," and revenue can quickly double that of other SaaS companies.
"They aren't as limited by their ability to hire, onboard and feed leads to enterprise sales reps," the report finds, "and they've built up significant goodwill from their users."
SaaS companies make money by offering software solutions to users on a subscription basis, typically on a cloud platform.
To get strong growth, PLG companies must reach out to their free users frequently. Those that had at least 11 touchpoints had a 28% rate of conversion to the paid version of the software, compared to an 8% conversion rate for those that had 1-3 touchpoints.
"The real differentiator for conversion rates for free trials or freemium products isn't whether you're reaching out to users," the report says. "It's how persistent your messaging is."
Free software leads to more paying customers than does non-PLG companies because of the large marketing funnel it creates. All of those free users become prospects for the sales, customer success or other team the company uses to generate conversions.
"High-growth businesses have a wider top of funnel to work with from the start," the report says.
No amount of free users will help the company if the software isn't good, however. Companies with the highest percentage of R&D resources — measured by the number of engineers and product developers on the payroll — had the highest growth. Those with 46% of their employees in R&D roles had growth rates as high as 250%.
A newer version of the OpenView SaaS survey was released November 12.