Giving Something Away: How Tech Startups Land Their First Customers
It's tough for tech start-ups to convince client companies to buy their new products. Potential clients have tight budgets, and few are willing to risk their operations on a product that might not exist anymore next year. That dynamic creates enormous challenges for start-ups that want to crack the enterprise market.
So how do start-ups get around this problem? Some use a marketing strategy called "enterprise freemium." It's a funny phrase for a simple idea: give client companies time to get comfortable with the value of a new product by giving away part of it for free. If the client likes the free part, odds are they'll pay for the premium product eventually.
I interviewed three companies that have used enterprise freemium to get their businesses off the ground. The enterprise freemium strategy isn't easy -- it requires finesse, much of which involves picking the right subset of the product to give away for free. Do that right, and a startup can attract lots of users quickly. These three companies do it right:
Your credit card information and social security number are safer thanks to Sentrigo. Slavik Markovich, an IT consultant who specialized in databases, discovered that months after he had completed his consulting assignments, he could often still access his client's data. After founding Sentrigo, whose software protects sensitive information in corporate databases from intruders, Markovich joked that he would have become far wealthier if he'd simply sold the credit card and social security numbers he could have accessed, instead of starting his own company. Since founding the company in 2006, Sentrigo has raised over $13 million in venture capital in two rounds and grew from 30 employees in 2009 to 50 in 2010.
As Sentrigo Marketing Vice President Andy Feit, explained "Many of the companies that purchased the product – such as firms that must comply with the Health Insurance Portability and Accountability Act (HIPAA) and retailers whose customers used credit cards for their purchases – are required by regulators to audit access to their databases. We expect more companies to see the need for our product as they move more of their data into the cloud, where access to it can be more difficult to control."
Initially, Sentrigo offered a basic database security product to customers at no charge to create an incentive for them to try the product in a highly competitive market. Early users provided valuable feedback, which helped Sentrigo improve its product. But it also made it clear to many of those customers why they needed more advanced product features.
However, after Sentrigo gained a critical mass of customers -- 1,600 to be specific -- it moved away from the freemium model for new customers and now focuses on promoting a free trial instead. "Given where the company is right now – we charge less than $10,000 for our product, compared to competitors who demand $50,000 – we thought we'd be better served by addressing this market with an aggressive price point, rather than freemium," Feit says.
Still, freemium played an important role in Sentrigo's evolution: "When we launched our product, we thought we had a three to four year head-start on the competition. Our freemium product enabled us to establish ourselves in a difficult market with lots of players (many of whom are much bigger than us) and target customers who are very risk averse."
If you've ever had trouble getting your online banking service to work, you know why Correlsense exists. The company helps banks and other service providers keep track of how well their systems work so they can identify and solve problems that might affect customer satisfaction.
Founded in 2005, Correlsense has raised $13 million in two rounds. It has grown from 25 employees in 2009 to nearly 60 in 2010. Today, Correlsense uses enterprise freemium to corral new clients. as CEO Oren Elias explained: "We expanded through enterprise freemium model. We offer customers the chance to use the part of our system that helps diagnose their network problems at no charge. This helps them get comfortable with the value our product offers, and it changes the dynamic of the selling process in a way that makes them more comfortable spending part of their IT budget on our product. Customers generally derive value from the free version of the product immediately, and when they want to solve the problems it finds, they are often willing to buy our full product."
Medium-sized companies have lots of data, and they store too much of it in big data storage systems. This is a problem, because those systems are expensive and the volume of data is growing quickly. Making maters worse, the cost of keeping data secure is also significant. One expensive option is to buy more and more data storage systems, which assume that end-users won't expose data. A smarter solution is to analyze the data and figure out which items need to local storage, and which can be archived in a less expensive manner.
This is where Aprigo comes in. Founded in 2008 by three entrepreneurs, Aprigo's service helps companies visualize and analyze their files in a new way to immediately spot and act on access breaches and storage inefficiencies -- thus saving companies money. Aprigo raised $3 million and has grown from 10 people in 2009 to 15 in 2010, and in 2011 it expects to have more than 20. It sells to IT managers at companies with between 250 and 5,000 employees.
CEO Gil Zimmermann says Aprigo uses enterprise freemium to get customers to use its free data analysis software in the hope that most will subscribe to Aprigo's software-as-a-service offering to manage their data. As Zimmermann said, "The freemium model gave us the opportunity to test out our application, how it was used, and what common problems we found, before releasing the paid version. It also gave us valuable usage statistics that helped us to understand how companies deal with storage capacity issues. From a sales and marketing perspective, having a free version also gave us a group of potential leads for the paid version of the product."
A Simple Lesson to Learn
Sentrigo, Correlsense, and Aprigo demonstrate an important lesson about getting customers: You have to make them an offer they can't refuse. For many companies, enterprise freemium has proven to be just that, and an important tool for getting new startups off the ground.