nfoTL;DR
- You need to weigh the pros and cons of Freemium vs Free Trial models based on your SaaS business's unique context and objectives.
- Freemium models excel in user engagement and lower customer acquisition costs but require a large user base for profitability.
- Free Trials can lead to higher immediate conversions and allow users to fully experience the product but may result in fewer sign-ups.
- Consider activation rates and conversion patterns: Freemium has a lower activation rate (20%) compared to Free Trials (40%), but both have their merits.
- Look at industry success rates: Freemium can convert 4 out of 1,000 leads without extra effort, while Free Trials can achieve a 17% conversion rate.
- Decide based on your growth strategy, whether it's Dominant, Differentiated, or Disruptive, and remember to continuously refine your approach.
- Togai offers a flexible solution for implementing pricing strategies, significantly reducing launch time from months to days.
Freemium vs. Free Trial - Which GTM Drives More Long-Term Value?
Freemium or free trial - which one to choose? Do you often find yourself in this perplexing situation as a SaaS entrepreneur? Do you keep wondering which GTM will help you increase the user base and boost customer retention? You are not alone.
In the world of SaaS, it is both crucial and challenging to develop the right approach for attracting and retaining users. So, how to do it right? For that, you need to have a clear-cut understanding of the ins and outs of freemium and free trial models. And this article provides just that.
Let's dive into a thorough comparison to help you make the best decision!
Understanding Free Trial and Freemium Models: A SaaS Perspective
In a free trial, customers can use a product for a limited time. On the flip side, a freemium model provides indefinite access to a portion of the product for free. Choosing between the two depends on a number of factors:
- Size of the target market
- Product experience
- Number of competitors
- Pricing compared to competitors
- Target audience
- Customer acquisition cost
- Cost of maintaining a free account
- User onboarding - self-service or not
A freemium model may not be the right choice for a highly competitive market with limited resources for long-term support. However, a freemium model may be the best choice if your market size is large and you have the resources to support it.
Incorporating your customers' requirements into your product design is crucial for success. Both of these models have the potential to capture a considerable portion of the market due to their affordability. However, neither model is fail-proof. Let us analyze it further.
Freemium Trial Model: Pros, Cons, and Challenges
SaaS guru Jason Lemkins points out in one of his articles that you would need at least 50 million active users for freemium to work in your favor.
And that’s the essence of freemium. To be successful, the freemium model needs a large volume of sign-ups.
Many companies, such as YouTube, restrict ad usage for their free version, while some editing apps limit access to premium filters or features related to inclusivity. Platforms for cross-selling, such as iTunes, provide the complete product free of charge but necessitate purchases on other platforms, like iCloud.
Pros:
- Help familiarize users with your product. Users get the opportunity to explore its features before committing to a purchase.
- Lower your expenses for marketing and acquiring customers by broadening your reach without depending on expensive paid tactics.
- Builds trust by offering a limited yet valuable version of your product for free.
- Outshines free trials and sales demos by 25% in conversion rates. The idea is simple: lure prospects with low upfront costs and entice them to try your software.
Cons:
- An in-depth understanding of customer needs and product USPs is imperative to decide the free features.
- Users may not upgrade if your offering is too generous.
- Customers may feel that the product doesn’t add much value and drop off if they do not receive the unique features of your product in the free version.
- The costs of maintaining 'free' users, including customer support and software updates, can be a burden.
- If the free product fails to solve user problems, it can discourage users from upgrading.
Free Trial Model: Pros, Cons, and Challenges
The free trial model is more popular in the software industry. It offers time-limited, full access to the product or service for around 7 to 30 days.
The success of a free trial depends on how fast users can realize the value of your offering. If they don't experience significant benefits during the trial, the chances of converting them into customers may be low.
Pros:
- Attract customers who are selective and prefer to test a product before purchasing it.
- Provide better quality leads than freemium signups.
- Need fewer resources for maintenance.
- Create a sense of urgency, thereby encouraging the customer to convert.
Cons:
- The number of signups can be lesser than freemium
- Cause a decrease in organic referrals.
- Intimidate customers if the product is too complex.
To overcome the cons, SaaS companies usually rely on tutorials and feature walkthroughs. You can also monitor the product usage data to gain valuable insights. Successfully converting free trial customers into paying ones requires careful planning and execution. This involves:
- Smooth onboarding to encourage optimal usage
- Offering personalized demos
- Sending trial expiry reminders to create a sense of urgency
- Offering early-bird discounts
- Extending trial periods
- Streamlining the payment process
Also read: The Ultimate Guide to Increasing Your SaaS Free Trial Conversion Rate
Free Trials vs Freemium - Which Fuels Growth?
