Should You Offer a Freemium Level for Your SaaS Platform?
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If you have a SaaS platform, getting people to sign up for your offer instead of your competitor’s is a challenge from a marketing, pricing and product development perspective. You have to communicate what sets your product apart, price it competitively and ensure that it has all the bells and whistles that your users really want.
To tackle these issues, many companies have made the decision to give their products — or at least a portion of their products — away for free. It’s the freemium model, and it’s a popular one for SaaS companies. But is it right for yours? Read on to find out.
What Is a Freemium Model?
Simply put, “freemium” means that you give away some of your product’s features for free. If your customers want access to the full offering, they have to pay. There are a few different ways that freemium models can be structured:
- Free forever, usable but limited. Users will need to upgrade for advanced features, capacity or space. An example of this model is Dropbox, which offers users a certain amount of space for free. When you max this space out, you have to upgrade to a paid plan.
- Free for individuals, but paid for businesses or teams over a certain size. Slack is an example of this. It’s free for individuals and small teams, but larger teams need to shell out for a premium account.
- Free, fully functional product with premium related products. Skype follows this model. Their main product (video chat) is free, but they also offer complementary products, like international calling and Skype for Business.
Freemium shouldn’t be confused with free trials, through which companies offer their entire product (or, in rare instances, a scaled-down version) to consumers for a limited time so that they can try it out before deciding whether or not to purchase.
There are advantages and disadvantages to both approaches, so you’ll need to weigh them and decide whether one (or neither) is right for your business.
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Who Offers Freemium Products?
When people think of freemium, they tend to focus on SaaS companies. But there are many other industries that rely on it, such as:
- Mobile Gaming: Pokemon GO, Clash Royale and Candy Crush Saga have each made over one billion dollars. What else do they have in common? They’re free games. Those in-app purchases really add up.
- Digital Media: Publications like the The New York Times and The Washington Post limit the number of free articles you can read. When you reach your limit, you get the paywall.
- Books: Many online booksellers and publishers are now offering portions of books for free, on the assumption that people will be hooked after a few chapters and will shell out for the whole thing:
The Benefits of Going Freemium
There are plenty of good reasons to consider offering a freemium product. First, it helps you be competitive — especially if your competition is premium products. If your competitors’ prices are higher, consumers may be more likely to give yours a try before handing over their credit cards.
Another benefit of going freemium — and this is key — is that your freemium product is a powerful marketing tool for the paid version. This strategy is called “product-led growth,” and it’s defined as “A go-to-market strategy that relies on product features and usage as the primary drivers of customer acquisition, retention and expansion.”
If you look at freemium through the lens of product-led growth, you aren’t giving away a product for free; you’re marketing your paid products through a freemium channel. What you have to determine is whether or not the costs associated with building and maintaining a free product are commensurate with what you’d spend on a marketing channel (and, of course, whether the ROI is worth it).
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The Disadvantages of Going Freemium
Let’s stick with the idea of ROI, because it’s important. According to Tomasz Tunguz of Redpoint Ventures, on average, freemium companies convert between 2% and 4% of their users to paying customers. That means that if your goal is to get 100 paying customers, you need between 2,500 and 5,000 people to sign up for the freemium version. That’s a lot.
Another con of developing freemium products is that if you make the free version too good, no one will upgrade. But if you make it too simple with too few features, users will abandon yours for a better option. It’s a tough balancing act that very few companies get it just right. And the SaaS market is flooded — if you don’t have a major competitor out of the gate, you will soon enough.
Lastly, developing products is expensive. Maintaining products is also expensive. “Free” costs money. Those customers who don’t pay — what are they worth to you? If you can’t recoup your costs with premium subscribers, what’s the ROI on everyone else? These are all questions that you’ll need to answer, and answering them isn’t easy.
Freemium Case Studies
There are a few companies out there who are crushing it with freemium, and I think it’s worth taking a look at what they’re doing right.
HubSpot CRM is the company’s freemium offering. It comes with a lot of features, including contact management, pop-up forms and ticketing. There are also free tools for email marketing and ad management, which HubSpot bills as “free forever.”
