For Small SaaS Vendors, The Benefit Of A Free Tier Is To Attract Partners
Recently, I published a report about a small software-as-a-service (SaaS) vendor, Dimdim, which is having success in the crowded Web conferencing market. Like many small vendors, Dimdim provides a free service tier, generously allowing up to 20 participants into the free meeting, to help drum up business. The report, though, did not simply highlight the number of users that Dimdim has captured in four short years of existence — over 5 million — but also its success in attracting partners like Intuit, Novell and Nortel CVAS. Why? For new vendors entering crowded markets, attracting partners is vital for two reasons:
- Partners open doors to new markets. In crowded markets, incumbent vendors and new entrants jostle to serve customer needs. For the new entrants, the customers that can be wrangled through media hype and analyst buzz is minimal. Mass appeal comes from firms with strong working relationships with a range of buyers in a number of markets — e.g., oil & gas, healthcare, government — embracing a small vendor's offering and introducing it to their clients.
- Partners help polish a product, making it business ready. Systems integrators, independent software vendors, service providers, and other prospective partners possess an understanding of the business and technology needs of their clients that fresh-faced newcomers sometimes don't have. As partners evaluate a product, they can point out flaws and nudge the product manager to make the necessary fixes. In the Dimdim case, its partnership with Novell exposed some needed fixes that not only benefited the service the two companies were collectively offering but also improved Dimdim's standalone service.
For small SaaS vendors, the freemium model — providing a free tier — can be an efficient way of facilitating these business relationships. How? First, you have to set aside conventional wisdom, which says free tiers are best suited for sneaking through the backdoor of businesses and creating evangelists. The freemium model should not be seen as simply a way to bypass IT department gatekeepers, but as the foundation of a marketing campaign that attracts buyers (people in companies who will actually pay you) and partners. The graphical illustration of this idea is below.
In practice, for small SaaS vendors, the freemium model for attracting partners allows two things:
- Partner self-selection. One of the benefits of this model for attracting customers is that it allows for the portion of the market that will find use in the tool to identify themselves in an inexpensive way. The same applies here: Novell and 5050BIZ sought out relationships with Dimdim after hitting upon their free product. This approach allows cash-strapped startups to let the market dictate how it should partner and what types of combined offerings it should pursue.
- Vendor focus on growing relationships instead of finding them. With an eye toward controlling business development costs, the staff a small vendor develops in this area does not have to spend the bulk of its time hunting down, pitching, negotiating and managing these business relationships; instead, they can simply focus on maintaining healthy, mutually beneficial relationships with self-selecting partners. This does not mean that these firms don't have to seek out partnerships at all — they do. But in building upon a base of partnerships built through freemium discovery, business development personnel can focus their efforts on specific, strategic relationships, pitching experience gained in other partnerships.
I would be remiss if I did not mention that the success of this approach to partnerships is only successful if the product delivers. So, product managers and marketers at small SaaS vendors need to know at the product development stage what issues they plan to address for customers and partners. In the Dimdim example, this meant providing an open source version of their product (great for systems integrators looking to develop on top of the communication software), open APIs (valuable for partners interested in attaching other services) and a mixed delivery model (suited for partners who want to present a hosted and on-premise version of the product to the market). It was this flexibility that kept partners around after they found the product when searching for a Web conferencing solution.