TL;DR
- You break down barriers for customers with freemium pricing, offering a straightforward path to explore and potentially upgrade your SaaS product.
- Freemium models can lead to better success and higher recurring revenue by allowing users to try before they buy, fostering loyalty and retention.
- Freemium reduces your sales and marketing expenses by allowing users to discover the product benefits on their own.
- Companies like Slack and Candy Crush have leveraged freemium to expand their customer base and encourage upgrades through incentives.
- Adopting a freemium strategy can be a good starting point for SaaS products in competitive niches.
- Freemium and free trials are different; freemium offers unlimited time access to a free plan with limited functionality, while free trials offer temporary full access.
- Freemium is suitable for SaaS products that require minimal onboarding support and can collect valuable customer data during the trial period.
- Be cautious with freemium if your product lacks a clear upgrade path or virality quotient, as it may not lead to the desired user conversion.
Freemium essentially means Free + Premium. It is a pricing strategy where you offer a free version of your product or service to acquire customers and then charge them when they upgrade to the premium version with additional features.
Freemium offers provide SaaS companies with a refreshing alternative to the challenges posed by a traditional sales-led approach. When you put up excessive paywalls, it's like constructing a complex maze that customers must navigate just to use your SaaS. However, with a freemium offering, you break down those barriers and offer users a straightforward path to explore and discover your product or service. It's a customer-centric approach that fosters engagement and allows users to fully experience the value of your SaaS.
Is this the only reason that makes freemium a winning model for SaaS? Obviously, no. Let’s get down to understanding what makes freemium pricing ideal for SaaS companies.
6 Reasons Why Freemium Favors SaaS Companies
1. Effective customer acquisition strategy.
The freemium model is a customer acquisition strategy that allows you to bring new customers into the fold by allowing them to try your product completely free of charge for an indefinite period. Most customers find this hard to resist. From there on, the model helps transition to a Product-Led Growth strategy (PLG) by reducing their paid customer acquisition costs.
Hence, the freemium creates an advantage over other competitors who are not offering any free plans. It helps garner a good user base to convert into long-term paying customers.
2. Facilitates Product-Led Growth.
The freemium model puts your product on a pedestal by giving away some of it for free and proving its value to your customers. Without having to pay anything, users can experience the benefits on their own terms. It's exactly this kind of growth that's driven by product.
By allowing users to experience your product for free, you can collect valuable feedback and user data to refine your product. Done well, it can lead to better success and higher recurring revenue. Since no phone explanations or demo runs are required, your commercial resources can be allocated to converting big opportunities or upgrading customers.
3. Enables easier customer conversions.
Freemium gives you the freedom to categorize your price plan in any possible way. The focus is to highlight the features and create a sense of FOMO (fear of missing out) amongst your customers about what they are missing out on by not purchasing the premium version.
Incentives like this help encourage your free users to upgrade, thereby promoting easier conversions once you’ve identified the hot leads.
4. Facilitates higher customer conversion rates.
In a "try before you buy" situation, new users can get a feel for how your product operates and make a fully informed decision about upgrading. When customers know exactly what to expect from your offerings, they tend to remain loyal to you, which eventually leads to higher retention rates. Your SaaS churn rate will be positively impacted by this product-led growth model, as well as your revenue retention rates.
5. Creates a good customer experience.
Providing a solid user experience and onboarding without the support of a team requires a lot of technical work throughout the site. However, it eases the sales pressure because customers can take the time to arrive at an informed decision about buying the product. Since the product speaks for itself and drives customer experience, it also takes considerable pressure off the sales team.
6. Reduces your expenses.
Generally, those using your product for free will not expect the same level of customer support or commitment as those on the premium version would expect. By offering the product for free, you encourage users to discover its benefits which, in a way, eases your expenses and time taken away from your sales team. However, you can still offer extra support to help them understand how to use the product by resorting to emails and other modes of communication.
5 Top Companies That Hit the Jackpot With Freemium Model
1. Dropbox
Dropbox’s freemium is incredibly popular because it offers exactly what users want. Customers can also choose from clearly defined paid plans to upgrade their usage. Dropbox's freemium model is an excellent example of how clear communication can positively impact customer satisfaction. The company now has over 700 million users with an IPO valuation of several billion dollars.
2. Spotify
Spotify’s freemium is a classic offer with a free, ad-supported tier and several ad-free paid subscriptions. Although the music streaming service was initially criticized for being over-dependent on its freemium, the company was the first of its kind to reach 100 million paid subscribers worldwide. Today, the company has more than 16 million subscribers and proves that freemium works in all industries.
