Hey, software makers: Skip the sales team. Go freemium to build a $1B business

Can you build a billion-dollar enterprise-software company without a sales force? Today, not only is that possible, it’s preferable — at least for some types of software companies.

Take the software development tools company Atlassian. Without a single salesperson, Atlassian has acquired more than 25,000 corporate customers and a collective 8.5 million users. The company has been profitable since day one, has raised $210 million, and is valued at more than $3 billion.

Atlassian is a great example of a software company that’s made all the right plays, including adopting an “enterprise freemium” sales model. With this emerging sales model, customers organically adopt free versions of your product, which spread virally through their organizations. Soon, companies see the value in your product and begin paying for more robust versions without being asked. Instead of hiring a huge sales force and sending these people out to convince potential customers to buy your product — the way Oracle, SAP, Microsoft, and even Salesforce.com built empires — a freemium model is a perpetual motion machine through which your product “sells itself.”

Atlassian Co-chief executive Scott Farquhar summed up the company’s business model in a recent Wall Street Journal interview. “Fifteen years ago, as long as you had the best distribution, you would win; it didn’t matter whether Oracle was worse than SAP,” he said. “These days, people are making decisions based on how good the products are.” Frankly, it’s amazing this traditional model persisted for so long.

In a typical enterprise-software sales scenario 10 to 15 years ago, companies like SAP or Oracle would send their respective sales teams to meet with prospective customers. Over the course of six to 12 months, the teams would court the “line of business” buyer, like the chief financial officer or the vice president of sales, and the IT staff at the prospect company, providing endless demos and drowning the potential customer with product collateral. Once the prospect was convinced the product was right for his or her company, the prospect would fork over millions to license the product, spend millions more on a systems integrator like Accenture or KPMG to install it, and then spend six months teaching employees how to use it. The customer took all the up-front risk by shelling out millions before even using the product. The relationship between the software vendor and the customer was asymmetrical: The customer took all of the risk, while the vendor got paid without having to provide any value.

No wonder end users love the bottom-up freemium method of using software first and then paying for it only if it delivers value. The model forces software companies to build great products, as they will only get paid (and ultimately get the renewal) if the product provides real value. All parties’ interests are aligned.

Some enterprise companies use a variant of the freemium model through which they offer a free, lightweight version of their product to acquire a large base of users, then supplement that with a traditional sales force to upsell customers on more sophisticated enterprise products. Box is a good example of a company that has successfully executed this version of freemium, and the model is driving very rapid revenue growth for the company. The approach is particularly effective at driving high-quality leads for the sales organization. Salespeople simply look for clusters of active users of the freemium product in an enterprise account; those customers are likely getting value, so they’re good candidates for an upsell.

In addition to Atlassian and Box, there are a wide range of software companies using some flavor of the freemium model, including Dropbox, WordPress, Shopify, MongoDB and Zendesk. In every case, the freemium model has helped accelerate their growth, and the results have been impressive. Every one of these companies is worth more than $1 billion, based on values assigned by recent private investments or in the public market. That success isn’t a coincidence. The freemium sales model is the common thread that ties these companies together.

Of course, freemium models don’t work for all types of software companies. They’re best suited for products used by engineers or other technically oriented employees who need help getting their job done. Their work could range from coding to project management to website development to analytics. These employees want elegant, easy-to-use tools to get tasks completed quickly and efficiently, and they are comfortable enough with technology that they don’t mind downloading software and figuring it out on their own, without help from IT. If you are a software company selling to a technical buyer, like developers, a freemium model might be the right path to consider.

Conversely, the enterprise freemium model so far hasn’t had much success in larger, traditional workflow categories like enterprise resource planning, or with customer-relationship management (CRM) products like those made by Workday and Salesforce. These products must be deployed across an entire organization all at once to make an impact, so these types of enterprise companies still rely on sales teams to sell big contracts with hundreds or thousands of seats. That said, the day is coming when freemium will likely creep into these sectors as well. Some companies, like Clari and Accompani, are parceling out critical components of CRM into lightweight mobile apps, and freemium might work well with that model.

As an enterprise software entrepreneur, what steps can you take to create a product that’s suited to the freemium model?

• Tip 1: Know your customer. As I mention above, if you are selling into a technical buyer, you should strongly consider a freemium offering. Non-technical buyers who may struggle to deploy enterprise software may be more challenging.
• Tip 2: Make sure a lightweight version of your product can deliver real value. Some product categories are good candidates for this, while others are not. In particular, products requiring complicated data integrations or lots of end-user training may not be a good fit. After all, if end users don’t see real value from the free version of your product, you won’t be able to upsell them the premium version!
• Tip 3: Figure out where to draw the line between “free” and “mium.” This is a delicate balance, because the free product has to be good enough to provide real value, but you want to leave enough functionality in the premium version so customers will be willing to pay.

It’s a new day in enterprise-software sales, driven partly by the new freemium model — and most companies would be wise to explore the option.

Roger Lee is a general partner at Battery Ventures in Menlo Park, Calif., where he invests in great entrepreneurs building innovative companies across the software and consumer landscape. Read his blog at rogerleevc.com.