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April 29, 2022
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.
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.
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.
There are five key reasons a freemium business model helps SaaS companies succeed:
The freemium model, while largely successful for SaaS companies, also comes with some drawbacks organizations should consider.
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:
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.
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.
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.
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.
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.
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.
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.
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.