What to do next? Micro startup existential crisis

I built a small web app based on the freemium model. Free accounts are free forever, paid accounts have 3 tiers: 5, 15 and 25 bucks a month. I'm the only person behind the app, 100% self funded.

The development itself took around 18 months, doing it little by little on a part-time basis, plus quite a few months of testing. So finally in August 2010 I stared placing some target ads and trying to drive some traffic to the site.

I've done google adwords, banner ads, paid blog articles, twitter, link building, postcards and one trade show. I've spent around $1,800 on marketing over 4 months.

After 4 months, I'm just barely breaking even with the costs of having the app live. Server, asset hosting, credit card gateway + merchant services, and other third party services such as video processing and encoding for example. I haven't made any of the money back I spent on advertising.

I have around 500 registered users, around 250 minimally active (verified their e-mail and logged back in after sign up), and 100 use the site on a regular basis. I"m embarrassed to say, but only 20 people actually pay for the app.

The paying costumers absolutely love the service. I get e-mails all the time saying they are so happy they found it. I also give very good and personable costumer support.

Now I don't know what to do anymore. I built, tested, advertised and supported the app. What's missing?

Is my app ever going to make money?

Do I just need to spend more money on ads? My conversion rate for free sign ups varies form 8-30% depending on the source, and paid sign ups 0.5-2%. Should I drop the free plan?

Is it time to abandon ship or put more money into it?

I'm lost!

Breaking even after 4 months of concerted effort (i.e. post-dev marketing) is actually pretty good. Many business take 1-2 years to break even.

Is the market big enough that it's possible to have 100x this number of users in 5 years? If yes, and if the marginal cost of each additional user is far less than the revenue you get per user, then you're right at the cusp. When you have 1000 paying customers maybe you'll be flying.

If the market isn't big enough, e.g. the total potential number of customers is only 2x what you currently have, then it sounds like you have a tiny niche, which means you have to make do with this number of customers.

Either that means it's not a good business model (because it's not possible to charge enough for the time+effort required to sustain it), or you need to figure out how to charge more.

At Smart Bear the initial version of my software cost $34.95; today it's $500/seat or $1300 per floating license. That's just to say, it's OK if the market isn't big -- if your customers are so happy, perhaps they can sustain a bigger price tag, and very soon you'll have some profits.

Perhaps the best way is to back into the results you want. For example, you decide you need to be making $5000/mo profit with N customers, where N is what you have now or perhaps 2x as many. What price would it need to be? What would you need to do to justify that price?

Seems like a problem with your "Target" customers. Use the free accounts as leads, and try to up sell them through email, discount coupons, promos, refer 3 friends get a free account, etc.

Then take a hard look at your Paying customers. Find out why they chose to subscribe. Find out where they came from. Once you have that forum ala you can better apply your marketing efforts on those customers.

Also, I am curious to take a look at the site. Perhaps there are parts of the site that can be modified to attract better clients. Please share the URL if you can.

I've been doing the MicroISV thing since 2003 and full time since the start of 2007. In this time I've had two moderately successful desktop products, one flop and one winner which is still doing well to this day. And to be honest I can say that it wasn't until 2008 that I really had a handle on what was working in my biz and what wasn't. By that time I realized I was an online marketer, technical document writer, friendly tech support person, and SEO guy who also happened to know how to program a bit. Emphasis on the 'bit' part there, I am very much the programming amateur coming from a non-IT engineering background.

In July this year I launched my first SaaS offering (using a freemium model which I've used in all my desktop products) in the same market space as my other offerings. This was after 12 months of development and testing. Had a two month open BETA and went live properly at the start of September. 10 weeks later and I have 26 paying subscribers and 100 odd free users and to be honest I see this as something of a blinding success. Why? Because the application works, and seems to work quite well and the users are happy with it. All this and I've not spent a cent on advertising and my hosting costs are only about 10% of the current revenue.

Now I know the real work is beginning, that of making the initial user experience that good that a fair percentage of users purchase because it is so simple to pick up. There's months and years of blog writing, flash demo construction, web site tweaking and in-product tour development in front of me. My goal is that whatever the question a user has that there is blog article, support article, or canned email response ready and waiting for it. And none of that work bothers me because I know in the long term it will bring the customers in.

I can afford to do this, plan, develop, measure and then rinse and repeat because my goals are modest. This is a three year proposition to me, I have another 20 months to work on the system before I will gauge it's success. If you're not trying to become a millionaire overnight and you can afford to, then I'd suggest you take a similar approach.

No one can honestly give you an answer to this question based on zero details, but I can say that this was essentially where I was in the first 4-5 months after releasing my SaaS application.

Now is the moment that decides whether you are going to make a go of it or if it is just a hobby -- I believe Seth Godin calls it 'the dip'. You need to honestly look at your service and figure out if you think it is going to work. What are you doing well? What are you doing badly? Be prepared to pivot. If you don't change and grow the operation, you won't be successful.

My product was able to get through this stage and we now have enough cash-flow to have a few employees around to help.

Read Software by Rob on Why Free Plans Don't Work. You actually get more paid users by not having a free plan, than by trying to convert free plan users to paying users.

What's the difference between free and paid version? If there is not a lot of value in that - nobody will ever pay even $5/month.

What kind of pull on resources do the free accounts have? I.E. For every $X/month overhead, {[$X-(PaidAcctFees)]/(#FreeUsers)}. I ask because if the overhead cost is negligible relative to the pull of the Free Users, then in my eyes it is not time to get rid of the free account.

Do you have an option for yearly service, at discounts for paying ahead per annum? Depending on your app, im curious to know what services are provided to incentive me leaping the $60, $180, or $300 hurdle. I avoid as many "per month" plans in favor of "per year" plans as possible, and am likely to seek out the same service, even at a cut in quality if it means I don't get yet another random bill monthly.

You have a good start as it seems.
User growth has 2 phases .

1. Initial users are always result of adverts.
2. Getting additional users is the key, thats best done through word of mouth

It would also be wise to give away few premium accounts to friends (even facebook contacts etc) which stay premium for a month or two.

The conversion rates look within normal ranges. What I'm wondering is perhaps your SEO plan isn't looking at the marginal cost to marginal revenue for advertisement. This is where looking at the sources for your users and how to create a natural plan. My favorite reading on this is from a guy who sells Bingo as a service. http://www.kalzumeus.com/start-here-if-youre-new/ http://www.kalzumeus.com/category/marketing/ Luck

Hi i personally feel that people don show interest in converting from free account to paid account.
Let me tell you an example :

I use blinksale free account where i get 3 free invoices per month and i started using it and loving it but the problem is i don feel like moving it to premium account and rather than that what i do is edit my previous invoice or do other lots of stuff in order to continue with my free services rather than having a paid one.

Its a human mentality which makes them think in this way "ah why do we need a premium account when we are happily using the app for free".

So remember once people get used to free accounts its very difficult to make them pay .

Coming to your product write down list of things atleast now:

What are the critical success factors of your product and also try to think as a potential customer and see if that particular product is imp to you or not and if its not then leave the project and if it is then go with the project. Concentrate on these critical points.
1)what are the features which customers are happy about.

2)As you never mentioned about the kind of product you developed and i don't know which kind of customers are using this product . Usually with your existing customers profiles you will be knowing what type of customers are interested in your product. So use social media and other groups and post it there so that people might give a chance to look at your product.

3)Try to reach as many customers as possible individually and explain them about the product rather than sending an email to bunch of possible new customers.

I Hope this helps you out.

I am no SAAS expert but maybe add more limitations to the free option or limit the free user for just 30 or 60 days. Run this test for few months and test the results.