Table of Contents
Freemium is a pricing model that allows customers to use a limited version of your product for free, in the hope that they will see value in upgrading in the future.
In theory, it’s a cheap way of acquiring customers. Offering something for free lowers the barrier for potential customers to start building a relationship with you. But even free customers take up resources. Every new customer you add means a higher processing load, more server power, and more time spent supporting them. If you aren’t getting a good enough conversion from free customers to make up for the strain they put on your company, freemium falls apart and your company implodes.
And in fact, that’s exactly what it did to us.
Freemium isn’t always the miracle lead machine that it’s been made out to be. In this lesson, we look at when offering a free plan makes sense – and when it doesn’t.
Why Freemium Plans Are Popular in SaaS
Freemium plans are particularly common for SaaS businesses, and there’s a good reason for that. It ultimately comes down to finding an easy way to show potential customers how the tool works, what the interface is like, and how the product’s features can benefit them.
Many SaaS tools, after all, talk a great game about how their solution is best, even with many competitors offering similar features. The best way to convince a potential customer that they need to purchase this product is to give them some sort of hands-on experience.
Demos are possible, but they can take a while to book and aren’t always the same as trying the software firsthand. Some customers also prefer a self-service model.
Graphic design software like Snappa is a great example. It uses drag-and-drop technology to help you create graphics… but you want to know that you can actually design something that looks good yourself before you spend any money.
Freemium plans may also be adopted by single users and then, if they’re happy, they either upgrade or share it with other people in their network or company. A sales rep might love how convenient a prospecting tool like Kaspr is, but after hitting the limit of their free plan, they decide to upgrade and tell their team members about it.
Since freemium plans are common in SaaS, some brands may also feel the need to offer them to keep up with the competition.
When does freemium work well?
It targets an individual
The most successful companies using a freemium plan start by targeting individuals, rather than companies. Think Dropbox or Evernote’s enormous free user base. An individual is able to quickly get started using the service, they have a good experience, and it spreads from there. Creating virality or a ton a referrals is one of the best ways to use a freemium plan.
There’s quick time to value
Customer are much less willing to put in time onboarding themselves with a free product. When things are given to us, we don’t tend to value them as much. Great freemium products provide value quickly so customers keep coming back to use the product. Think companies like Spotify. You understand what you’re getting the first time you hit play. The more you use it, the more likely you are to end up paying for an ad-free, mobile download pro accounts.
MailChimp saw enormous success in launching their freemium plan. A year later they reported a 150% increase in paying customers, and a 650% increase in profit (mostly due to a drastically lower cost of customer acquisition). Creating email campaigns in MailChimp is so easy, free users, limited to 1000 subscribers, saw the value right away and began to rely on the product as their business grew.
If your product requires a lot of set up to get to the Aha! Moment, you’re better off raising prices and using a more hands-on sales and onboarding approach.
Easy (and valuable) conversion to premium
In theory, freemium plans leverage momentum during the customer journey.
If a user has already signed up for your tool and taken the time to get started and learn some basic features, that’s momentum. If they’re happy with what they find, they are now further into your sales funnel than a competitor. Well-timed offers and sales outreach can leverage that initial momentum to convert the user into a paying customer.
The big idea behind freemium is to eventually convert those users into paid. So you better make it easy for free users to see the path towards premium. A common path is to convert individual users into a team account. I used Trello obsessively as an individual before I introduced it to my team at work. It was easy to see the value behind upgrading to a team account so we could all work together on projects.
Back to the success of MailChimp. As businesses grew their subscriber lists beyond the 1000 subscriber limit, it was much simpler to transition to the paid MailChimp account instead of moving to a different platform. Customers continued to receive value, and were happy to pay for it.
Make this path super clear, and keep reminding customers what they are missing out on. If you’re able to withhold features that power free users would love to have – it’s a great incentive for them to upgrade!
Customers bring value either through upgrading or acquiring more customers
Evernote CEO Phil Libin has said “The easiest way to get 1 million people paying is to get 1 billion people using.” If your customers aren’t upgrading, then they better be helping you acquire more customers who will upgrade.
It’s been hypothesized that offering a free plan (whether that’s a free museum pass, an individual SaaS account or a light version of your service) creates a ratio of 10 free users : 1 paid user. Your one paid user needs to be able to support those ten free customers (or they need to support themselves).
Freemium only works if you’re getting value from your free users. If they aren’t contributing anything to the relationship, the cost of supporting them outweighs the benefit.
When does freemium fail?
Freemium plans can work, which is why many SaaS products offer them, but they don’t always work well. There are a few factors that can result in freemium plans being a failure for your business.