Once HubSpot gets a business hooked on the company’s CRM, they’re presented with a suite of premium tools for different job functions, including marketing, sales and service hubs that start at $50 per month, and a CMS that starts at $300 per month (you can also create bundles based on your business needs). If your company is already using the CRM, it’s easy to see how upgrading would make it easier to have all of your tools under the same umbrella.
HubSpot has done a great job at product-led growth. Their total revenue for 2018 was $513 million, up 37% from the year before.
ProfitWell is service business that supports subscription-based SaaS products. They have a powerful analytics tools that they give away for free — which is notable, since most of their competitors charge for similar tools.
In a blog post on the company’s website, co-founder and CEO of ProfitWell Patrick Campbell says:
“You can lower your CAC and increase your distribution substantially by utilizing the baseline product as a lead source, similar to an e-book, but one that’s much better and much more valuable to our users.”
That’s what they consider their analytics dashboard — a lead source. They can market their premium products to their users, which include tools for customer retention, revenue recognition and pricing.
Ubersuggest is Neil Patel’s free keyword tool. His tool isn’t the only one out there, but it’s definitely one of the most comprehensive options you don’t have to pay for.
If everyone else is charging for keyword tools, why would Neil give his away for free? Because it brings people to his website. In fact, it brings almost 10,000 visitors to his website every day. Do all those people then click around Neil’s site and sign up for his consulting services? Of course not. But some do.
Neil does very little marketing for Ubersuggest, but because people are always looking for free keyword help, he gets that traffic. He’s found a great way to use the freemium model to get more people engaged with his content and service offerings.
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Questions to Ask Before Going Freemium
Still not sure if you’re ready to market a freemium SaaS product? Ask yourself these seven questions:
How big is your target audience?
The most successful freemium SaaS products are those that appeal to a large demographic. With such low conversion rates, you need a wide pool to get any traction on the freemium side. If your product has a narrow or niche audience, then you’re probably better off going the free trial route.
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Do you have the resources for it?
If you already have a product built that you’re considering switching from paid to free, then the only resources you’ll need are marketing ones (at least initially). If you’re building a product from scratch, it’ll take considerable financial and development resources. Knowing that it will likely be awhile before you start seeing any revenue, can you actually afford to do it?
How many paid users do you need to offset your development and marketing costs?
This is your most important calculation. If you will need 1,000 paid members to offset your investment, you may need more than 25,000 freemium sign-ups (depending on your conversion rates). Can you make that happen? Even if you can, what differentiates you from your competitors? Why will users choose you?
Is the free part a good enough hook?
You don’t want to give everything away, so what do you keep for premium members? It’s important to make the free version of your product compelling enough that people will want to use it. It has to be comparable to paid products in your space as well; otherwise, users will skip right over premium and go directly to a paid product with a company that’s been around longer than you.
Are your premium features worth paying for?
Again, it’s a balancing act when it comes to making your freemium version stand on its own, while also getting people to upgrade. What features can you provide for premium members that they can’t get at one of your competitors? If your features are similar, can you price your premium version lower or add tiered pricing?
Can freemium users be monetized?
There’s a saying that if you aren’t paying for a product, you’re the product. And there’s definitely some truth to that. Your freemium users will need to provide value for you or it’s not worth doing. Can you serve ads on the free version? Can you leverage them for testimonials to help attract customers who will pay? Will they generate data you may be able to use or sell in other ways?
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Do you actually want to do it?
In business, we all have to do things we don’t want to do. Launching a freemium product is a major undertaking. If you don’t believe in it — if you’re heart’s not in it — then you absolutely shouldn’t do it. Do a free trial instead. Or just market your paid product.
If you’re in the process of building a product and still haven’t figured out your pricing model, that’s a good time to think about going freemium. Or if you already have paid products and are launching a complimentary one, maybe try making the free one to help market your existing products.
Product-led growth has been hugely successful for companies like Slack and Dropbox. It could be successful for your business too, especially if you have the money and people power to make it happen. And if you don’t? Don’t sweat it. There are plenty of other marketing channels out there — you just have to find the right ones for you and your products.