Ask HN: Do bootstrapped businesses lose much money on free trials?

https://news.ycombinator.com/item?id=8128463

by freedrull • 12 years ago

44 30 12 years ago

news.ycombinator.com

I assume these companies probably run on ec2: https://www.hostedgraphite.com/ https://circleci.com

And probably many more that I can't think of at the moment...

I noticed many companies that do something similar offer a free trial for their services. How much money do you think they lose out this way? I assume they probably run an ec2 instance per customer, at least for the hosted graphite.

The cheapest ec2 instance is around $15/mo. If the trial is 30 days I’d assume they’re likely losing a lot of $15's here and there.

Am I wrong?

spamizbad• 12 years ago

I don't have any knowledge of the inner-workings of either company you listed, but I can tell you from experience its highly unlikely they're running an EC2 instance per customer. That would be very expensive and very weird.

byoung22• 12 years ago

its highly unlikely they're running an EC2 instance per customer. That would be very expensive and very weird.

Not so weird: https://www.mongohq.com/pricing/dedicated

CaveTech• 12 years ago

Their business revolves around supplying dedicated database servers...

It would be a very weird architecture for the average SaaS product.

mseebach• 12 years ago

The existence of a company that offers dedicated EC2 instances to their highest tier of customers (and no free trial on that tier FWIW) doesn't meaningfully challenge the GPs assertion.

thibaut_barrere• 12 years ago

Most bootstrapped SaaS I know (including mine) do not, indeed, run a dedicated EC2 instance per customer. Some I know do, but it is in the "dedicated / contact us for pricing" option, and the price of the plan makes the EC2 price a detail.

pbiggar3• 12 years ago

As you say, we don't (founder of https://circleci.com here). Our infrastructure runs on LXC, so we divide up big EC2 machines into about 10-12 containers, and of course it's multi-tenant so if you're not pushing code you're not costing us money.

byoung22• 12 years ago

The cheapest ec2 instance is around $15/mo

The on-demand t2.micro is $0.013 per hour, so in a 31 day month, you would spend $9.69. The t1.micro is available as spot instances, and currently the price is $0.0061 per hour (fluctuates with demand), so if you were able to get it at that price for a whole month, you could pay $4.53.

I doubt they are spinning up an instance for each trial, but let's say they are. If you get 100 free trials and it costs $500 to $1000, if you can get 10% to sign up for your cheapest plan ($19/mo) and the average customer stays with you for 3 years, you'd have $6840 of revenue after 3 years.

patio114• 12 years ago

This is one of those "How long is a piece of string?" questions. It depends on each individual business' circumstances. The vast majority of SaaS businesses run in a multitenant fashion and don't have meaningful hosting-based COGS for a marginal trial. (I know those two examples you picked are not representative of the typical SaaS, but I'm going to take this in another direction anyhow.)

This might be news to much of the peanut gallery, so here we go: COGS (cost-of-goods-sold: servers, etc) is not nearly the dominant hard cost associated with free trials. It is, overwhelmingly, cost of customer acquisition -- i.e. the marketing spend required to attract one customer at the margin. B2B SaaS companies routinely pay hundreds of dollars to get one new account at the typical $29 to $249 monthly price points.

Why do we do this? Because of the SaaS LTV formula: monthly price / churn rate. If you have a mediocre-ish 5% churn, then a $30 a month account is worth $600. If you can buy them for $200 apiece, why not do so? ("Massive stress-inducing cashflow crunches!" Good answer, and that's the classic reason why SaaS companies raise money despite having near-zero COGS and products which can be bootstrapped to market.)

$200 per new account businesses might imply, in a card-not-required-upfront model, 2% conversion rates on $4 trials which have converted at 25% from $1 clicks. Or, in a card-required-upfront-model, 25% conversion rate from trial, $10+ clicks.

ef4• 12 years ago

To elaborate on patio11's point: I actually do spin up an ec2 instance per customer, and even then it's not really a relevant cost compared to the cost of acquiring customers.

Why would I do such a wasteful thing? It's totally not worth the engineering effort right now to switch to a more efficient multitenant architecture. Even a single new customer is worth more to me than I'd save in a year.

mechanical_fish2• 12 years ago

Twenty-first century rule of thumb: If the single-tenant architecture is the thing that you build first, because it's less effort, you should probably never bother with multi-tenant, unless a truly compelling rationale appears. VPSes are cheap and they will keep getting cheaper.

Multi-tenant is such a pain. Your customers become coupled on so many axes: Security, performance, downtime, resource management, versions of software in production, retirement of obsolete hardware. Everything one customer does effects others; you can't touch one customer's setup without potentially affecting others; if you try and coordinate the customers via email or phone, deadlocks will happen and progress will grind to a halt.

I worked on a product that launched multi-tenant and swiftly pivoted to single-tenant; it saved our bacon. Before that the support team was working overtime issuing lame apologies: "Uh, sorry about your lost sales due to slow performance; your neighbor has no idea how SQL works."

lifeisstillgood6• 12 years ago

I seem to be struggling with the maths in this

  2 cust from 100 trials (each trial costing 4 USD) where the 100 trials came fron 400 clicks (PPc of 1 USD)

This implies we spent 400 + 400 USD to get two customers or a cost of acquisition of 400USD

The other card-required one seems to be

  25 customers from 100 trials (cost if trial still presumably 4usd) 100 trials come from 400(?) clicks at 10USD

So that's 4400 to get 25 customers or 176 USD per customer (much closer to 200

I am not nit-picking for the same of it - just trying to follow what seems to be something deeply ingrained in saas owners psyches.

Edit:

Just in case it's obvious I want to say it has been a long day and I have a cold :-)

patio114• 12 years ago

Possible that I botched mental math at 3 AM, let me check if after morning coffee.

