Product to Product: Hotjar’s Marc Von Brockdorff on freemium pricing models

The latest episode of Product to Product, a podcast for / by product people, is here. We spoke to Marc von Brockdorff, co-founder + engineering director of Hotjar.

Listen below:

Hotjar is on a mission to democratize user data and feedback by making their analytics platform accessible to everyone—no matter how small their website.

They’re a startup success story that you don’t hear too often. They’re based in Malta, a tiny island in the Mediterranean, and in 30 months, they bootstrapped their way to over 200,000 users and $10 million in annual revenue.

An integral part of their success is their freemium pricing model. Their free forever plan makes it possible for anyone to use Hotjar without ever paying a cent.

Roadmunk’s Eleni spoke to Marc to found out why they decided to build a free forever plan, how it impacts product decisions and how it contributed to their rapid revenue growth.

The episode can be listened to above, and we’ve also included a transcript below. You can subscribe to Product to Product on iTunes (here) and Google Play (here), or get the latest episodes delivered to your inbox by subscribing here.

PS. A quick programming note: This is the last episode we will be releasing in 2017. We’re taking a bit of a break and we’ll be back with new episodes in the New Year.

 

 

Eleni: Hey Marc, thanks so much for doing this—we really appreciate you joining us today.

Marc: Hey! I am really happy to be here. Thanks for having me.

Eleni: Can you start by telling us a little bit about what Hotjar does, your role there and how it’s evolved since you guys first started?

Marc: I’m one of the founders of Hotjar, and we started back in 2014. It started as a bold vision to change the way the web is built by democratizing user data and feedback. Early on, before we actually worked at Hotjar, all the founders were makers. We all loved building stuff and we all, individually, used different tools to help us figure out how to improve what we were building. We used tools that allowed us to record visitors and see how they were acting. Other tools allowed us to see heat maps. We often tried to reach out to customers to get their feedback and understand what they liked and what they didn’t like about what we were building.

The problem back then, however, was that most of these tools were actually geared towards the enterprise market. They were super expensive. You couldn’t really afford to have all the tools.

When we started to build Hotjar, it was at the time when we knew that hosting costs were decreasing. We saw an opportunity in the market to build a tool that combined all of these important tools, that we found important, at a very cheap price point—and to actually make it available for free.

I, myself, started off as a developer. My role changed from developer to recruitment. I was just focusing on building the team. And more recently, maybe just over a year ago, I started slowly moving to product. As the team started to grow, there was more of a need to have some structure and product management.

Eleni: We’re going to take a deep dive into how you built your freemium model—but first, can you walk us through how you view “freemium”?

Marc: Initially, our plan wasn’t to have a freemium. At a very early stage, we thought that we could have a very low price point to appeal to a wider market. We were just going to go with a $29 plan with a free trial that allowed users to try the software. If they wanted to keep using it then they would pay that monthly fee.

When we started the free beta, we began by collecting loads of email addresses for people who were interested in using the product. When we actually launched the product (the beta), we then slowly started inviting these people to use the product. We realized that all that free usage was actually having quite a positive effect the number of users who were subscribing.

We were creating this big group of fans, people who loved using the product, who would then go on and refer their friends.

That’s the kind of network effect, and we found that to be extremely powerful in those early few months when the product was completely free. That’s how we decided that we should go the freemium route.

"Freemium is not a bare-bones version of the tool."

We don’t think of freemium as a way of providing a bare-bones version of the tool for free. What we want to do is actually make the freemium plan as good as possible so that we get more users. And we’ve kind of used a combination of value-based pricing and cost-based pricing for the people who are paying us—those who have bigger sites and who can afford more.

So, if you have a small site—like a blog—and you’re never going to need that much space or storage, then in our opinion you don’t need to pay for it. You should get to use Hotjar for free.

Eleni: Do you think a lot of companies that have a freemium model see it the way that you do—or do more companies see their free plan as a bare-bones version of the product that doesn’t actually offer as much value?

Marc: I’ve seen both techniques being done. I have seen companies where, to them, the free tool is kind of the secondary concern—in the sense that all the changes they’re making are simply based on what their paying customers want. We think that is kind of dangerous. You do need to listen to what your paying customers want, but ultimately you shouldn’t completely ignore people who aren’t paying.

Eleni: You mentioned how you guys launched with a free beta. I’m wondering if you can give us an overview of how you guys went to market. How did Hotjar reach the public?

Marc: When five founders got together, we tried to define what we thought the first version of Hotjar would look like. We literally just got a Google Doc and listed everything that we thought was important.