3. Slack
Slack’s freemium allows prospective subscribers to try out the basic functionalities without any limitations. However, its freemium model allowed users to access only ten thousand archived messages. Nevertheless, this free tier helped Slack expand its customer base through word of mouth and grassroots adoption rather than expensive marketing campaigns.
4. Candy Crush
Candy Crush is one of the most popular games to offer freemium to Facebook users. So popular was this game that it attracted players of all ages worldwide. The key takeaway from Candy Crush is that customers can be persuaded to pay for a service or product if the incentives are right.
5. WordPress
This widely used blogging software is available free of cost for those who want to create a website within a very limited budget. WordPress is proof that while customers take advantage of freemium, they are willing to pay for services outside their area of expertise.
Freemium Model Vs. Free Trials
Because of similar sounding terms, there is a general misconception that the freemium model is a free trial. In truth, both concepts are entirely different. Here’s how:
Freemium companies offer their products or services for free along with a paid version when users want to upgrade to more features. Under the freemium model, products will have:
- Limited functionality to incentivize customers to upgrade to the premium version.
- Unlimited time access to the free plan for all users.
- Product value that motivates users to discover it on their own and upgrade it when they want to.
- The ability to be used as an alternative to free trials.
A free trial has the following features:
- Users have access to most of the premium features for a limited time (usually a week).
- Users have lifetime access to the basic features of their product. However, users must upgrade to paying customers to access the premium features.
- Free trial is basically a generous offering than a sales tactic. It is a great way to keep customers returning for your product.
Often, more than five-day free trials are needed for your product to shine, for your potential customers to use the product to its fullest potential, or for them to gather accurate information about it. In such cases, the freemium model is the best option to put your product out there for the world to know.
Freemium Model: When Should You Use It?
The freemium model has proven to be a success for many companies. It can be a good starting point even if it doesn't work for you. Freemium is a good strategy for SaaS products when your product:
- Is user-friendly and only requires a little onboarding support to set up.
- Is a slow starter and takes time to make customers understand its value.
- Belongs to a good competitive niche.
- Support free users without giving you additional expenses.
- Allows you to collect customer data and feedback from the trial.
Additionally, the premium version of your offering should have a clear and desirable benefit for users. As one of the many freemium companies, you should also be willing to educate your free users to foster more trust. It's time to adopt a freemium strategy if your product meets several of the mentioned criteria.
Also Read: Understanding Freemium Pricing Pros and Cons
When Should You Not Choose Freemium Model
Despite the lure of offering your products or services for free, the freemium model may backfire if used under the wrong circumstances. Freemium is weighed down by several factors. For instance, your product will not attract users if it lacks functionality and user-friendliness. Contrariwise, if the free features garner the required traffic, you may lack the required conversion rate.
The trick with Freemium is knowing where to draw the line. Choose a parameter to differentiate your free plan from the paid plan. Set limits for the free version. Consider adding premium features to the paid plan, but keep it simple.
Freemium may not be the ideal choice if your product:
Lacks any channel upgrades
It is essential to have a well-defined upgrade path for your users with clear reasons to upgrade to a paid plan. Additionally, it is crucial to differentiate between your free and paid plans to highlight the benefits and make it more tempting for users to upgrade. This helps answer the question of "What's in it for me?" and encourages users to choose the paid plan.
Lack of virality quotient
It is important to keep an eye on the virality quotient of your product. Are your free users satisfied with your product? If the answer is yes, the next step is to figure out how to encourage them to share it with others. One way to achieve this is by creating well-designed referral programs and incentives.
Generally, your free users should convert into paid customers or facilitate your acquisition by spreading the word about your product to others. If neither of these is happening, it is time to rethink your product and pricing strategy.
Closing Points
The SaaS Freemium Model is not going anywhere. For your SaaS products to be successful (especially if users have access to products that solve problems) you need to allow your users a taste of your product without having them commit to anything.
However, well-established SaaS companies are using PLG’s Go-To-Market strategy as a means of ensuring new entrants do not disrupt their offerings. These two scenarios will likely make freemium the cornerstone of the SaaS industry.
The freemium model is ideal when you want your product or service to attract a perfect customer base, which is why many SaaS companies prefer it. If you want to launch your SaaS product with the freemium model, Togai offers you a pricing implementation platform that will help you implement any pricing strategy ten times faster in less than a day.
Schedule a free demo to understand how Togai can help you.
