MailChimp Business Model & Revenue Model to Consider For Own Startup

•  MailChimp business model started off as a pay-as-you-go business model. But now, it also utilizes subscription and freemium models. 
• MailChimp started as an email marketing tool in the year 2000. Nowadays, it also offers marketing automation and other services.
• However, it is their pay-as-you-go business model that laid the foundation for its success. 

MailChimp’s case is yet one more powerful case study for early startups. Suppose you are an agency owner thinking of growing into something bigger or a startup owner looking to start a Software-as-a-Service business. In that case, this case study contains several powerful pointers. 

The pay-as-you-go business model (PAYG) is less dominant these days than it was 10 years ago. Yet, for various businesses, charging clients based on usage is still relevant. In fact, 21% of SaaS companies use the PAYG. For example:

• Stripe and other payment services charge a percentage of transactions. 
• AWS, Dropbox, and other cloud services charge based on the amount of storage space used. 
• Twilion charges based on usage of its services. They are SMS messaging, voice calls, email sent, and phone numbers in service.
• Digital Ocean charges hourly or monthly for droplet size and usage, block storage, data transfers, and load balancers.
• Airbnb takes a percentage from booking a stay or experience charged from the host. In addition, guests also pay service fees from the booking subtotal.
• In the case of MailChimp, users are charged based on the number of emails sent.

MailChimp business model exemplifies a few other business approaches that are a centerpiece of MVP and lean development. They are:

• Customer-centric approach,
• Fast iteration time,
• Organic (no venture capital) growth.

MailChimp Business Model Path: Facts and Figures

• Today, MailChimp is a giant with 13 million global users. At the start, it was a side business for a design agency. 
• It was a big question for MailChimp owners whether to go full-time with it in 2007. There were already established market players. For instance, Constant Contact went public and yielded $107 million in 2007. MailChimp was acquired by Intuit in 2021 for $12 billion in both cash and stock options. 
• The revenue chart of global leaders in email marketing for 2020 shows that MailChimp has managed to dominate the market with its revenues of 800 million in US dollars.  

So, how did MailChimp business model start? Ben Chestnut, a co-founder, told in the interview the story of MailChimp’s origins. In their web design agency, The Rocket Science Group, they had several clients who needed help with marketing emails and newsletters. So, they built a tool to serve just these clients. However, these services were priced low compared to the main activities. Later, it became annoying for the agency to deal with these small checks and little tasks. As a result, they gave that tool to customers and enabled them to pay with credit cards. So, this side little tool Rocket Science built for emails became a sort of MVP. It was released to its early adopters whose pain points it solved. It started to grow as well as generate feedback. 

To sum up, here is the summary of the path MailChimp business model took to success.

MailChimp Business Model: Customers First Development, Fast Iteration, No Venture Capital Involved

This side business got three to four years of MVP iterations. It was certainly a lean development. The agency designed a bare minimum version, with only the requested functionality. They fixed bugs and added features upon request. Since the early adopters for whom they built this tool were agency clients – they were in close contact. They had the ability to listen to all the difficulties and preferences clients had. 

This customer-centric approach and fast fixes of the product form the foundation of modern-day MVPs. If you check today’s Startup Services, they always include a discovery phase, customer-centric approaches to build a prototype and narrow down functionality. 

The importance of building products from customer feedback can also be grasped from interviews of business failures. For instance, the creator of GrowBo spoke about his failed business which was also an email marketing tool. He realized that the crucial mistake he had made was to build a product based on his vision. The product failed to generate enough cash flow, and it didn’t overcome the “SaaS slow ramp of death”. The latter is the term meaning cash flow never manages to catch up with expenditures. So, his next business endeavor started with mailing customers “What do you want?”. It translated into a business that is currently operational. 

What’s the danger with “SaaS slow ramp of death”? 

There is a term coined “SaaS slow ramp of death”. It applies particularly to SaaS companies. This is because SaaS charges often in small amounts. $9.99, $20, rarely $50, of course as applicable to the majority.  Email marketing tools are always in the lower range, especially at the beginning. So, imagine the base user brings around 20$ a month. For a startup at MVP stage, the first point to reach is to have at least 100+ customers on a recurring basis.

Because of this, it takes a long time to grow a customer base to build up a revenue stream. There, at the start of a SaaS business, it will take a long time to start covering the cost side. So, cash flow is really a priority metric to watch for any SaaS company development. 

MailChimp was a side project for its owners for 5+ years. The owners started noticing its side business only when its revenue stream came to a level of their main design agency revenues.

Move to subscription and freemium

Undoubtedly, the great jump into the scaling phase came with the introduction of subscriptions with a free tier. The year freemium was offered, MailChimp’s customer base jumped from 80,000 clients to 450,000. Next, it became 1 million and has been doubling ever since. 

