Finding the right pricing and business model is one of the most difficult decisions that SaaS founders are tasked with while building an early-stage tasked company. Competition, market, costs, personnel, and other factors all contribute to the complexities behind pricing decisions.
Out of the more popular models to choose from, “freemium,” can be one of the most compelling, especially for first-time founders looking to get their first users through the door. Freemium is a pricing model that allows customers to sign up for free and use a product with certain limitations. Compared to a traditional pay-to-use or free trial approach, a freemium model drives more user sign-ups by giving away a free plan. Combined with word of mouth referrals and other viral marketing behavior, this can result in exponential growth, allowing solid growth with even a smaller-than-average conversion rate.
Is freemium the right pricing model for my SaaS business?
As always, it depends. Our first SaaS business to grow past the $1M ARR mark (Wavve) was fueled by a fantastic freemium model that has driven more than 150,000 customers to the app. However, for our most recent SaaS business (Churnkey), the freemium model does not fit as well. Let’s go through when freemium makes sense and evaluate the pros and cons to help decide if it’s the right approach for your SaaS.
🔥 Take: Freemium is not a business model, it’s a growth strategy
Too many founders default to a freemium model because they see so many of the most successful startups using it (Dropbox, Mailchimp, etc.,). However, when you go freemium, you are making some big tradeoffs.
Choosing freemium is essentially saying “I think there is a huge market of users that I could reach, so I am willing to pay my infrastructure bills as we scale in exchange for a higher acquisition rate and a lower conversion rate.” There is always a risk you will attract a high number of users, be stuck with a huge infrastructure bill, and have no revenue to show for it.
When should freemium be considered for my SaaS?
Wait for some product-market fit. For starters, you need to have a well-defined product funnel and ideally an idea of your conversion rate from trial signup to paid. Knowing what specific steps in the funnel a free user will need to go through to convert to paid will help you understand your customer’s journey. If you are going to take the tradeoff from a higher conversion rate to top of funnel growth with freemium, you will want to know what you are giving up.
When there is a large potential target market of users: If the goal of freemium is to maximize signup totals, this only works if there is a large pool of users to go after in the first place. This is why so many B2C SaaS products have been successful with freemium. They know that the consumer space has the potential to bring in a massive amount of users and they are willing to give up a higher conversion rate as a trade-off.
When pricing is set relatively low: Customers that are attracted to freemium SaaS apps generally are not going to turn around and speed hundreds per month on the same product. If your pricing is on the higher end ($100+/month), you may want to stick with a trial and focus on higher conversion rates with a lower pool of potential users.
When free users will refer paying customers: If you’re going to be giving away your product for free, make sure the free users are doing the marketing for you. Growth with a freemium pricing model works best when your product has built-in aspects of virality to it. With Wavve, every video we generate for a free user has “Created with Wavve” branding displayed for the first 5 seconds. Intercom displays a “We run on Intercom” snippet at the bottom of each chat. Wistia built a smooth looking video player and prominently brands itself everywhere a free video is embedded. Dropbox relies on free users sharing files and spreading the word about their product.
If you think freemium might be a good fit for your SaaS business, let’s go through the pros & cons of going freemium:
The Pros of Going Freemium
- Cheap growth compared to paid channels: As mentioned before, freemium is essentially the decision to trade infrastructure for growth. Thanks to so many advances in cloud services, infrastructure costs are more manageable than ever before. In many cases, a fraction of the cost of paid ad channels.
- Huge growth potential when combined with word of mouth growth: People are much more willing to share a free product with their network compared to a paid product. We saw this directly with our first SaaS business, Wavve. When we launched our free plan, we saw a consistent bump in referral traffic thanks to people being willing to share a free tool with other podcasters. This was especially true for bloggers and other influencers sharing tips with their audience.
- Freemium can be very predictable: Once you have a product funnel and freemium has been in place for some time, your conversion rate and growth can be very predictable.
- Helps activate lapsed users: One unintended consequence of using a freemium model was that we experienced a high reactivation rate from churned customers. It’s common for users to get by with the free plan until they are ready to activate again.
The cons of going freemium
- It takes time to begin working well: Freemium will take months to test and understand properly. Be sure you are ready to give it a real go!
- Support can get overloaded: Free users are notorious for putting a strain on customer support. Be sure you have a solution for this when it happens. Knowledgebase, onboarding videos, self-serve help options, etc.,
- Finding balance is tricky: Balance between free & premium breakpoints is difficult and can require testing. Be ready to test and update your breakpoint between free & paid often. The last thing you want to do is give your product away for free to people who would be willing to pay.
As with most decisions SaaS Founders must face, the best way to see if freemium is right for your business is to test and measure it. Product analytics, user feedback, and churn reporting tools are going to be your best friends while testing. If you are in need of a Churn Reporting tool, Churnkey has you covered with our done-for-you offboarding solution that helps reduce churn and only takes minutes to implement.