Pros and Cons of a SaaS Freemium Model

SaaS companies benefit from a broad range of customer acquisition models, and many have opted for freemiums. In the wild, however, freemiums produce vastly different outcomes. The average conversion rate hovers between 2 and 5%, but some companies like Slack have seen rates as high as 30%.

With these mixed results, there’s plenty of debate about whether the freemium model really works. And as with most things – it depends. Understanding the pros and cons will help you decide for yourself.

 

What Freemium Does Well

Get good exposure:

Making your product free puts it in a lot of hands fast.  Some of these users will eventually pay for the service. Moreover, if your free version takes off, you can garner market share ahead of competitors and even attract an acquisition.

For example, EchoSign, a tool that integrates electronic document signing with customer relationship management systems, captured over a million users with a freemium model, proving its viability as a product.  The early success prompted Adobe to purchase the company as a complement to their document publishing suite.

 

Develop a loyal following:

When people use the product in the free tier, they get comfortable with it. Once they’re used to it, they’re less likely to switch to another unfamiliar product. Because a freemium isn’t limited by time, people have the runway to make your software an indispensable part of their daily routines, which is the perfect time to ask for payment.

 

Collect user data:

Since the free model attracts a large audience quickly, you have significant usage data and feedback that’ll help you improve target marketing, fine-tune the ideal customer persona and define premium tiers.

 

Grow with your customers:

A freemium model lets you create a partnership with customers. For example, Mail Chimp’s free tier limits the number of subscribers and monthly emails to levels appropriate for small businesses. These free users embed Mail Chimp in their marketing activities. Then, when their needs expand, it’s a no-brainer to start paying for the increased capacity.

 

Why Freemium Fails

Freemiums cost money:

The user doesn’t pay for a free tier, but you do. You have to build and maintain the limited product, handle customer accounts and provide data storage.

And remember those conversion rates? The vast majority of users will never pay. Many companies find the cost of freemium outpaces resulting revenue.

 

Users don’t see the value of premium tiers:

A free offering may attract the wrong types of users who will never need your higher-value features. People who do need extra capabilities may overlook your product because they can’t access them in the freemium. A free trial model may work better in this case.

 

A free level may limit what you can charge for paid levels:

With freemium, you set the value of at least part of your product at $0, which influences how people estimate its worth overall. It’s hard to ask free users to jump from paying nothing to $100 or more per month. If you need a higher subscription price to make a profit, freemiums may work against you.

 

ROI requires huge volume:

As Phil Libin said as CEO of Evernote, “The easiest way to get 1 million people paying is to get 1 billion people using.” Because conversion rates tend to be small, the free user population has to be 100 to 1000 times larger than paid users. That can increase the cost of maintaining a freemium, and for niche companies, the market may not even support those numbers.

 

Where Freemium Works Best:

It’s not a sure thing, but many companies have rocketed to success using freemium, and even if it doesn’t go the distance, it can get you started. Here are several good signs that freemium will work for you:

  • Your product is easy to use without a lot of setup or onboarding support.
  • The product takes time to show its value or get people hooked.
  • It costs almost nothing to support free users.
  • You’re prepared to capture and use customer data and feedback from the trial.
  • You’re willing to engage continuously with free users to educate them and build trust in the company.
  • The premium level confers a clear and desirable benefit.

Even if freemium doesn’t generate all your revenue, it can be a useful tool. Many companies are using it just to get the product into the market for the first few years; then they switch to a free trial or demo model to serve more serious buyers.

You can also monetize the free tier. Companies like Apple have used the iTunes app to sell complementary products, such as music tracks, streaming services and iCloud storage. And Spotify generates income with ads.

There are no hard and fast rules about how and when to use freemiums. But your decision depends on whether or not this model can get you to your revenue goals.  Experiment and stay flexible, and you’ll find the right strategy for ultimate success.