Freemium Business Model: Will It Work For Your SaaS Startup?

Bethany Mullinix
5 min read
Freemium Business Model: Will It Work For Your SaaS Startup?

For startups and SaaS companies, one of the major challenges is turning interested prospects into customers. While sales-driven strategies propel other industries, product-led growth is the key to success when it comes to SaaS.

The idea is to get as many people as possible to use the product; hopefully, they will be engaged and excited enough to tell their friends. Often, this initial usage is free. Then, through a careful nurturing strategy, you show customers the product's value. Eventually, they soften to the idea of the upsell, paying to use additional features or product tiers. 

This is what’s known as the freemium model.

Many startups have had success with the freemium model, but how do you know if it’s right for your organization? And if it is, how do you continue to generate revenue when you’re giving so much away for free? This article covers how the freemium model works, how you can use it profitably, and provides some examples of companies doing freemium right.

How Does A Freemium Model Work?

A freemium model typically works best for SaaS businesses that offer different product tiers. A basic, simple version of the product — one that solves some of the challenges these customers face and alleviates immediate pain — is offered to customers for free. 

However, if the customers want a more robust solution for their issues, they have to pay to use the premium version of the product. The company has to nurture its freemium customers by showcasing the value of the premium product through various channels to encourage them to upgrade.

Some examples of freemium SaaS companies that have found the right balance in their free and premium offers include:

How do these SaaS freemium companies achieve success? It all comes down to incentive. Companies design product tiers so that customers can see the benefits of upgrading to a paid level based on the features they can access. 

The Difference Between Freemium Vs. Free Trials

Freemium models are often confused with free trial models. While they are similar, there is a key difference: time period. Freemium models are free forever, while free trials have an end date, typically anywhere from two weeks to 30 days.

The customer must decide whether they will pay for the premium product within that trial period. If they choose not to upgrade, you may downgrade the customer to a basic version of the product they can use for free or lose access to it entirely.

Advantages Of Freemium Models

There are five key reasons a freemium business model helps SaaS companies succeed:

  • It serves as a form of marketing. Who can say no to free stuff? The beauty of the freemium model is that it doesn’t require a large marketing budget. Consumers are naturally attracted to free products and get excited about sharing free things with their networks.
  • It requires less effort to acquire customers. The freemium model is excellent for brand awareness and customer acquisition. Customers don’t require much convincing to sign up for a free product.
  • It provides insights into your target audience. As freemium customers sign up, the company can glean more insights to learn specifics about their demographic, psychographic, and behavioral characteristics, all of which can help the company better nurture its customers and make upsells.
  • It creates ongoing leads. Even if a freemium customer does not pay for the premium product, the organization can continue to nurture the lead and build a relationship with them through email marketing and in-app messages.
  • It makes conversion easier. Giving people the opportunity to try out the product (or a version of the product) before fully committing to a paid version with premium features is a great way to convert leads into customers.

Disadvantages Of Freemium Models

The freemium model, while largely successful for SaaS companies, also comes with some drawbacks organizations should consider.

  • It uses a large number of resources. While the sales and marketing team may not have to spend a lot of time and energy acquiring free customers, they do have their work cut out for them when it comes to nurturing free plan customers. Plus, the company still needs to support the free software on the back end. Typically, freemium companies supplement customer acquisition costs with the overhead they earn from paid users to support freemium users.
  • It may limit your conversion rate. It’s vital to remember that many free customers will never convert to paying customers. As a result, the company needs to be able to support the free customers for the long term and deal with low conversion rates. Free users often don’t convert because they already have their needs met with the free product, and there is no incentive to pay.
  • It invites potential fraud. In some cases, when a freemium product trial expires, users may create new email addresses to get additional use out of the free software. To avoid this scenario, it’s best to require credit card validation.
  • It can mislead customers. Depending on what the company is offering for the free product, it may not fully represent the premium offering. As a result, customers may have a sub-par experience and walk away entirely. 

Best Practices To Generate Revenue With The Freemium Business Model

If you want to succeed with the freemium model, it’s important to build a long-term business, marketing, and financial strategy. Follow these best practices for generating revenue:

1. Know Your Customer Base.

Build a customer profile that is as specific as possible for both the free and premium products. You will need to understand the account on more than just a demographic level. For example, for a B2B SaaS company, it’s important to know whether you’re targeting a Series A company vs. a Series B company and the specific needs and challenges for each.

2. Have Clarity Into Your Financials.

Your business must be financially sound in order to support a freemium business model, because the majority of your customers may not be paying a single cent. It’s important to set up your business model, pricing, and upgrade paths correctly to ensure you make a profit.

3. Don’t Overpromise And Underdeliver.

Sometimes, freemium SaaS companies do a poor job setting expectations. This can result in low software adoption, as customers may be disappointed when they sign up for the free product. Clearly communicate free and premium product features so customers can see the additional value they get if they pay.

4. Consistently Nurture The Customer.

Nurturing begins the moment a customer signs up for the free product. Your SaaS freemium company needs to clearly showcase the value of its premium product—through case studies, email marketing, metrics, and testimonials—so customers can see what they will gain when they upgrade. Messaging should include how much time or money they are saving when using the free product, for example, and how much more they could save with the premium product.

5. Increase Adoption Through Onboarding.

How many times have you signed up for a free product and then never used it because you forgot about it or didn’t know how to use it? SaaS companies won’t be able to upsell their premium product if customers aren’t using the free version for which they signed up. It’s vital to have an onboarding strategy to teach customers how to use the product and remind them to use it. This can be done through demos, sales calls, texts, and app notifications.

6. Always Be Responsive.

Free product customers still require customer service; they may have questions about how to use the product or be facing a challenge they don’t know how to solve. This is an excellent opportunity to offer fast and responsive support to improve the customer experience and show them how much you value their business — even if it’s free.

7. Get A Payment Method On File.

Some SaaS freemium companies ask customers for a credit card when signing up, even if it’s just for the free product. This reduces one more barrier from converting a free customer to a paying customer. They already provided you with their payment information, so all they need to do is agree to the sale. When taking this route, always set expectations clearly and clarify that their card will not be charged until they agree to upgrade.

Ready To Go Freemium? Zeni Is Here To Support You.

If you’re considering a freemium business model, Zeni can help determine your financial readiness. We have experience with all types of SaaS companies and can work with you to make sure you have a clear picture of your existing sales and revenue and ensure you are set up for the financial implications of a freemium. Plus, our CFO services make it easy for you to seek deeper counsel as needed.  

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