Assistly’s Pricing Gamble: A Case Study in Freemium

7/26/11Follow @wroush

At last week’s True University startup school event at Berkeley, Alex Bard, CEO and co-founder of San Francisco-based Assistly, moderated a session on freemium business models; his panel of startup veterans spent an hour delving into the pros and cons of offering free products as a way to drum up new business. It turns out the subject wasn’t just a theoretical one for Bard. This week Assistly, which offers a Web-based customer support platform similar to Zendesk, significantly overhauled the way it charges for the service. It made the first seat free for all customers, and greatly simplified its prices for other levels of service.

Granted, this might not be the most earthshaking news to hit the Bay Area technology scene this week. But Assistly’s move is a risky one that, in the short term at least, entails some loss of revenue; the young, venture-backed startup is balancing those costs against the hope of recruiting more customers down the line. So it’s an interesting case study in the thinking behind freemium products and pricing—which, needless to say, is a subject of great interest to many Silicon Valley startups, especially those using the Web as a delivery channel. I sat down with Bard yesterday to talk through the changes and the logic behind them.

As I explained in a profile article a few weeks ago, Assistly’s main product is a Web-based system that monitors Twitter, Facebook, and other social-media channels for customer complaints, and helps customer-support reps be more systematic about responding to them. Before this week, Assistly offered companies tiered pricing—a fairly common phenomenon in the world of business-focused Software-as-a-Service (SaaS) products. Companies could pay $39 per user per month for the lowest tier of service, $69 for the middle tier, and $99 for the highest. The differences were in the level of customer support Assistly itself offered to users, the number of Twitter and Facebook accounts that could be tracked, the number of e-mail inboxes that customers were allowed to plug into the system, and so forth.

Now, by contrast, the startup is offering a flatter pricing scheme, starting with the simplest price possible: nada. The first full seat on Assistly’s system is now free; adding a second user costs $49 per seat per month, as does every user after that. In addition, companies can pay $1 per hour for part-time usage—an option designed for employees or managers who only need occasional access to the platform. (There used to be a $19 monthly up-front fee to use the flex-hour option, but that too has been eliminated.) If customers want more functionality, “a la carte” upgrades are available; monitoring extra e-mail inboxes, Twitter accounts, or Facebook pages costs $29 per month per inbox, account, or page.

“When we launched the tiered pricing model, we thought it made sense,” Bard says. “Certain customers have certain requirements, and they could self-select the buckets. It’s a pricing psychology that Salesforce.com, 37signals, and a lot of SaaS customers have really put into practice well. And it does help you to optimize revenue.” If just a few customers opted for the $99 plan, for example, it could help to underwrite the much larger number of customers who selected the $39 plan.

But the more time the startup spent talking to companies in its target market of small-and medium-sized companies, including many who had opted not to use Assistly, the more it realized that its tiered pricing was having some unintended effects, Bard says. For one thing, it was too complex. “Customers were confused about which bucket they belonged in,” Bard says.

The system was also generating what might be called feature envy. “The $39 users might see one or two features that they would love to have, but the cost to switch was pretty high,” says Bard. “So you’d start to get a base of users who were dissatisfied, but didn’t convert up.”

Finally, there were many potential customers who couldn’t afford even the lowest-tier plan. “By listening to people who went through our trial experience and did or didn’t become customers, we identified this category of companies who loved our service but couldn’t afford it,” even at $39 per user per month, Bard says. “By the way, you can put all of the TechStars companies and the startups coming out of all these other boot camps into that category. They just don’t have $500 a year to put into customer support.”

By replacing the tiered pricing with a simplified freemium model, Assistly was able to eliminate all three of these problems in one stroke. Getting started with the system is now faster, because customers don’t have to decide between buckets. If customers get feature envy, they can add just the features they want, for an a la carte price. And if they can’t afford to pay at all, they can still sign up for one free account.

But the new freemium model isn’t simply a way to correct old problems, Bard says—there are also some positive reasons behind the change. One major rationale for making the first seat free, Bard says, is that “none of our large competitors are doing it,” which could help to differentiate Assistly in a market where Zendesk, RightNow, and other makers of customer-support platforms have big head starts. (Assistly only recently crossed the 1,000-customer threshold.)

