
Ask HN: Do bootstrapped businesses lose much money on free trials? - freedrull
I assume these companies probably run on ec2:
https:&#x2F;&#x2F;www.hostedgraphite.com&#x2F;
https:&#x2F;&#x2F;circleci.com<p>And probably many more that I can&#x27;t think of at the moment...<p>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.<p>The cheapest ec2 instance is around $15&#x2F;mo. If the trial is 30 days I’d assume they’re likely losing a lot of $15&#x27;s here and there.<p>Am I wrong?
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patio11
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
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_fish
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."

~~~
lifeisstillgood
Counter point to this was a recent client who is working to consolidate the
seperate VPS' because the combined data of different clients is so much more
valuable - insights About customer data even when gleaned from competitors is
useful.

(Talking about terabytes of usage data in aggregate here btw). YMMV

~~~
mechanical_fish
Any rule of thumb as general as the one I proposed is bound to have
exceptions. For one, when the tenants know each other and have formed a
consortium to allow their data to be aggregated, it's not the kind of "multi-
tenant" I had in mind. Now, instead of a bunch of independent renters, we have
a condo association.

My first instinct in a situation like this would be to ask: "Why not build a
separate data warehouse and have some worker processes copy the clients' usage
data over there, in batches or in a stream, raw or pre-processed as you
prefer? Then the data can be be indexed however you want and JOINed with wild
abandon, without further perturbing the individual client systems and their
existing, presumably working architecture." Isn't that the old-school IT way?
Yeah, I know, terabytes, but a terabyte isn't as scary as it used to be. Of
course, the devil is in the details and I'm sure there are reasons.

~~~
lifeisstillgood
To be fair those were some of the to and fro arguments we had - mostly I think
it came down to the pain of data transfer (by then it had moved three disks
iirc). A Hadoop cluster was being built when I left. I guess I should catch up
and see how it's going.

But yes - definitely not the typical SaaS use case

------
encoderer
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](https://cronitor.io)

------
fivedogit
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.

~~~
lifeisstillgood
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?

------
pbiggar
I'm a founder of one of the examples you list:
[https://circleci.com](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/](http://blog.circleci.com/we-raised-a-6m-series-a/)), so
even if our trial was expensive it wouldn't break the bank.

------
spamizbad
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.

~~~
byoung2
_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](https://www.mongohq.com/pricing/dedicated)

~~~
CaveTech
Their business revolves around supplying dedicated database servers...

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

------
byoung2
_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.

------
nanch
"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](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.

------
PeterisP
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.

------
xxpor
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

------
diego
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](http://www.crunchbase.com/organization/circle-ci)

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

------
Plutonius
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/](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.

------
rpedela
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.

