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

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.

"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.

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.

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.

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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.