Giving away a $2.4 million tool could bring $23 million in service revenue
The tool earns about $2.4 million a year in profit from subscriptions, and Patel projects the agency could make about $4.7 million a year in profit from the leads.
A Product Market Fit Show | Startup Podcast for Founders · Forget PMF—Neil Patel says to give your product away for free instead. | Neil Patel, Co-Founder of Neil Patel DigitalNeil Patel, who runs an ad agency, says his software tool makes about $200,000 a month in profit selling subscriptions. He thinks it would make more money if he stopped selling it and gave it away.
The math starts with volume. The tool collects 18,000 to 20,000 free registrations a week. About 16% are in the United States, or roughly 2,880 people.
Patel then filters for people his sales team can call. Ask for a full sales lead, meaning name, email, phone number, and website, and roughly half disappear. That leaves about 1,440 Americans a week, or about 5,760 a month.
Those leads go to his agency. On a similar tool, Ubersuggest, visitors answer questions to receive a multiweek plan for growing traffic, and the company closes 0.7% of those leads for consulting work. Applied to 5,760 leads, that close rate produces about 40 deals.
He applies his all-country average price of $2,700 to those United States leads, so 40 deals equal about $108,000 for the month. His simplifying assumption is that one month of new revenue counts as 18 months of value, or about $1.9 million, and then he multiplies by 12 on the assumption that each month of the year brings in the same amount, projecting about $23 million a year in revenue. At a 20% profit margin, that is about $4.7 million in profit, roughly double the $2.4 million a year the tool earns on its own in profit from subscriptions.
The bigger upside is if free brings in more users. Patel argues that removing every login and paywall could double qualified registrations back to 2,800 a week, which would double profit to about $9 million, and doubling traffic again could reach about $18 million. He says he does not know if the numbers will work out that way and that time will tell on the experiment, but because he has a big buffer plus similar data and a large sales team, he thinks he can afford to test losing the roughly $2.4 million in tool profit to chase the larger service profit.
Questions people ask
Why does he count only American registrations?
He narrows the pool to people his sales team can call. He starts with the American share of registrations, then keeps only those willing to share full contact details. He says the $2,700 average price he uses in the math comes from all countries.
How can a 0.7% close rate be enough?
A close rate is the share of sales leads that become paying customers. At 0.7%, fewer than one in 100 leads buys, which sounds tiny, but with 5,760 leads a month it still yields about 40 deals, and at $2,700 each plus repeat payments that adds up fast.
Does giving the software away cost the company anything?
He treats the lost tool profit as an acceptable cost. He describes the tradeoff as robbing Peter to pay Paul, and says to set aside the tool's revenue and expenses because he can run that business, and to compare the $2.4 million in tool profit with the projected service profit.