And for what it’s worth: Our business was one of those freemium fails, which we’ll talk about in a minute.
Available resources fall short
Resources are finite. If you have an abundance of resources going to freemium users, that can derail your revenue quickly.
We discovered this the hard way: “When your available resources, whether it be team size, performance caps or money, are tight, then “free” has a real possibility of causing more damage than providing any real benefit.”
For many companies, the limited resource in question is the support that free users need.
Tickets and questions from paying users get drowned out by those coming from free users, and service suffers overall as a result. Everyone gets a reduced customer experience, and it can both drive away paying customers and discourage freemium users from converting.
For us, it was technical restraints on our server resources. Each free user created additional demand on our servers as we pulled their Stripe history and processed their dashboard. Too many free users signing up at the same time meant that paid accounts saw a decrease in performance. We simply couldn’t scale fast enough, and it starting affecting our churn rate.
There’s not enough value in upgrading
After trying out a freemium model Hubstaff realized that users of the free plan didn’t see enough value in the premium product to upgrade. The free plan offered a limitation of three users. For companies that needed more, instead of paying, they’d just use a different email address to get another three free users. Ouch.
If the free customers you’re acquiring don’t see a reason to pay money for your service, they won’t. It might be because your free plan is too generous, or there are too many companies that do the same thing for free.
Regardless, why would anyone buy the cow if they can get the milk for free?
It’s an afterthought instead of a managed product
Creating a free plan isn’t just a set it and forget it pricing strategy. You need to be consistently working to improve conversion from free users to paid. Deciding who to market to, which features get added to each plan and how you’ll be supporting different tiers are all ongoing decisions. If you want to try freemium, you’ll need to commit to an entirely new way of doing business.
What’s the difference between free trials and freemium models?
One quick point of clarification here: Free trials and freemium plans are two separate things. Each has its pros and cons, and both allow users to get hands-on experience with a product before hopefully making a purchasing decision.
A freemium plan, however, is a purely free and often limited plan. It may be called a “free forever” plan or have a $0 monthly cost reflected in the pricing page. These plans typically only allow base functionality access to a product.
Content Camel, for example, has a free “solo” account that gives a single user access to the platform’s standard features. The goal here is to get users to either upgrade to higher-level plans for more features, and/or to bring more team members on board.
A free trial, however, will offer full access to a set plan’s features for a limited time. This is often for 10-, 14-, or 30-day periods so that users can get a good idea of what the full breadth of the software can do, and ideally make a purchasing decision at the end of that trial.
Freemium has the risk of users staying free forever and using the plan indefinitely without ever paying. There is also a risk they may not have enough features on their own to make it useful OR that there are so many features available there’s no point in converting, making it a hard balance to strike. As we’ve already discussed, you need everything to be in line to use the freemium model to drive conversions without it eating into your revenue.
Free trials allow people to access the most critical features of a tool and pressure them to make a conversion decision after 30 days. And while they may need help from customer support and are using the platform at full capacity (which can take up server space), each user’s free trial has an end in sight— they won’t be a money sink forever.
How to know if a freemium pricing model is right for your product
As we’ve already mentioned, there’s a lot to consider when deciding if a freemium pricing model is right for you.
You can start by asking these questions:
- Is your end user also the decision-maker, or do they influence the decision-maker? IE- an accountant at a small business would likely have more say over payroll software if a selection is made than an accountant on a team of 20 working with three supervisors under a CFO at a large corporation.
- Do you have the resources?
- What is your most direct competition doing? If everyone is doing freemiums and you believe you need to offer something for a chance at drawing customers, worth considering at least offering a short-term free trial instead of “just” demos.
- Consider your decision-maker's preference- is this something they’ll look for in
- some capacity?
Final thoughts: How to do freemium right
When you’re implementing a freemium pricing model, try to implement these best practices when possible:
- Find that magic balance. You need your tool to be useful enough to make them want to upgrade, but not so useful they never have to. This may require some testing.
- Make sure you’re marketing to the right people. You may, for example, want to market to high-level decision-makers who will want to upgrade or mid-level users who can directly appeal to higher-level decision-makers.
- Watch your revenue analytics closely. Using detailed, accurate revenue analytics designed specifically for SaaS brands is crucial to helping you determine if your freemium pricing model is working for you or against you.
Remember that if you want to optimize your freemium model— or decide if it actually is benefiting your overall profit margins— you need accurate data about what’s happening.
Baremetrics can help with this. We offer SaaS-focused revenue analytics with 26 revenue metrics that are crucial for subscription-based businesses, and we prioritize the accuracy and reliability of data above all else.
Ready to discover what’s actually driving high-value customers and revenue? Get started with Baremetrics’ 14-day free trial here.
