To Freemium or not to Freemium?

There are numerous examples of SaaS products stuck with lots of users and few paying customers. The common advice is not to give away too much in the free plan and always be upselling. The best example that comes to mind is 37signals but even they have greatly deemphasized their free plans recently to almost being fine print on their pricing pages.

Does Freemium still make sense for a SaaS product? Are full-featured trials a better option?

The answer probably would be "it depends". How easily is your product segmentable into free/paid versions? If there's a pretty clear feature breakdown between what a functional free version would like vs. a premium version people would pay for, then a freemium model may make sense. A great example of this would be dropbox.com which offers several gigs for free, and you pay for additional gigs/features. We put together a brief post on our blog that discusses this a bit.

If your service is difficult to segment, it may make more sense to offer a free trial (which 37 signals does as well).

What it comes down to is make sure you have strong data/financials to understand what would make better sense (and better revenue) for your business- freemium vs trial/pay.

Good luck!
best,
Tim

I've found with my product and my client's products that allowing someone to test drive your app helps them become more confident with the solution and reduce their perceived risk. The key is to allow them to access all of the functionality, but enforce restrictions that encourage them to upgrade once they achieve some level of success.

For example, an invoicing app may require upgrading to a paid account once you add more than 3 clients. The free customer is usually willing to upgrade because they are experiencing their own success and realize it is "the price to be paid" for continued growth. The MailChimp example, above, is another good example of letting them get a win (send an email campaign), see how easy it is, and realize the benefits.

As you mentioned, you could go for a 30 day free trial with a credit card. The informal research that I've seen suggests that the conversion rate is higher than not asking for a credit card. However, the barrier to entry for some to enter their credit card information may be too much, so you may also see a higher bounce rate. As a customer, I prefer to try then provide a credit card, so that is what I like to recommend for most startups that I help launch.

Personally, I think a lot of the recent hand-wringing about freemium (and "free" for that matter) is much ado about nothing. It was not that long ago when media and analysts et. al., were decrying (free) opensource products as portending the end of civilization as we knew it. Now having the word "free" in your business plan marks you as a clueless entrepreneur, scared to test your value prop in a real market.

Without knowing too much about 37signals model, I would guess that the trend for a growing business to de-emphasizing "free" is a positive and predictable one, but not one that (necessarily) represents an indictment of the model itself.

Eventually, a free model segments your market. Those who are willing to pay represent a different market segment than those who are not so willing. Basic "Crossing the Chasm" dictates that you focus your resources on the best segment to get over the chasm. It's only natural to put more resources into the paying segment and really, the highest paying account level (if you have several) unless the middle tiers represent a larger market.

Resources (including for acquisition) should only be committed to free relative to the conversion rate to paid.

There has been some good answers to your question already but I thought I would throw my view in as a user of many web apps, some paid for and some free.

My favourite SaaS or web app model is offering a fully featured free trial for 30 days (or whatever timescale is most relevant) and then dropping down to a free version at the end of the 30 days if the user does not start paying.

So that would not involve entering credit card details until you are ready to actually start paying for the product.

I am a user of TactileCRM, currently using the free version after having use of the full version for 30 days. Once my business is ready for it (very nearly now) I will definitely be subscribing to the paid version because I know I will use the features the paid version gives me.

I am also a user of Freshbooks and also used their free version until I had enough clients that warranted paying for their excellent product. I am so keen on Freshbooks that I actively look for other apps that work well with Freshbooks.

Finally, I am also an avid user of Evernote and use it every day. I use the free product and do not envisage needing the paid version for the foreseeable future, as the free version suits my needs very well.

Those are just a few examples of web apps that I currently use and am a big fan of.

Notice that even though I am not a paying customer of Evernote (or TactileCRM yet) that I still support the product and tell people how great it is (please see other answers that I have submitted to this site for evidence and my Twitter stream @TomBatey).

I know that offering a 30 day free trial and then dropping down to a free version with fewer features after 30 days is not suitable for every SaaS product but I find it my preferred model when considering signing up to an app.

Hope that helps.

Kind regards,

Tom

I agree with Tim's point on "make sure you have strong data/financials to understand what would make better sense (and better revenue) for your business- freemium vs trial/pay." and Brant's point re: "Resources (including for acquisition) should only be committed to free relative to the conversion rate to paid."

If you decide freemium is the way to go, I recently wrote a blog post How to Convert B2B Software Free Trial Users into Paying Customers that you might find helpful. It's one thing to offer a free trial, but converting them into customers is where most software companies think they have it covered but in fact are going about it all wrong.

I would not be concerned with the ratio between free and paying users. Typically free users don't cost you anything, so why bother. Sooner or later some of them may still turn out to be paying customers.

Cutting of customers after 30 days is a bad practice. You would get more frustration with the people that would actually can become your customers.

There are definitive advantages to having high number of free users:

• lot's of feedback
• many potential beta testers for new versions
• many people that can tell their friends about it
• more chances of having good customer testimonials

One thing I have seen used successfully was asking the fremium users to tweet/blog about the product if they liked it. As a sort of 'gift in return'.

The reason why basecamp does not need to promote their free plan is that they got enough attention already. I have used basecamp for 6 months before I eventually upgraded.

Let us know what you decide
good luck

Roland

"It depends". That is true. On what though? You have to think as if you're offering multiple products itself (vs free and paid of the same product).

Free Product: You do this primarily for marketing and up-selling.

• a) So is your free product compelling enough to warrant a user's time and energy? Really?
• b) Does the cost of the free product break your marketing budget? Does it even fit in your budget? Or are you better off eliminating the free product and spending that $ on actual marketing?

Paid product: This is what pays the bills, so

• c) Is your paid product significantly better than the free product warranting a user to now start (gulp!) paying? Really? Remember this need to hold without distorting a) above

a) and c) are easy to develop if you can understand and segment the customers.
b) and c) essentially force you to think of the pure economics of the business.

I'm not saying Freemium is great or Freemium sucks - but you have to introspect accordingly.

You might very well find that "My free product offers 80% of the value, so customers have less of an incentive to convert. So I'd rather eliminate it to transfer value to paid product and spend the cost of supporting free subscribers on real marketing ".

Personally, we're developing a freemium model for ourselves.

I recently agonized about this myself. After reading a few great blogs I decided to limit my fremium to 3-day trial and post a simple pricing structure. If you ultimate goal is getting paying customers, don't get into freemiums. Most of the time the customers want to know what they get and how much it is. Let them try and tell how much it'll cost. It really works.

Mailchimp is a good example of freemium - part of the process is getting prospective customers (paying customer) to learn how to do the task properly (in this case, email marketing).

Understanding how to track the success rate of their promotion, giving proper advice on what to send, and handling bounces / unsubscribes are tasks / features a person who has never done a mail campaign would not know how to evaluate - it's all new to them. Once they do it, they understand why its important and then understand why they want to move from free to paid.

As a consumer I like the freemium model. The decision is what to offer in the freemium plan. Not too few features people will think it's a bait and switch move or it's a useless plan. Not too many features where people have no incentive to upgrade.

One reason to offer a freemium option is to build as big customer base as possible. In case you business fails, you have a customer list which you can use in your next venture.