Yet, again, Ben Chestnut stated: “…5 years [we were] chasing after silver bullets…oh.. This is going to be the unlock..and it wasn’t the unlock. Let’s launch this feature – that will be an unlock. And it wasn’t the unlock. Let’s do this PR. That’ll be the unlock. Never. And freemium was something we accidentally fell into. Didn’t really think much about it. And that turned out to be this thing that kind of […] kept doubling users.” But they did have an organically grown user base with dozens of thousands of users and years of iterations of trial and error. Moreover, MailChimp founders did not attract any venture capital to cover costs or speed up growth with promotion. 

However, freemium model is a double-edged sword: you need to know how much you can give out for free and you need to be sure that users will stay and pay. MailChimp ticked off both boxes: it had years of users on Pay-As-You-Go business model who stayed with their business. Even before the subscription, their revenue followed a recurring pattern. Below is how MailChimp’s pricing looks these days: free tier, then Essentials, Standard, and Premium plans. 

And while it looks like a subscription model, it still factors in the usage:

Actually, the co-founder of MailChimp once said that if they introduced freemium at the start – MailChimp would have been a completely different company. Let’s now discuss the gains of the pay-as-you-go business model.

Pay-as-you-go Business Model

 In our article How to Evolve your Mobile MVP App Development?, we emphasized the crucial point of having a quality customer base. MailChimp had years of organic growth on the PAYG model. Not only did customers purchase email sends on a recurring basis, but also the business grew without pouring money into Customer Acquisition. In general, the pay-as-you-go business model brought several advantages to MailChimp:

1. Flexibility and Affordability for Customers: MailChimp was created for customers who were ready to pay. But they would not want a subscription-like commitment at that time. In addition, there was no use in providing services for free. After all, the first customers were the agency’s paying clients. 
2. Lower Risks for Customers: With PAYG mode, customers pay for services they use. Therefore, there is no risk of paying for tools and services and then not using them. When users are small niche businesses, cost efficiency is one of the top priorities.
3. Scalability for Customers: With usage-based services, customers are free to use as little or as much service as they need. In subscription plans, a business puts itself in brackets of capped capacity. With PAYG, users can scale their consumption if they need to. 
4. Attachment to value: the business model is based on the ability to create, deliver, and capture value. With the PAYG business model, the value is tightly linked to dollars for both: the business and its clients. So, if customers feel like they don’t receive enough value for the dollar amount they pay – it immediately shows up in business revenue statements. Nothing speaks louder than money spent and received for the value provided. 
5. Tracking usage patterns. MailChimp’s PAYG model generated data on the volume of services clients used. It permeated into all pricing: subscription, freemium, and transactional emails. 

Pay-As-You-Go Revenue Model 

We have briefly discussed the pay-as-you-go business model in our article Top 10 Business Models to Consider for your startup. Now, we’ll look into how it led MailChimp to the sustainable success it enjoys today.  

The pay-as-you-go model (PAYG) often takes the form of a prepaid plan. A user purchases a certain number of credits which translate into a respective number of services. For MailChimp, its pricing strategy on the PAYG tier looked as follows:

These days, its transactional email services are formed into blocks as follows:

In addition to email sends, MailChimp offered SMS sends, though for the US only. Later, MailChimp expanded into social media marketing, scheduling posts, and AI. 

It is essential to evaluate the place the PAYG revenue model takes in pricing tiers. Users on PAYG plans have only the basic functionality of two lower levels available. Full functionality becomes available at the next Standard tier.  So, it indicates that subscription is more lucrative in a hierarchy of pricing strategies. However, it is only thanks to years of PAYG business data that MailChimp was able to work out free margins for its freemium that really skyrocketed the business. 

Pay-as-you-go business model and niche strategy

As it was mentioned before, MailChimp started for a few customers. For larger companies, the clients of the design agency, the owners are still charged hourly for emails. The niche strategy targeted smaller businesses that could not afford to hire an agency on a regular basis for emails. It was its email builder/editor that initially attracted a large portion of its niche users. 

The customers’ major pain point was a struggle to compose a marketing email. MailChimp designed a linear flow. It spanned everything from composing an effective email, making it stand out in the receiver’s mailbox, ease of sending out emails, and analyzing the results. 

Then, as users started joining, they were majorly small businesses. Today, Mailchimp is used by small businesses and major companies, with 60% of users being small to medium-sized businesses.

Mail Chimp created a linear workflow to compose an email. After going through the step-by-step instructions, users could see a preview of the email next to an editor. There is also simple A/B testing available. It allows users to compare which of the two variations of email campaigns worked better. 

When the owners went full-time with MailChimp in 2007, they also introduced more features. Users were able to get advanced A/B testing with deeper analytical insight and for more than 2 campaigns. 

In addition to AI features, MailChimp also introduced machine learning. It became particularly useful for working out the best email send times.  At the same time, MailChimp started seeing a growth of large companies in its user base.

Frequently Asked Questions About MailChimp’s Business and Revenue Models