Your growth strategy plays a crucial role in helping you make a choice between free trials and freemium:
- Dominant Growth: Works well with either freemium with free-trial upgrades (ideal for feature-rich products) or standalone free trials.
- Differentiated Growth: Best suited to free trials due to the unique nature of these products.
- Disruptive Growth: Leans towards freemium due to its low costs, access to simpler product versions, and potential to entice users to switch.
Success Stories of Free Trials: Intercom and Netflix
Intercom, a Software-as-a-Service (SaaS) platform, brilliantly integrates customer support into sales and marketing. It offers a 14-day free trial, giving full access to its features, which helps convert prospects into customers.
Netflix, the streaming giant, offers a 30-day free trial without content capping, which means subscribers can enjoy unlimited content during this period. The goal is to promote increased utilization, fostering a user routine that results in additional subscriptions.
Freemium Case Studies: MailChimp and Slack
MailChimp, a top-tier email marketing platform, offers free access until users hit a 12k email or 2k subscriber limit. However, full access to email marketing automation requires an upgrade. One of the strengths of this model is that users tend to be hesitant to switch platforms once they have invested time and effort into setting up their campaigns. If they need to upgrade due to business growth, it's seen as a positive step, not an inconvenience.
Slack, a popular team communication platform, offers many features for free, subtly encouraging users to upgrade for additional benefits. This soft-sell approach is a highly effective retention strategy. In fact, reports state that Slack has a 30% conversion rate when it comes to transitioning from freemium to paid clients.
Analyzing User Acquisition Funnels: Freemium vs Free Trials
In 2020, a survey conducted by OpenView on over 150 SaaS companies unveiled significant variations in activation rates and conversion patterns between the two models. The study found that:
- Freemium products had a median activation rate of 20%, compared to 40% for self-serve free trials.
Free trial products had twice the conversion rate compared to freemium ones (14% vs 7%). - Based on these findings, it seems that offering a free trial model can be more effective in generating immediate revenue. If wider reach and long-term engagement are your priority, then the Freemium model could be more effective.
However, these stats aren't universal rules. While they can help identify trends, they should not be relied upon as a complete replacement for thoughtful consideration of your product type, intended user behavior, and overall company objectives.
Freemium Model: A Success Story in SaaS
The SaaS industry has found great success with the Freemium model. Let's take a glance at the figures:
- A typical SaaS company with a Freemium product can convert about four out of every 1,000 daily leads into paying customers.
- 75% of these conversions don't need extra sales or customer success efforts.
- The model has a 6% conversion rate from website visits to free signups and a 7% conversion rate from free signups to paid customers.
- 62% of these paying users are self-served, easing the load on your team.
- Businesses that utilize freemium products experience approximately 50% lower Customer Acquisition Costs (CAC) than those that do not.
If the conversion rate is unusually high, it might mean that customers are leaving at a high rate. On the other hand, a low conversion rate could indicate that your product is not a good fit for your target audience. The Freemium model's strength lies in creating loyal customers who will likely stick with what they are familiar with when transitioning from free to paid use.
Free Trial Model: Success Statistics for Boosting Retention
Studies prove that self-serve free trials can convert six leads, with half converting without sales intervention. Successful SaaS companies aim to maintain an annual revenue churn rate of 5-7%. This means losing just $1 out of every $200 each month. The free trial model enhances conversion by:
- Allowing potential customers to explore all product features for a limited period, usually 7 to 30 days.
- Building trust by allowing customers to try the product before they pay for it. This leads to higher conversion rates - around 17%.
However, Freemium models offering limited functionality for free only achieve about a 5% conversion rate.
It's worth noting that the conversion rate for site visits to free signups is approximately 4.5%. Even better, the rate of free signups converting to paying customers is a promising 14%.
Moreover, platforms like Togai can help you implement these pricing changes effortlessly with their plug-and-play model, ideal for pricing and product teams.
Closing Thoughts
Deciding whether to use Freemium or Free Trial models for your SaaS business is a decision that cannot be made with a one-size-fits-all approach. It's about understanding your unique needs, goals, and customers.
And if you're unsure where to start or how to implement these pricing strategies efficiently, Togai is here to help! Why not explore our sandbox or schedule a demo with us today?
Remember that the quest for gaining more users and increasing retention is a continuous process. It involves experimenting, learning, and adapting. It's not just a matter of deciding between freemium or free trials. Keep exploring until you find what works for your business!
