Why You Shouldn't Be Using The Freemium Business Model Part Two

In Part One of this article, I explained why using the freemium business model is bad for bootstrapped startups to use at the beginning of their growth.

Instead, like Mailchimp, they should wait until they have a viable, sustainable, revenue-generating company before introducing the freemium model (if they so wish). To understand precisely why go back and read Part One if you haven’t already.

However, although Mailchimp is a great example of when you should start using the freemium business model, it's a bad example for indiehackers to use when it comes to growing their businesses from zero to that point where a freemium business model will work.

That might be surprising because, after all, Mailchimp should be a great example for indiehackers on how to grow a business from the ground up. After all, it never raised any capital. The money used to grow the business came directly from their customers.

Here's why and what you should do instead.

Why Mailchimp Is A Bad Example For Early Growth

Mailchimp was launched in 2001 as a side project for the web agency that the founders had created. At the time there were very few companies that offered email marketing solutions for small businesses and their web agency clients were clamoring for one.

In 2007, they shuttered their agency and went all-in on Mailchimp which, by this point, had 30,000 paying customers. And, by the time it launched freemium in 2009, it already had 85,000 paying customers.

Now, we know that the decision to grow freemium at that point (and not before as I explain in Part One) exploded their growth – in one year they generated 150% more paying customers and a 650% increase in profits. And that growth continued in the years that followed.

But the question we’re asking now is how did Mailchimp get those initial 85,000 customers (and therefore get to the point where freemium was a viable strategy to use) and why am I saying that how they did it is not an example to follow?

Here's Why

Founder Ben Chestnut struggled for some time in those early years trying to get traction on search engines like Lycos, Vista, and Yahoo. With little to no money to spend, he tried to find cheap or free ways to get traffic to the Mailchimp website, but he had little success. That is until a small search engine called Google started getting more and more popular.

Chestnut became more interested in the Google search engine and started to experiment with its advertising. But, unfortunately for him (and Mailchimp), that was a dead-end too. Then, one day, Google said that they would start indexing PDFs. So, Ben wrote a PDF document detailing email marketing tactics and strategies that small businesses could use and posted it online. It got the number one ranking in Google for email marketing and that kickstarted a steady growth in website visitors and, subsequently, paying customers.

As Chestnut himself says, it was pure fluke. It just so happened that Google was ranking PDFs higher in their algorithm at that time because they were brand new. In other words, Mailchimp was in the right place at the right time to take advantage of a short-term ‘loophole’ on a particular platform.

And this is why Mailchimp's growth strategy prior to going freemium should not be replicated by you today.

Firstly, the specific hacks that it used no longer function. Google does not rank PDFs higher in its algorithm anymore.

But secondly, and more’s to the point, short-term loopholes are fleeting and hard to come by. You can never rely upon them to be there when you need or want them to be. Will there be hacks and loopholes available to exploit on existing and new platforms like social media? Of course, there will be. And there’s nothing wrong with using them. But to rely on them as your primary means of growth is to rely on pure luck and the chance that one will appear when you need it.

There’s a better way. One that doesn’t rely on pure chance but upon something that will always be there and always work – human nature.

Grow Using Human Nature

Our brains have evolved to make decisions and be persuaded in a very specific way.

We have hundreds of known cognitive biases (and probably hundreds more yet to be discovered) that dictate how we react to specific situations and how we make decisions. These cognitive biases are hardwired within every single one of us and are the result of millions of years of evolution to help us survive and thrive.

And, although the world within which we live is very different from that of our ancestors, for better or for worse, these biases still exist and impact our daily decision-making. We can’t get rid of them even if we try and, even if you know what they are, you can’t stop them from affecting your decision-making processes.

As such, it makes sense to use a marketing strategy that harnesses the cognitive biases within our customer’s brains to convince them to buy.

This is a far more effective, and evergreen strategy to use. You can rely upon it whenever you want and, if short-term loopholes appear on existing or new platforms then you can treat it like a bonus growth opportunity as opposed to being the only thing you are relying upon.

In other words, you have full control over your growth rather than relying on the likes of Google, Instagram, and other platforms to dictate when and how you can grow.

So, what is a marketing strategy that best harnesses cognitive biases?

It’s a strategy that companies like Apple, HubSpot, Salesforce & CrossFit have used to become wildly successful.

Now you might be thinking:

I’m just an indiehacker, not a large corporation like them. How does this apply to me?

Whilst it’s true that Apple used this strategy when it was already an established company, HubSpot, Salesforce & CrossFit all used this strategy when they were just small startups with no customers or very few (in the case of HubSpot).

But what about funding? They all received funding, right?

Yes, for the most part, they did. Apple, HubSpot & Salesforce did receive venture capital funding.

But CrossFit did not for the vast majority of its lifespan.

Its founder Greg Glassman actively fought against taking venture capital for many years until he was forced to resign, and a new CEO bought him out with the backing of a VC firm.

As such, you don’t need funding to implement this strategy.

But what if you don’t want to become a massive corporation like these businesses? What if you want to create a lifestyle business?

Implementing this strategy doesn’t mean that you have to become a large corporation like the companies I have mentioned. There are a number of businesses that have implemented this strategy and retained a ‘lifestyle’ size. Companies like The Bullet Journal for example that does roughly $8 million a year in revenue and has remained essentially a one-man business.

But I’m not creating a software company.

This strategy works with any industry and solution type, not just software. I’ve already talked about fitness company CrossFit and physical products company The Bullet Journal, but it also works very well for service companies too. Companies like The Ken Blanchard Companies which sells management training services and Get Things Done which sells productivity training services have done extremely well using this strategy.

In short, don’t think this strategy is limited to a certain type or size of company because of the examples that I use, it’s for everyone and every business.

Now, without further ado let’s look at what this strategy actually is and how to use it yourself. Click here to read Part Three.