To freemium or not to freemium?
That is the question. In my mind, deciding whether or not to use a freemium model is not a pricing consideration. It’s not even a strategy for your marketing team to decide on. Instead, it is a core business model question that you and your team should be asking of yourselves. I personally am conflicted about whether or not a freemium model is worth it, but as with just about anything in life - it depends.
An internal debate has been raging in my mind since listening to the freemium episode of Steli and Hiten’s podcast. So I’ve jotted down some thoughts about this topic.
Making the decision
If you have a SaaS offering and are considering whether or not to offer a freemium plan or a free trial, you have to decide if you want to focus on customer uptake or on revenue. Do you want a lot more people trying your product or service out? Then maybe freemium is the path to go down.
There’s a plethora of factors in play that determine whether or not any random web visitor will sign up for your service. Are they your target market? Are they in the market for your service? Are they skeptical of your offering? Do they have the money to spend on your product?
These and countless other questions all weigh into whether or not someone would be willing to give your website the time of day, never mind whipping out their credit card to invest in a long term relationship. By the way, if you’re considering going down the free trial route, check out Pierre Lechelle’s in-depth breakdown of free trials.
It’s about reputation
If your SaaS product is brand new, and especially if your service is innovative and unlike things that your existing competitors are offering, people will be hesitant of your offering. And rightfully so. We’re all afraid of the new - there’s a lot of dodgy scammers and underdelivering companies in the world. For this scenario, freemium could benefit you. Nobody knows you yet, nobody likes you yet, and there are very few people that trust you as a company. Having them sign up and play around without making a concrete investment can help grow that trust and fondness of your service.
Having said that, if you’re offering freemium because you’re hoping to build trust and credibility in your market, and have chosen building reputation and trust over focusing on revenue, there’s something you have to realize. It would be foolish to have new users sign up and enter their credit card details even if your trial or freemium offering doesn’t cost them anything. The resistance they feel for signing up will mean that entering their credit card details will equate to purchasing your product outright. This can be a dead-end in your customer acquisition funnel.
The fear of selling
My best thoughts come to me on a long walk or in the shower. I’m not sure if it’s the same for you, but next time you’re doing the activity that gets you in the zone of thinking, ponder this thought. Are you considering offering a freemium tier because you’re afraid of asking for the sale?
It’s nothing to be embarrassed about, and it’s an afflication a lot of us face - I know I do. Having a free tier means you don’t have to make the push, and it means you can fluff up your ego by seeing activity around this thing you’ve created. Someone of this mindset can very easily convince themselves that they’re doing it to build up their userbase, and they’ll upsell at a later stage.
Let’s be honest with each other. If you’re hesitent to ask for money of someone you don’t have a solid relationship with yet, are you going to be less hesitent by risking chasing away someone that’s been your user for months? If deep down you realize that this is honestly one of the reasons you’re wanting to go down the freemium route, rather invest some time in building up your pitching and selling acumen.
The dangers of freemium
If you offer a freemium tier, you have to realize that the majority of your userbase is going to be non-paying customers. Those people will also be hogging up the majority of your support queue. You are committing to supporting a large amount of people that will never pay you any money, and may not necessarily help spread the word about your product. Time is not a luxury you have, and you’re sinking money on dead-end users. The problem is that if you don’t, you’re going to anger people.
I don’t have the citation available to me, but free users are generally the most vocal and demanding of users. If you piss them off, they will go and talk shit about you online. If you shower them with love, they aren’t guaranteed to sing your praises. By committing to supporting free users, you’re risking your company’s reputation if you neglect that support queue.
Another danger is knowing how low the conversion rate of free -> paying in the SaaS world is, your pricing will either have to be high enough to warrant all of the free users, or your userbase will have to be massive. The former is difficult because the benefits of being a paying user will have to be seriously enticing for a high price. The latter is difficult because getting a million users is going to be one of the most daunting tasks you’ll ever undertake.
Another danger of freemium is that you’re setting a base standard of expectation for potential users. You’re attracting them with ‘free’ as opposed to a solution for a problem they have. If they join because something is ‘free’ rather than because they’d pay for something outright, how serious is their problem? Probably not that serious, so they probably won’t be as likely to convert. Of course there is no way to know if someone joined your freemium plan AND has a serious need for your solution, unless you have an intensive customer feedback process.
