Companies such as Dropbox, Zoom Video Communications, LinkedIn and Slack Technologies use a "freemium" business model. They offer a free basic version of their product and count on customers to pay for upgrades to premium versions. Freemium business models have grown rapidly in popularity with tech companies. But do such freemium companies need salespeople?
Freemium relies on word-of-mouth, user referrals and referral bonuses, along with paid advertising, to grow the user base and generate revenues. With a pure freemium model, there are no salespeople. Consider messaging software provider Slack Technologies. By 2016, a pure freemium model had driven Slack’s growth to 2.3 million monthly active users in just two years. Slack CEO Stewart Butterfield initially predicted, “I think we can get away without having a sales team in any kind of traditional way probably forever.” Yet today, as Slack’s business has evolved, the company has a rapidly growing sales force. Other freemium companies, including Dropbox, Zoom and the more mature LinkedIn, also have teams of inside and field salespeople selling their products.
So what changed?
The no-sales force model worked well while these companies sought out individual users and small business customers with relatively simple needs. But when the core of the paying market shifted to larger enterprise customers, inside and field salespeople began to make sense for two reasons.
- Customer business needs, products and buying processes became more complex.
- The lifetime value of such customers justified the investment.
Dealing With Complexity
In complex buying situations, customers want information that can’t be found through a search engine or on a company website. They want insights they may not have discovered through direct product use experience. Selling to large enterprise customers involves several dimensions of complexity.
- Business needs complexity: Enterprise needs vary by industry and customer. Customers want solutions to align with existing business processes and systems. Dropbox has enterprise salespeople with specific industry expertise. These salespeople are deployed to large prospective customers that already have many employees who have organically adopted Dropbox. The salespeople use their experience working in similar situations to understand the customer’s broader needs and tailor custom solutions.
- Product complexity: Simple freemium digital offerings naturally become more complex as companies shift their focus towards larger enterprise customers. Zoom Technologies initially offered enterprise customers a video/audio communication system. As Zoom learned more about the needs of these customers, Zoom’s offerings expanded to include Zoom Rooms that transformed existing conference rooms into collaborative workspaces, and cloud enterprise phone systems. This list of offerings will certainly grow over time, as will the need for salespeople at Zoom.
- Decision-making complexity: Enterprise customers often make technology investment decisions through the collaboration of multiple decision makers. These individuals have different perspectives. Finance is concerned about ROI, IT is concerned about security and business risk, and user departments are concerned about features and ease of use. Salespeople can help navigate the intricacies of corporate purchasing and forge alignment among diverse decision-makers within the customer’s organization.
Realizing Lifetime Customer Value
Ultimately, the decision to use salespeople, instead of less expensive digital sales channels, is a matter of economics. The questions are: How much can a seller gain by serving a customer through self-serve digital channels? How much more can it gain if inside or field salespeople are involved? Salespeople are expensive, but they can also be highly effective at generating revenues.
A field sales force makes sense in the following circumstances. First, potential customers must find enough value to consider spending a substantial amount of money on your product/service over the life of your relationship. Second, digital channels are unable to deliver that value. The lifetime value of individual users and small businesses usually isn’t enough to justify the expense of in-person selling. But enterprise selling is a different ballgame. For example, our global consulting firm’s current annual spending run rate on freemium platforms is over $3 million, mostly on LinkedIn, Microsoft One Drive and Zoom. At Zoom, the company’s 405 largest customers (those contributing more than $100,000 in revenue in the past 12 months) had an average annual spending run rate of $350,000 (according to the April 30, 2019, 10-Q filing). We estimate the lifetime revenue value of such a customer is over $2 million. It’s not surprising that Zoom is deploying salespeople against this customer segment.
An Evolving Need for Salespeople at Freemium Businesses
Even as digital channels and products transform the sales world, complex buying situations continue to suggest a need for salespeople. Salespeople’s primary value is in helping customers address complexity, whether those customers are buying freemium or non-freemium products. With freemium, enterprise customers may learn about a product through word-of-mouth or through a referral. They may initiate a trial using self-service digital channels. But eventually, the complexity of business needs, product/solutions and buying processes will compel enterprise customers to seek human help—from salespeople.
The story does not end after the initial purchase. As customers embed freemium products into their organizations, their needs will continue to evolve. They may use self-service or inside sales channels to purchase upgrades or complementary products, even if a field salesperson coordinated the initial deal. They may turn to field salespeople again when things get complicated, for example, when the freemium company offers new products that create added value along with new complications.
As more freemium companies seek to monetize the huge opportunity of enterprise customers, we expect to see even larger teams of inside and field salespeople selling freemium services.
Copyright (c) 2019 by Harvard Business Publishing. Reprinted with permission. This blog originally appeared on the Harvard Business Review website: https://hbr.org/2019/09/yes-freemium-businesses-need-salespeople