TL;DR
- Explore the freemium pricing model as a way to showcase your product's value and guide users towards premium upgrades.
- Adopt freemium pricing if your product is viral, solves a unique problem, is self-service, intuitive, and becomes more valuable with use.
- Strategically restrict free features, motivate users to want more, and clearly communicate the upgrade benefits from the start.
- Make the transition to premium effortless, offer time-sensitive discounts, and give a taste of premium to highlight what users are missing.
- Use A/B testing to understand user preferences and tailor the freemium pricing strategy to meet customer expectations.
- Monitor for signs of an ineffective freemium approach, such as poor conversion rates, low referral traffic, high churn, or unsustainable acquisition costs.
- Togai's pricing implementation platform can optimize any pricing strategy quickly, enhancing revenue growth.
SaaS businesses operate in a highly competitive landscape, where winning customer loyalty and differentiating your software from the competition is crucial. It's not just a matter of determining the right pricing for your subscription or SaaS offering and showcasing its capabilities; it's also about effectively demonstrating the value your product brings to users.
To address this challenge, many providers have turned to the "freemium" pricing model as a means to attract new customers to their platforms. Freemium pricing models have gained immense popularity in the realm of product-led growth, as they offer users a glimpse into the value they can derive from a product. This approach can be remarkably effective in acquiring new customers. So, let's delve into the strategies that can make freemium models work seamlessly for your product.
An Introduction to Freemium Pricing Strategy: The Customer Acquisition Model
Freemium is a combination of Free + Premium. It is one of the most preferred tactics to entice new customers to buy your offerings. It is also a clever tactic promoting product-led growth because it allows users to sample the product's value.
Essentially, the strategy is to allow the customers to try a free version of the product or service and to let them understand the benefits of using your tool. The ultimate goal is to nudge them towards that eureka moment where users realize your tool is the best and decide to upgrade to premium versions.
The freemium pricing strategy is being deployed everywhere. For instance, Spotify, the music streaming service, is a household name that offers music for free as soon as you sign up for their service. However, the free music comes with a catch: You will have to put up with their advertisements and restricted track skips. B2B SaaS providers like Trello, Airtable, and Slack are also noteworthy examples of successful freemium implementation.
At first glance, providing a product completely free of charge may not appear to be a sustainable business approach. However, with the right freemium strategy in place, it can actually be a mutually beneficial proposition for both businesses and users. There are enough business examples that demonstrate its success. However, this pricing model is not for everyone. Many businesses that try to take off with a freemium pricing strategy often end up failing to convert free users to paid ones.
Obviously, this pricing model will work only if you fulfill a specific criterion.
5 Factors That Make Freemium Pricing An Ideal Option For Your Business
It is best to consider freemium pricing only if your business has the following:
1. The ability to scale virally.
The freemium model will allow you to save a lot on marketing if your users invite more users from the get-go. This is the technique Dropbox uses. The company lures more users by offering free storage space for every new user that signs up with them.
2. A good market potential.
Is your product solving a common problem with little to no competition? If so, it has a good chance of success because it is needed. Your product can fulfill the need without any competitors. Evernote, the note-taking and task-organizing app, is a good example of a product with unique market potential.
3. Adequate self-service.
For a freemium model to succeed, it's important to have low overhead costs associated with supporting free users. Typically, offering in-person support is reserved for paid plans, allowing you to manage costs while still providing value to your free users.
4. The product is intuitive.
If your users can understand the value of your product without any extra effort, it can provide easy access to the market. You do not need to give any demos for your customers to understand how to use the product, and you do not need any extra support to set it up.
5. Longer usage with better service value.
A great freemium tool exhibits a certain "stickiness" where the value of the service increases the longer users engage with it. This stickiness makes it difficult for users to switch to alternative solutions once they have discovered and relied on essential features. The more time users invest in your product, the more they become dependent on it.
7 Ways to Make Freemium Pricing Model Work For You
1. Be careful with the freemium limits.
If your service or product offers many unique features, it is best to restrict the free subscription to a few basic functionalities. Also, you must be careful not to make the basic version too basic. The main objective is to make users trust your brand by giving them a taste of your offerings. This trust is essential if you want them to transition from free to premium subscriptions. `Instead of making it a boring offer, make your free offering an adventure that lures users into seeking extra features by paying for them.
