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 you’re betting that a portion will love it so much, they pay for more.
What freemium platforms have you spent time in? Zoom, Slack, HubSpot? I’m willing to bet you’ve tried out the free version of at least one.
It’s no wonder why the freemium model is a favorite among with SaaS shoppers.
As a SaaS product marketer, you pull back the curtain to allow your soon-to-be-paying-customer a hands-on glimpse of seeing lots of your goodies, let them smell the functionality brewing, and even let them touch some of it, but with limits of course.
You find that their first impressions turn into a second visit, then a third, followed by spending more time with the product as they’re gradually making micro-decisions if this will be the product for them long-term.
Best suited for: Larger companies wanting to scale quickly.
Secret Ingredients of Making Freemium Work: 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.
While it’s a tough pill to swallow, the lion’s share of your users will not spend a dime on your killer SaaS product. Dropbox sees about a 4% freemium to premium conversion (while outliers like Slack see a whopping 30% conversion rate).
Expect that 95–98% of your freemium users will never pay.
SaaS companies offering a freemium option must 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.
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 7, 14, or 30 days. The more complex your software, the more time you should allow your subscribers to try it out. 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.
Best suited for: 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, and they know they’re under the gun to try it quickly before the trial expires. Free trial conversion rates vary widely, but according to Lincoln Murphy, 66% of SaaS companies observe up to a 25% conversion rate (much higher than freemiums).
In both models, your product must be easy to use with little learning curve. Most people won’t spend a lot of time watching training videos or reading manuals.
Goal: Grow revenue.
After a free trial, people either subscribe or stop using the software. 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 is more complex and requires more hand-holding, 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.
Looking to up your game and turn more SaaS shoppers into SaaS qualified prospects? Contact one of Bay Leaf’s SaaS growth experts.