Hootsuite Freemium Model

Give it away and they will pay later – Recently the founder of HootSuite, Ryan Holmes, wrote an article titled, “How to Get 5 Million Customers with Zero Ad Budget,” and shared that for the first three years, HootSuite spent literally no money on marketing, PR or advertising. Rather they built their business on the freemium model. The majority of users, hundreds of thousands of them, paid absolutely nothing for the service. And, it worked! Especially because free users have no vested stake in you, and no long-term contract. If you don’t deliver, they’ll move elsewhere. To this day, over half of HootSuite’s paying Customers-including some of HootSuite’s biggest enterprise clients, were once non-paying, free users. As Holmes says, “put your energies into developing an irresistible product and loyal user base. Worry about making money later. I can’t imagine doing business any other way.”

Freemium – The word “freemium” is a combination of the words “free” and “premium.” It is a business practice in which you give your product or service away at first, grow an extremely large Customer base that eventually can’t live without you, i.e. Facebook, Twitter, Google, or in which you give a core product away for free to a large group of users and sell premium products to a smaller fraction of this user base, i.e. Skype, Dropbox, and Evernote. All were built on freemium. While this seems to be a new technique applicable to internet-based companies, this is the way many businesses started off, including brick and mortar, building a Customer base and brand awareness. The following is the marketing plan we executed 20 years ago when we originally opened John Robert’s Spa and couldn’t afford to spend any money on advertising. The result? Two decades of consecutive positive sales growth. The following is an excerpt from my first book Secret Service: Hidden Systems That Deliver Unforgettable Customer Service (Amacom Books, 2003):

Don’t Discount, Give it Away – Discounting lowers the perceived value of products and services. Instead, we camouflage our discounting through vehicles that make people think they either won our services or received them as a gift. I would rather give away a service than discount it. As a good example of how we disguise a discount, every time a BMW dealer sells a new car, the owner receives a gift certificate to John Robert’s. Similarly, we give gift certificates to travel agencies, realtors, mortgage lenders, jewelers, restaurants, and builders as a gift of appreciation to their high-end Customers. We target all our marketing to stimulate business during our slower months. A prime target is virtually across the street from our Mayfield location: Hillcrest Hospital, which employs more than 2,000 doctors, nurses, and administrative staff. At the end of August we had their Chief Operating Officer send employees a $25 gift certificate to John Robert’s as a gesture of employee appreciation at no charge. That helped spark a typically slow September and October, and in addition we really benefited in November and December, when many of Hillcrest’s employees booked repeat services and purchased gift certificates for family and friends.

Fishbowls are another effective marketing technique for gaining new clients. We put fishbowls in high-end restaurants, with a sign that reads, “Drop in your business card to win a day of pampering.” Each month we collect hundreds of business cards of professionals who frequent these high-end restaurants. Everyone who enters and isn’t already our client wins something. Why? Because we know that 70 percent of the people who try us become regular clients. Our fishbowls produce many winners and are another source of disguised discounts. Fishbowls have generated many high-end Customers for us, and many of today’s fully booked operators at John Robert’s built practically their entire clientele from fishbowl winners.

Some people think we are a little aggressive in our marketing, meaning we give too much away. Let’s look at it this way. Our choice could be to advertise or do one of our promotions requiring us to give away our initial services to gain more business. We could take out a reasonably small ad in the paper that may cost us $1,000. The problem is that we can’t control who is reading it. It may be a “right fit” potential Customer or it may be someone who is not a “right fit.” I want to ensure that my advertisement reaches only Customers who fit into my target demographic and income level. Also, some Customers may come in based on the printed ad promotion but find that we are not their type of place, and they never return. Let’s say an ad brings in 10 new Customers, which I would consider very successful. These 10 people may come in and spend an average of $50, which would result in revenue of $500. Consider that a typical salon could pay their service providers in the range of 50 percent commission. Let’s do the math: The ad cost us $1,000 and we got back $500; however, the cost of providing the service was $250 (commission to the service providers). In reality we are still out $750. We gained 10 new Customers, who may or may not be the ones who prefer our type of salon; also, the typical retention on “blind” advertising is well below 40 percent.

In the second scenario, we give $50 gift certificates to a high-end Lexus dealership or restaurants to give to their top Customers. Note that this is direct marketing to people who are our specific target, who definitely have high, discretionary income. Let’s say 10 of those people use their $50 gift certificates. First, we have no initial expense with this marketing. If 10 come in and use their $50, it ends up costing us $250. The 10 new Customers received $500 in services, on which the service providers are paid 50%. Comparing the two scenarios, in advertising we incurred a $750 expense, while the gift certificate promotion cost us only $250, a savings of $500. Both promotions drew in 10 new Customers, but I guarantee you our retention rate on Lexus drivers or high-end restaurant goers is substantially higher, about two times, than that from blind advertising.