2. Leverage usage to make customers want more.
While the freemium model aims to attract new users, it's essential to prevent customers from becoming complacent with the free offering. To encourage usage and drive conversion to the premium package, consider implementing limitations based on usage intensity, such as the number of seats, actions, or desired outcomes.
For instance, you can take inspiration from the New York Times, which offers free access to a limited number of articles per month. This approach replaces the revenue previously generated from paper subscriptions. Another example is the Harvard Business Review, which follows a more stringent policy by offering only two free articles in total.
When implementing a freemium model, it's crucial to be transparent and clearly communicate the differences between the freemium and premium offerings right from the start. Customers should have a clear understanding of what they will receive for free and what they will need to pay to access additional features or content. This clarity sets appropriate expectations and helps customers make informed decisions about whether to upgrade to the premium package.
3. Have a give-and-take policy.
Leveraging the freemium model as a marketing force can be highly effective. One way to do this is by providing additional incentives to users who refer others and contribute to expanding your customer base. Dropbox serves as a great example of this strategy. Users are aware that they can earn extra storage space by referring new users to the platform. This creates a win-win scenario where existing users are motivated to bring in more customers while Dropbox experiences growth through these referrals.
Furthermore, Dropbox employs the limitation of storage space for free users. When users run out of their allocated free storage, they are prompted to consider upgrading to a paid subscription to continue enjoying the service without restrictions. This approach not only encourages user engagement but also serves as an opportunity to convert free users into paying customers, further monetizing the freemium model.
4. Enable seamless upgrading
Ensuring a seamless and effortless upgrading process is crucial to increasing conversion rates within a freemium model. Continuously evaluating and optimizing the upgrading process can lead to improved customer experiences and higher conversion rates. Here are a few considerations to help make upgrading as seamless as possible:
- Streamline the process
- Use clear messaging
- Optimize the design
5. Make upgrading attractive with discounts.
Add more appeal to the premium upgrades by offering discounts on your premium plans. It can be an effective strategy to capture the attention of potential customers who are considering an upgrade. Create a sense of urgency by setting a deadline for the offer. This deadline will make such customers rush to join so that they don't get excluded from the reduced price.
6. Let users experience the premium and see what they're missing.
If users can’t understand the overall experience, your premium features may not look appealing. Hence, offering premium features for free for a limited period would be wise to make customers understand what they are missing out on.
An exemplary implementation of this approach can be seen in the case of Todoist, a SaaS product designed for managing to-do lists within Gmail. When users download the free version with the intention of enhancing their productivity, they soon realize that adding notes to these lists requires a paid subscription.
7. Rely on A/B testing
One of the cardinal rules in any pricing strategy is to test your solutions to ascertain your user’s expectations. Understand what makes them spend their money and present it delightfully.
There are multiple ways to make freemium pricing strategy work for your business. However, there are plenty of doubts about this strategy because it only works for some. Those businesses that use freemium pricing often fail to achieve success when they attempt to use freemium as a revenue platform instead of a customer acquisition strategy.
5 Signs That Freemium is Not Working For You
Adopting a freemium pricing strategy may show the following telltale signs if it does not work out for your business. You need to look out for:
- A less than 1% freemium conversion rate from your customers.
- Referral customer traffic comes down to almost zero percent.
- A high churn rate among paid customers because they failed to realize the value of the change from free to the paid premium version.
- The large presence of similar products in the market that offers a similar solution with more freemium features.
- Higher customer acquisition expenses as opposed to lifetime value.
Find The Sweet Spot With Freemium Pricing
Freemium pricing is not simply about bringing in new customers with your free offerings. Converting your freemium to premium conversions should be the prime target. Your freemium product should be appealing and valuable enough to entice users AND make them look out for more. In order to build a successful product, it is essential to stay connected to your users and learn what they like most about it.
At Togai, our pricing implementation platform is designed to empower businesses to optimize their pricing strategies and drive revenue growth. Did you know that Togai enables you to implement any pricing strategy ten times faster in less than a day? Schedule a free demo today and unlock the potential of pricing excellence for your business.
