What we cover in Episode 28
Hotjar has grown a lot in popularity over the past four years. Over 400k websites are using Hotjar, and they have over 21k paying customers.
We talk to David Darmanin, founder and CEO of Hotjar about his experiences in building such a successful company.
In particular, we focus in on the roles that both freemium and being a remote only company have played in their companies success. We cover:
1. How they decided to go freemium
2. The pricing strategy they created to monetize freemium users
3. Adopting a hybrid model between freemium and free trial
1. The Decision to go Freemium:
One of the reasons product-led growth is becoming an increasingly popular choice for founders is because of the shift towards a more B2C type experience when buying software.
David and his co-founders all came from a B2C background so when thinking about Hotjar's go-to-market they wanted it to launch with a low price point to get started, and to get it into the hands of as many companies as they could in a low friction way.
They didn't initially set out to create a freemium product; they made that decision based on data collected during their beta release.
"We surveyed people in the beta on their willingness to pay. We identified a segment of users who loved the tool but were not prepared to pay. Their NPS was amazing. We knew if we made the product paid only, we would lock out this large group of people who were a fan of our product."
The advantage of freemium is in creating a significant volume of fans for your product. Compare people searching for Hotjar and one of their competitors, CrazyEgg, founded ten years prior. You can see the difference in people searching for those brands.
Freemium is only a potential choice for your business if there is a broad enough market for your product.
"A freemium model requires a lot of volume; it's a volume play. If there isn't a large number of people suited for your product, what's the point in giving it away, there is no one to spread the product to."
If you have a complicated, niche product, a freemium model will provide little in the way of value for you.
2. A Freemium Pricing Strategy
Being successful at freemium isn't just reliant on acquiring users, you also need to work hard to implement the right pricing strategy that will monetize those users.
You'll need to strike the delicate balance in giving enough of your product away that it will provide value to users so they'll spread your product to their network, but not so much that there isn't a compelling enough reason to upgrade.
In Hotjar's early days, David felt they gave away too much for free:
"We gave away a little bit too much for free initially. We heard from our users that they loved free, and had everything they needed. When people churned, and we surveyed them, they didn't understand the difference between free and paid. It showed they didn't understand how our pricing worked."
That leads on to another crucial element of your freemium pricing strategy, deciding on the value metric you'll use for pricing.
"It's essential to understand what your value metric will be for pricing, so it's clear once you hit that limit, and it's an obvious limit, you're motivated to move up. So, in our early days that wasn't well designed. It's hard to design your value metric ahead of time. But you should be thinking about these problems and experimenting on them from a very early stage."
Limits are an example of a product qualified lead, demand you create from the product, which can be monetized by either a salesperson or through a touchless sale.
A common problem with the PQL model is over-engineering them to the point where it becomes confusing for users to understand why their upgrading, and what they're upgrading too.
"We experimented with having a lot of different limits, so although we gave a lot away for free, there was a lot of different limits, to the point where it could have become a little confusing. For example, limits around reporting, data collecting rate, it could become overwhelming."
3. Moving to a Freemium Hybrid Model
Freemium will convert at a lower rate than other conversion types like trial or demo, that's why volume is so crucial to success.
But, it's also a great way to reduce churn because users have already experienced value from the product before signing up.
Hotjar learned this lesson when they switched a lot of their focus across the websites towards paid plans vs. getting started with freemium.
"With freemium, you get a lower conversion rate, but retention is much better. At the end of 2016, we experimented with switching over the home page CTA's from getting started with free, to the business trial. That gave us a huge bump in revenue, but after about six, seven, eight months we started to see the impact on churn."
The experiment between freemium and free trial led Hotjar to experiment with ways to surface up to the free trial to the right segments of free users.
In our previous episode with Hana Abaza from Shopify, we talked about the different upgrade triggers you can use to move people up through your different pricing tiers.
There is a soft option where you have a visible way for people to signup for a trial on your website. And then there is the intent, using product information to determine segments of users who are potentially a good fit for an option to upgrade.
Hotjar have the benefit of users installing their tracking script, so they can see how much traffic users are getting to their website:
"With Hotjar, the moment you install the script, we can see how much traffic you're getting. At that point we can say "Oh wow, you have amazing traffic, here's the right plan for you. By the way, you can try this for free for 30 days."
Traffic was Hotjars pricing metrics, so this was an incredible way to surface up higher tiers of their product to different segments of their freemium base.
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