At that point, we had seen a few viral marketing campaigns before from other companies—and when I say viral I mean the sort of campaigns where you get somebody to sign up for something and then if they refer friends they move up in position to access the product. It was something that we’ve always kind of wanted to do and we thought would be ideal to test out for Hotjar.

Basically, we built a landing page on hotjar.com which essentially got people to sign up—put in their email and end up in a beta queue. Then, based on how many people they referred Hotjar to they would move up in the queue. We had some offers too—for example, the top hundred would get a free lifetime business plan and we had some t-shirts to give away. We tried to gamify the experience of this beta queue.

Before we even built anything, we had worked on some screenshots of what we thought the product would look like—at this point, the product didn’t even exist. We added these screenshots to show exactly what people would get by signing up.

Early on, we saw a lot of activity on Twitter. People were tweeting, trying to get others to subscribe because of this inbuilt viral loop that we had created. That was proving to be extremely powerful. I think we got most of the initial signups through this viral effect.

This early-access list launched in July of 2014 and by August we already had close to 20,000 emails. This was extremely positive because it’s a validation of what we’re doing. It kind of told us: okay, we’re working on something that people actually want.

Then we launched our beta in September, just a few months after we had started collecting these emails. The platform didn’t even include all the tools we have today, and most of the tools were extremely basic.

We didn’t invite everyone on the list into the product right away—just the first thousand people. We also continued to collect emails on our landing page. That resulted in the queued up people trying to refer just so that they could make the next batch of invites. And then in effect, by October—just a month after—I think we had about 35,000 emails ready in the system.

Fast forward towards the end of the year: we had invited roughly 7,000 users. We had chosen the first of April 2015 as the official launch date. That was the date we were going to go commercial and actually start charging customers.

Eleni: When you guys were developing the beta, what were the points of discussion? Was there any debate about whether this was a good idea or not?

Marc: The reason we were able to launch with a free beta was that a few of the founders had personally invested their own funds. This gave us a bit of a runway, and we had some funds to inject into marketing and give ourselves a salary. That made the decision quite easy in the sense that we felt it was super important for us to do a free beta. It gave us an opportunity to see actual users use the product. To be honest, in those first few months, we relied on user feedback to decide how to build specific parts of the product.

"We relied on user feedback to decide how to build specific parts of the product."

Eleni: You were leading engineering at the time, what technical considerations did you have to keep in mind?

Marc: We probably should have put a bit more thought into this one. When we started to build Hotjar, we just didn’t imagine how quickly it would grow. We built it in a way that we thought would kind of scale enough. We realized quite quickly that we had to change parts of the infrastructure and the way certain features work, purely because they were not scaling upwards.

I like to think of having scaling issues as a nice thing to have, but also a limitation. We have had quite a few instances where we’ve had to re-engineer parts of our infrastructure just because we haven’t really built something that would scale to that extent.

I do think that it is probably bad, straight off, to build something that is extremely scalable, because the reality is that you don’t want to invest too much time into building the perfect platform if you don’t actually manage to get it to one million users.

Eleni: How did people initially react when you first launched this? What was the reaction from both your users and yourselves?

Marc: We decided to use a tool called Intercom, which is pretty much an industry standard now. We had Intercom inside the app, and every time somebody logged in we could send them a message and they could message us back.

Every time somebody signed up for the free beta, we wanted to have a conversation with them to get to know why they’re using certain features and what they like about it. Early on, I’d say, a lot of people were excited about the fact that they instantly got access to all of these features for free.

The second thing that lots of users actually commented on was that they didn’t realize that a few of these web technologies were even possible. One of the features is the recording feature, where basically you can watch users interact with your site. A lot of users didn’t actually realize that doing something like that is actually possible. It kind of makes sense, because these type of features were actually previously available for the bigger companies with steeper pockets because they were so expensive. We suddenly took something that was super enterprise and made it available to anyone, really.

Eleni: When you first started the beta, how were you thinking about eventually monetizing and creating paid plans?

Marc: Unfortunately we didn’t spend too much time on this, so I think it was just a half hour discussion. In hindsight, perhaps we should have spent a little more time but we always knew we wanted this $29 dollar plan.

Actually, as I mentioned earlier, the initial plan was to have just one plan and not have a free version. But then we realized the importance of having free members and giving Hotjar to as many people as possible because it supported our vision. And something that we didn’t plan for happened. We went commercial on the April 1 and we offered everyone a free two-week trial.

