Users vs abusers

Is freemium a tactic or a strategy?

The distinction between a user and a customer is a curious one. 

I just finished reading a paper that distinguishes these two. And, the distinction is central to the article’s key points, which are mostly about the “Reality of Freemium in SaaS.” I am always a bit leery of anyone who claims to have access to “the reality” about anything. I might have suggested a phrase in the title that went more like “our perspective on…” or “key success factors in…” or even “some case studies in…” or my favorite, "I had some free time so I wrote about..."

This is more of an overview paper and some specific case studies (positive and negative) would help its argument.

But I digress. So, back to the original point. The author's point is quite simply that “Customers pay to access the system [whereas] users use the system for free.” One gets the sense that users are positioned here as freeloaders. "Users" are too cheap to pay up, and that the "Customers" have to bear the burden of the cost.

Here's more: “Customers could be individuals or companies. The individual customer will both pay the bill and be the only one that accesses the vendor’s system under that account. On the other hand, a company might have 1000s of employees using the system under one account with only one payer. Users could also be individuals or companies, with 1 or 1000s of users, but since there is no payer, they are not customers.”

One also gets the feeling that the Sixteen Ventures folks are frustrated with SaaS vendors who aren’t making enough money fast enough. I can understand that. I lived it myself. But the distinctions here are a bit misleading. We not only have the stated distinction between customers and users, but now we have payers and employees. And if an employee is a user on a system where there is no payer, then that employee is not a customer. At least that’s how I read their point. This employee is a source of cost rather than revenue.

Earlier in the paper, the author points out that there are other reasons to have non-paying users. They might be a source of future leads, or user feedback, etc. But I would like to stop for just a minute here and consider the distinction between a customer and a user.

I get what the author is saying. The point is that SaaS companies need to figure out how to get paid. A shorthand way of saying this is that Freemium is a tactic, not a strategy. If they don’t figure that out, they will soon go out of business. Or perhaps become a self-funded charity. This is a fair point and it has been out in the open for almost a decade now. The answers are still unfolding. How do SaaS companies make money? And from the stockholder standpoint, how do investment funds make money if their SaaS companies don’t make money?

But the distinction between user and customer here is problematic. A great product must meet the needs of the entire user base, whether or not they are customers, employees, payers or users. In addition, there are many different kinds of SaaS products and SaaS business models. We can consider the models for individual productivity tools such as DropBox or Mozy or Vimeo. These kinds of products each have their own SaaS value propositions and the revenue model needs to be designed as integral parts of the product itself. But then you have collaboration products, like Salesforce for CRM, or Innotas for PPM. Or even some newer concepts like Qlubb and LendingKarma. These are products that are designed to support many different classes of users in an integrated application.

For my part, I don’t see much value in the distinction between customers and users. What that distinction does for me is to create the potential for a fragmented product vision. What I would like to see, rather, is a revenue strategy that is integrally built into the product, and that the product is designed to meet the needs of all users, whether they are customers, employees or payers (not to mention guests and casual users).

But here's the real point: if you don't offer some form of try-it-buy-it, your competitors will, and that fact will cause you pain.

It’s a worthwhile read for SaaS entrepreneurs who are still struggling with their revenue strategy. Check out the recommended reading at the end for other good articles. Find it here.

(Image source: tutor2u.net)