PeterisP• 12 years ago

Bypassing the question about costs, even if they would be "likely losing a lot of $15's here and there" then such costs are often considered acceptable for customer acquisition.

For example, back when Paypal was getting started, it simply gifted $10 to every new user, and in B2B sales you can expect to spend thousands on every prospective customer, even if no sale happens in the end.

diego• 12 years ago

You're asking a loaded question. Companies spend money on acquisition strategies. Free trials are only a loss if they don't result in the acquisition of customers that justify the expense.

As to your question, at IndexTank we had a free trial plan that allowed us to host hundreds of customers on a single AWS instance. Why would you imagine that any company operating at scale would have to dedicate a whole instance to a nonpaying customer? It's the same as assuming that AWS would give a free user a whole physical server.

BTW, CircleCI is not bootstrapped.

http://www.crunchbase.com/organization/circle-ci

pbiggar3• 12 years ago

That said, when we were bootstrapped (the first 14 months or so of CircleCI's life), we still offered a free trial.

xxpor• 12 years ago

Looks like hostedgraphite is on Hetzner, while circleci is ec2:

    [localhost Downloads]$ whois `dig +short hostedgraphite.com | head -1` | grep -i netname

    netname:        HETZNER-RZ13

    [localhost Downloads]$ whois `dig +short circleci.com | head -1` | grep -i netname

    NetName:        AMAZON-EC2-8

rpedela• 12 years ago

Typically startups just rent one or two instances big enough to handle the first set of users/customers then expand as needed. So the cost per free user depends greatly on the product. I think it is unusual to give one instance per free user.

nanch• 12 years ago

"Do bootstrapped businesses lose much money on free trials?"

No, they don't lose money. If a business is at a net loss offering free trials, then they'd stop offering them.

--- start example ---

Let's suppose your yearly revenue from an average customer is $96 ($8/mo). And suppose your free trial is 30-days ($8 value per trial). What conversion rate from trial-to-paying do you need to rationalize offering a free trial?

Well, 10 trials is a cost of $80, so we would need one customer (+$96) per 10 trials (-$80) to convert in order to make the trial offering a net-gain. If your conversion rate is less than 10% then it wouldn't make sense to offer free trials.

Now, this is all assuming that a customer wouldn't sign up straight-away if you didn't have a trial; which is not necessarily the case!

--- end example ---

The goal of a free trial offer is to convert the trial customer into a paying customer and the cost of non-converted trials is factored into the cost of customer acquisition.

Every service is going to have their own implementation - at OwnOcean we spin up a Digital Ocean instance for each customer so that each customer has their own space. So with https://www.OwnOcean.com, we don't have trials but we'll happily give you a refund. It's simpler than offering free-trials and functionally equivalent.

fivedogit• 12 years ago

FWIW, offering free trials in my SaaS business was THE strategic decision that jump-started our growth. Before that, I would do a screen share (or worse, a guided walkthrough) on the phone with the potential customer and it just wasn't convincing enough, alone, to get them to sign.

Once I started offering a 12-month contract with the first month (or 2 or 3) free + cancellable, that's when I started getting paying customers. That period of usage allowed them to begin trusting us beyond a short pitch.

The important part is to get them into a contract for a full year with the free trial period tacked on the front. If you just do the free part with no contract, they probably won't be proactive enough to sign up, even if they liked it. What you want is for them to be lazy after the free trial period is done, not cancel, and become a regular paying customer.

And yes, this is very dependent on your costs. My business was like cable TV: each additional customer brought zero extra variable cost and 100% extra revenue. So the free trial strategy was very, very strong.

lifeisstillgood6• 12 years ago

Would you track usage after first month and prompt or cancel those who clearly had abandoned and were not using it but still being charged?

pbiggar3• 12 years ago

I'm a founder of one of the examples you list: https://circleci.com

Most of the people on this thread have it right: acquiring customers costs money but you make it up in the long run. You should be doing your SaaS metrics and include the cost of trials in your CAC, which should of course be less than 1/3 of your LTV.

Because we're an infrastructure-based business, there is a bit of cost in giving people a trial, but it's not really that big a deal, and free trials are largely noise considering our overall run-rate (in January, we announced that this was over $1m ARR).

And of course, raising money makes this easier too: we've raised about $7.5m at this point (http://blog.circleci.com/we-raised-a-6m-series-a/), so even if our trial was expensive it wouldn't break the bank.

encoderer• 12 years ago

We ran the numbers on this last month, for our SaaS startup (shameless plug at end of this post). Certainly Patrick is right that the marginal cost of an additional user is low. It's why the math works on a "free for life" entry level plan. But in our case, we offer SMS (including international) on paid plans, so a free trial has a real non-zero cost for us. And there's an additional risk attached to offering a free trial and ending up with a riptide of unprofitable customers.

Of course, not having a free trial could also have a non-zero cost. We made some assumptions and played with a model but in the end we followed our gut. We have that free for life plan, and an affordable, under $10/mo entry-level plan. We offer free trials to customers when it seems appropriate, and we'd certainly give one out if asked, but it's a manual process for us and we like that.

* Cronitor offers dead-simple cron job monitoring and time tracking. Check it out at https://cronitor.io

Plutonius• 12 years ago

I think many companies have additional services that are free just to attract clients. For example I found a good on-line service North and Loans here http://northandloans.ca/ that provides payday loans. And this service is completely free for clients. It's a reliable service that matches the potential borrowers with the direct loan lender. So the client just need to confirm his or her solvency and fill in the application form. Everything else is done by the specialists. The money is transfered through the bank.

Ask HN: Do bootstrapped businesses lose much money on free trials?

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