We told them that they would have to start paying two weeks after we went commercial. What happened, unfortunately, and kind of fortunately at the same time, was some people actually started to pay immediately—even before their trial was over. We didn’t actually have everything ready for payments because we just assumed people would complete their trial before paying us. So yeah, I remember the first few days after the commercial launch we were quite stressed trying to get stuff done manually.

Eleni: Eventually you guys launched with not just a $29 plan, but several different tiers. Can you walk us through your pricing model right now, and tell us how you landed on your current model?

Marc: Currently we have a freemium plan, and that is basically free forever. With that plan, we do have some limitations on the account. For instance, you can only store up to 300 recordings and up to three heat maps. Then we also have the Plus Plan, which is the $29 plan, where users can store as many heat maps and recordings as they want. Besides that, we also have a Business Plan, which is $89 per month. From that point on, prices change based on the amount of traffic they have.

Eleni: How do you prioritize what you build when the bulk of your users aren’t paying users? How do you make those decisions?

Marc: We have clearly defined what we want to achieve over the next few years in terms of functionality, and where we see the product going. We also rely on user feedback. We are an extremely user-centric company. We review feedback often. And as much as possible, we try to take it into consideration when prioritizing what to do next.

We use a tool called Receptive to store customer feedback, and in reality, if you look up top ten requests between free users and customers there isn’t that much difference. They’re asking for the same things, which makes our life much easier.

Eleni: Has there ever been a time when there was a tension between your high-level vision of democratizing analytics and your needs to build a product that also makes money?

Marc: We’ve been quite lucky from the start. I think we were profitable in month two after we went commercial. We’ve been growing roughly 6-7% month-on-month. We’ve never really been at the point where we’ve second-guessed ourselves because we just need to make money as a result.

Eleni: How did that get you to profitability so quickly?

Marc: Because of the free beta, we had months of feedback from our users, which helped us shape how we wanted the product to look. Essentially, when we got the actual launch, we had a product that users really grew to love.

We were also quite fast at implementing changes. We’d look at what people were asking from us, and within a week or two we’d actually have that feature live. We made it a point to manually contact all the users that specifically asked for something to tell them it was implemented. That won us a lot of fans.

Eleni: What is the hardest part of managing a freemium product as a product manager?

Marc: Everything that we build needs to scale extremely well. We can’t afford to launch something that could break quite easily.

"Everything that we build needs to scale extremely well."

Eleni: As a product manager, what do you find to be the most gratifying part of offering your product for free?

Marc: As soon as we deploy something, we know that thousands of users are instantly seeing it. We actually start getting hundreds of people sending us feedback. That is extremely satisfying, and something I think that anyone involved in a product should be proud of. You can work on something that is actually affecting thousands of people.

Eleni: What opportunities do you think Hotjar would have missed if you had launched with that $29 plan and never did the freemium model at all?

Marc: My gut feeling is that we probably wouldn’t have grown as fast as we did. We probably wouldn’t have had this big group of fans that we have today. We’re lucky to be in a situation where we have a lot of users who really love the brand, and I think that is something that we would have missed out on if we completely eliminated the freemium model.

Eleni: Hotjar is really interesting because you’re completely bootstrapped. Can you speak to the kind of paradoxical idea that offering your tool for free can actually help you build revenue?

Marc: If you build a product that can scale, it’s fine to invest a lot in your freemium because, naturally, what’s gonna happen is that the 20% are going to start paying. They’ll support the freemium plan.

I think the second consideration is that you need to obviously look at what your costs are—luckily for us, we started Hotjar at a time when hosting costs were going down and it became super affordable to store data. If you do have a product where the costs are a bit higher, then you might be in a situation where you can not afford to have a freemium plan.

Eleni: Do you think free forever is sustainable forever?

Marc: As long as the paid plans cover the cost. We’d like to leave the free plan free forever and actually make it even better than it is today. I think, given the economies of scale, it seems like it’s going to be possible for us to do that.

Eleni: If you had the opportunity to give one piece of advice to another company that was debating whether or not to adopt a similar model and go-to-market it in a similar way, what would your number one piece of advice be?

Marc: Listen to your users, and truly build a product that is satisfying and fulfilling a deep need for your users. Freemium might be a good option, but it also might not be. The reality is you need to actually speak to your users, find out what the use cases are and find out why they are using the product.

Eleni: Thanks so much for chatting with us today. Where can people find you if they want to connect?

Marc: It was a pleasure to be here. If anyone wants to connect, you can reach me at twitter.com/marcvonbrock or on LinkedIn here: Marc von Brockdorff.


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Author
jillean

Jillean Kearney

Jillean is the Content Marketing Manager at Roadmunk. She spends too much time listening to podcasts and thinking about her next meal.