Popular examples of cloud software companies employing the freemium business model include:
Freemium vs Free Trial: What’s the difference?
A freemium business model often looks like a free trial
strategy at the outset. However, a freemium approach is not time-limited. Freemium users can use the basic free version for free, forever. The freemium model allows users to experience and get hooked to products by removing initial barriers to adoption. As users realize incremental value over time, they are willing to pay for premium features and capabilities.
SaaS businesses use freemium as a customer acquisition model to greatly increase conversion rates on their website. However, freemium strategies work best when the size of potential users is extremely large, and the learning curve of the product is fairly flat.
Early-stage startups also typically employ a freemium approach to acquire early adopters and test viability of their product-market fit.
A successful freemium strategy requires a relatively easy learning curve and onboarding experience. The product needs to continually engage customers so they can eventually switch to the premium version.
It’s always your that product dictates whether you choose a freemium model or not. Never the other way around.
| ||Freemium Business Model ||Free Trial Strategy|
|Time limits ||It is usually offered free forever. ||Is limited for a particular duration (15 days, 1 month, etc.)|
|Functionality ||Offers limited functionality to entry-level users. ||It usually offers complete functionality of the paid product.|
|Paid Conversion Trends ||1-10% of freemium users upgrade to a paid plan. ||Typically 30+% of free-trial users convert to a paid plan.|
|Markets ||Business-to-consumer and Business-to-individual users. ||Business-to-business.|
When should you NOT try a ‘Freemium’ model?
Freemium is not for every SaaS business out there. Here are some questions that might help you decide if freemium is right for you:
- Is there really a market for your product? If there isn’t a massive Total Addressable Market (TAM) for the product, it shouldn’t be offered for free. The vast majority of free users will never convert into paying customers, implying extra pressure on your existing resources.
- Is your product built to self-serve? A freemium model is a volume game. If the product dictates heavy hand-holding, sales assistance and human-touch to onboard users, a freemium model may not sufficiently scale.
- Is there a reason for users to upgrade to a paid version? Unless new, attractive and useful premium features offer users incredible value as they engage with the product, they may not have the right incentive to ever upgrade to a paid plan over their current freemium solution.
As with every pricing strategy, Freemium also has its fair share of pros and cons that should be carefully considered while gauging its viability.
Advantages of Freemium:
The free product serves as the perfect user base for experimenting with new features and getting valuable feedback without upsetting the workflow of your paid customers.
- Increases brand value as you start attracting more users through word of mouth and referrals from your existing user base.
- Helps you to undercut competitors and stand out in a competitive market alongside gaining a significant amount of market share in no time.
- Monetization of the free plan by introducing ads which also serves as a motivation for some users to upgrade to premium services.
- Reduce Customer Acquisition Cost (CAC) by minimizing spend and letting your product drive acquisition.
Disadvantages of Freemium:
- Not striking the right balance between your freemium product and premium product – if the freemium plan isn’t attractive enough, then you won’t attract new users, and if the freemium plan is too heavy, then the new users won’t move to the premium plan.
- Bleak conversion rate from free to paid - According to "Free", a book authored by Chris Anderson, only 5% of your entire customer base will belong to paid services. So, the revenue generated from 5% has to support the rest 95% of your free users.
- The unnecessary and ever-increasing burden imposed on your operational resources resulting in ballooning costs which are predominantly caused by serving free users.
As Rob Walling, Founder of Drip put it wisely,
Freemium is like a Samurai sword: unless you’re a master at using it, you can cut your arm off.
Want to explore more about Freemium? Check out Wielding Freemium
, a video series produced exclusively for breaking down the Freemium business model - featuring experts from Spotify, Atlassian, Appcues, Chargebee and more