Another big reason to introduce a free product: it’s a pretty good way to make customers love you. “The benefit isn’t necessarily that you will be able to convert some percentage of the free users to premium,” says Bard. “It’s that if you do this, you can build a fanatical user base that effectively becomes your marketing channel. They go out and help you acquire customers, and those customers may have larger requirements, and will pay you. So in large part, this is Assistly really aggressively coming to market and starting to build our brand.”

Bard says the pricing overhaul has been in the planning stages for about six months, and is “one of the biggest releases in the company’s history.” It’s definitely the kind of change that requires buy-in from the board of directors—so to get some extra perspective, I contacted Phil Black, one of the founding partners at San Francisco-based early stage investing firm True Ventures. True invested in Assistly early this year, alongside Bullpen Capital, Index Ventures, Social Leverage, and Salesforce.com, and Black is on the startup’s board.

He says the pricing change was a smart move because it’s now “drop dead simple for a user to understand what they are getting and how much it costs to scale.” If Assistly customers had actually been consuming more of something—storage, bandwidth, CPU power—at the higher prices, then the tiered scheme would have made more sense, Black says. But “the Assistly product delivers full functionality out of the box,” which means that “it should cost the same for the first agent—or the second one in Assistly’s case, because the first one is free—as for the 101st agent.”

Alongside the flattened, freemium pricing scheme, Assistly is introducing some unusual features that give paying customers a way to earn free hours. For every new user added to a company’s account, for example, the company gets a free hour of flex usage; setting up a Twitter account inside Assistly earns three free hours. The company is calling the system “Wow Rewards,” and it’s designed to incentivize customers to add a la carte upgrades while also making the whole system more fun to use.

“Fun” is a word you don’t hear too much in business-to-business software circles, but Bard says the company is already collecting feedback from customers who are enjoying the new setup. “We got this awesome e-mail on Monday that I sent around to the company, where this person was configuring Assistly, and she said the new experience was like a game—it didn’t feel like a chore. This person had earned 30 free hours.”

There’s no doubt that by cutting the base price for the companies that were previously paying $99 or $69 per seat per month, Assistly is sacrificing revenues, at least in the short term. (Customers who paid $39 per seat, by the way, are permanently grandfathered into that price—they aren’t being forced to pay $49.) Indeed, quite a few companies were formerly paying Assistly $58 per month: that is, $39 for the first full seat, plus the $19 up-front fee for flex hours. All of those companies got e-mails from the startup over the weekend informing them that their service is now free, not counting their flex hours.

But Bard is convinced that the new pricing plan will come back to benefit Assistly in the form of faster customer acquisition. “The risk is that we are giving away a lot of future revenue that we would otherwise have had because people would have paid for one seat and then bought a lot of flex hours,” says Bard. “We took that into consideration and we felt that the benefits of doing this—the value to customers, the marketing and word of mouth that we would get out of it, the evangelism—would be more than enough to offset the revenue impact.”

Time, as they say, will tell, but one thing’s for sure: lots of other SaaS startups will be watching to see how Assistly’s freemium strategy works out.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://www.pricingwire.com Chris Hopf

    Excellent post Wade and thanks for the insight into what went into Assistly’s thinking when making this significant shift.

    Indeed time will tell. I am a big advocate of getting paid and studies have proven that if you value what you offer the market enough to charge for it, doing so communcates value to your prospects and eventual paying customers. Too often companies default to playing with their pricing instead of fine-tuning and improving their messaging, offerings and value communication.

    Free trials is one thing, but perpetually free is quite another . . they have set themselves up to be on the hook for supporting these free users for…ever? Really?

    More I could say, but indeed they are bold and I commend them for trying something different (I hope it works out even better than they hope).

    Respectfully,

    Chris Hopf
    PricingWire

  • http://alexkinsella.tumblr.com Alex Kinsella

    This model is light years ahead of the competition. Excited to see how assist.ly takes advantage of the lead they’ve built for themselves.

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