One thing that’s very easy to forget is that of all the people that will try your product, lots of them won’t have purchase intent. Lots of them will never have any purchase intent. If you don’t analyze your metrics properly, you can easily be lead to believe that your growth is good therefore your future is hopeful. This false hope of revenue can hit you hard down the line.
People are busy. People are apathetic about many of the things they sign up to online. How many things have you signed up for in the last year? Without doubt, it’s more times than you can remember. Are you still using all of those services? Not a chance. Did you stop using them because you dislike them? Probably not. You’re just busy with your own things. People that use your freemium tier WILL forget about your product if they aren’t deeply invested.
If you go down the freemium road, you have to realize that the moment a user signs up, the timer starts ticking. You’ve managed to convince someone to give you their time, and now you have to do everything you can to get them hooked before they lose interest. From their perspective, losing interest doesn’t cost them anything, and using your service does cost them something - time - which is their most valuable commodity.
That’s why you have to focus on your onboarding process and get your freemium users to paying customers as soon as possible. To do that, you should be focusing on one thing. You should be minimizing the time to first value delivered. Get people to that aha moment as soon as you can. Get people excited about your product enough to tweet to their followers about it, as soon as you can. As discussed in my other article, lowering churn - even for freemium users - will help your acquisition numbers. And delivering value ASAP will help keep that churn rate down.
Another thing to keep in mind is that if you offer a freemium service, design it so that this tier is simply a path to get users to convert to paying customers. If you do not design it this way, you’re throwing away revenue. Focus on your freemium-to-paid-customer conversion rate. If you’re happy with the amount of freemium users signing up month-over-month, focus on optimizing that conversion rate. If your freemium numbers aren’t great, focus on your marketing.
Track that data
Whether you choose a freemium model, a free trial model, or a model with no free options, make sure to have your analytics set up. You need to know where your potential customers are dropping off in your acquisition funnel. Without data, you’re just guessing and potentially optimizing the wrong things. You may even be hindering your conversion rate.
For a freemium service, find out exactly which step would be the one where you can get your users most eager to switch to a premium service. Figure out how to get them hooked enough that they feel compelled to get access to that extra feature - or to get them to pay to get out of limited usage. You should also figure out the key points that users need to go through to get there. Track each of those, and you’ll be able to determine which of them have the worst drop-off rates. Focus on improving those.
Questions to ask yourself
Does the value of your offering increase as time goes by, or as users use your service more? Is your product sticky enough to get your users into a habitual behaviour? Will moving away to a competitor, or simply stop using any product in your solution range, hurt the user more than the benefits they’re getting out of using it? If the answer to these questions is yes, then maybe consider freemium. If not, think about your business model a bit more before committing to anything.
Weighing in the biases
Many smart psychologists and behavioural economists have described quite a decent number of cognitive biases that affect the decision-making processes that people have. These apply to the world of SaaS customers and window shoppers. Biases are the systematic errors that our imperfect human brains make when we make decisions, and we seldom realize we’re making them. Your customers and users seldom realize their biases too.
In behavioral economics, there is a hypothesis called the endowment effect. It states that people will value something more, simply because they own it. Here’s one study proving that very affliction we all have. People react stronger to losing something, than they do to gaining it. The bias behind the endowment effect is called loss aversion.
Loss aversion can be applied to models that have free time trial or usage limit trials. At the end of the trial period, if their use of your service was really beneficial to them, loss aversion activates in those people. They’ll be forced to confront the reality that they’ll lose future benefits, or they can upgrade. The same effect can’t really be applied to a true freemium model, as users generally aren’t limited, but merely capped. There isn’t much to lose by staying on that tier.
However, the endowment effect can be applied to non-free business models. If you already have a paying customer and manage to keep them subscribed for a period long enough to make them happy, this effect works in your favor. They will feel a sense of ownership - especially if you have a great customer success team, and engage with your customers, and use their feedback. That sense of ownership will affect their perspective of losing access to their relationship with your service.
Similarly, with upfront purchases or month-to-month contracts, your customers will feel the effect of another cognitive bias, the sunk cost fallacy. This is truer if they’ve been with you for a long period and have heaps of data in your system. They won’t WANT to leave. They will rationalize that they’ve already spent so much time and effort getting your system to be a part of their workflow. With freemium it’s too easy to walk away.