SaaS startups of all stripes have to face one sticky question at some point—what’s the best way to win customers? Sadly, there’s no crystal ball for that question. But you can begin crafting an answer by considering the two most common approaches today, freemium and free trial.
With the freemium model, people use a product at no charge and with no time limit. However, most free offerings have some restrictions, such as capped storage capacity, limited support or fewer features, which become available after payment. In a successful freemium model, millions will use the application, and a few will love it so much, they pay for more.
Market: Target the masses.
The freemium model works best in very large markets where you can scale up fast and rely on viral advertising for exposure.
Product: Keep it simple and addictive.
Strong freemium products take no time to learn and offer immediate value. Ideally, people adopt the application into their daily lives and come to rely on it. In turn, paying customers stay loyal longer than with other models.
Think of a product like Dropbox. It’s as easy as moving files from one folder to another. Before long, people have gigabytes of data stored there. When users run low on space, it’s easier to pay for more than move files elsewhere.
Goal: Capture market share.
Millions of free users will generate brand recognition and help you garner market share over competitors. If you plan to attract investment dollars or find a purchaser in early stages, freemium success proves product viability.
It’s harder to turn a pure freemium model into long-term profitability, but if the product and timing fall in line, you can win the race to industry leadership.
Challenge: Turn free users into revenue.
Since 95–98% of users will never pay, freemium companies have to figure out how to extract value from them anyway. For example, user data can identify useful features, like customizations, integrations or live support, that will attract people to paid tiers. Also, social shares and user-generated content will keep marketing buzz strong without straining the budget.
However, it’s not always easy to take advantage of user interactions. Freemium apps have to be designed from the beginning to capture the right data and encourage sharing. And once launched, they have to operate with very little support; otherwise maintenance costs could eat up any profits.
Options: Capitalize on usership.
Rather than relying solely on turning free users into payers, many companies beef up the bottom line with complementary revenue streams, such as advertising or selling compatible products. For example, Apple’s iTunes is a free mp3 player, but they make plenty of money on music purchases.
Some businesses also start out with freemium to prove product viability, gain market share and attract investment. Then, with a strong user-base, they move most of the product into a paid tier. Font-Awesome, which offers an icon library for web developers, has followed this strategy to success.
Free trials let interested consumers use a product for a short period of time, usually between 14 and 60 days. Most free trials include all features, but some will limit capacity or number of users. Ideally, prospects discover a product’s value during the trial and subscribe.
Market: Target niches.
Smaller markets cannot supply the sheer numbers required for freemium, but free trials can work very well, especially for specialized industries, such as real estate, or complex tasks, such as project estimates.
Product: Solve specific problems.
Software that targets niche markets usually addresses a unique pain point and attracts prospects who want to solve it. People are willing to pay, but the free trial lowers the risk of investment. Those who sign up for a trial tend to be serious about the software, so conversion rates typically run between 10 and 30%, much higher than freemiums.
The product still needs to be easy to use, however. Most people won’t spend a lot of time watching training videos or reading manuals. For example, MyCase management software for law firms makes it easy for testers to dive in with little introduction.
Goal: Grow revenue.
After a free trial, people either subscribe or stop using the software. So at any given time, most users are paying, which generates an early revenue stream and promises profitability for the long term.
Also, many companies publish their subscription rates, setting expectations about the software’s value. Those who start a trial are prepared to pay if the solution works, making it easier to convert them in the end.
Challenge: Manage conversion costs.
If poorly managed, free trials can soak up resources and overwhelm profits. With a smaller user base, a company has little word-of-mouth marketing to rely on; it costs money to attract prospects and user growth can be slow. Also, feature-rich products often require onboarding support, which further raises expenses.
Testers have limited time to use the product and if they never get started, they’ll never buy. Thus, you need to invest in strong marketing communication during and after the trial to keep people engaged.
Finally, a smaller target audience requires good conversion rates to stay profitable. Successful companies must constantly refine the trial process from landing pages to sign-up forms to follow-up messages.
Options: Combine trials with other strategies.
If your product takes a lot of setup or requires extensive customer data to evaluate, consider offering a demo along with the trial. A demo populated with realistic data illustrates how the product works, so prospects don’t bog down in set up.
If you want the growth opportunities of freemium, follow the example of Evernote and offer free trials of paid tiers. People are already familiar with the product, so the learning curve remains flat; the trial entices them to experience new, subscription-worthy benefits.
Although many people approach the free trial vs. freemium choice as a dichotomy and look to other companies for guidance, you don’t have to follow the pack. Find what works best, even if it bucks the trends. In the wide and wild world of SaaS adventure, the trail is yours to blaze.