Free trials and freemiums are both customer acquisition models and choosing between the two can be a difficult decision and depends on many factors. Although most startups prefer free trials, freemiums have their own place in the SaaS world. This post explains why startups and established SaaS companies should not ditch the freemium option right away and consider the pros and cons of both to make an informed decision.
Both models are not meant to rescue an ailing SaaS business, fix the product or a terrible onboarding experience. Instead, these are meant to convert un-paid sign-ups to paid subscriptions by attracting potential customers, generating qualified leads and driving conversions.
What is a Customer Acquisition Strategy?
A customer acquisition strategy is a part of go-to-market strategy (GTM) and refers to the channels, media and tools to acquire new customers. Four essential elements of the GTM strategy include:
Who (The Customer): Defines the ideal customer, their pain points, and how the product fits in their workflow
Where (Market): Competition, the type of market you are competing in, market dynamics (stability, growth rate etc.)
What (Product and Pricing): What are you selling and the unique value proposition, how much value does your product deliver, how is it different/better than the competition, the pricing strategy (based on the number of seats, usage based, feature based etc.)
How (Marketing Channels): How to reach the target audience, what channels are the most effective, which channels they use the most, which channels have the optimal CAC (Customer Acquisition Cost).
Businesses need to design their customer acquisition strategy from the customer’s perspective rather than doing it in isolation. They need to pay special attention when planning the customer acquisition strategy, which can help them:
- Boost growth, generate interest and minimize barriers to entry. When the competition is making potential customers go through complicated free-trial and freemium sign-ups, you can differentiate your business by easy onboarding or self-service trials.
- Reduce CAC (Customer Acquisition Costs), which involves finding inexpensive ways to drive growth such as encouraging users to share their experiences on social media and their zones of influence.
- Focus on the first interaction. A great first impression can be a competitive advantage and a differentiator.
- Focus on shortening the sales cycle, allowing users to realize the product value sooner.
SaaS companies should have a clear understanding of their ideal customer’s lifecycle and plan their customer acquisition strategy around it. The customer lifecycle has four main stages as follows:
Acquisition stage: the user/customer wants to quickly access whether or not a product is the right fit for their needs
Adoption stage: the user experiences the initial benefit or value, learns to use the software and evaluates it before making a final decision
Retention stage: at this stage, the customer receives the benefits and value from the product on a continuous basis
Expansion stage: the customer is looking for ways to add functionality, more capabilities or features
SaaS companies not offering a free-trial or freemium can miss out on sales opportunities. Free-trials and freemiums allow potential customers to realize the value of the product early in the buying process, and are the most direct ways of making them realize its benefits. SaaS companies need to carefully choose the right customer acquisition strategy for a variety of reasons, including the following.
- Efficient resource allocation in a highly competitive industry
- Targeting the right audience that is most likely to convert
- To increase brand awareness
- To increase customer engagement and retention
- To adapt to the changing market dynamics
What is a Free-trial?
A free-trial software or service generally refers to a free solution that is offered for a limited time period, which is usually 14 or 30 days. In addition to a time limitation, free-trials can also have limited features, which is generally referred to as a hybrid approach. For example, a free video editing software that works for a limited period of time might also include a watermark on exported videos. The key benefits of offering free trials include enticing interested, but hesitant (to pay) users to explore the benefits and features of a software, experience the value it offers and ultimately convert into paid subscriptions.
A free-trial model can either be opt-in (user is not required to enter credit card information in advance) or opt-out (user has to provide his/her credit card information before signing up for the free trial). The opt-in method helps build trust and saves the support team from having to deal with angry customers who want a refund because they forgot to opt out from the trial.
What is a Freemium?
The concept of freemium combines free and premium. The software/service provider offers both free and paid solutions. The free solutions are a basic or limited version of the paid products, usually without any time limitation. Users who need additional features or functionality can buy a subscription plan and upgrade to paid options.
The key benefits of the freemium model include creating brand awareness and widening the customer base, converting free users into paying subscribers, and building customer loyalty. Different companies use different parameters to limit the functionality of a freemium software, while some put multiple limits including:
- Limited features/functionality
- Limited support
- Limited capacity
- Limited seats
- Limited bandwidth
- Limited space
- Limited time
- Limited number of uses
- Including Ads
- Cross-selling e.g. a software itself can be free, but you have to make purchases on other platforms
Some examples of freemium offerings include Slack (limited features), Dropbox (limited capacity and features), Asana (limited seats, limited features), Hubspot (limited sales features), and Zoom (limited seats, features and bandwidth).
Free Trial vs. Freemium
There is no one-size-fits-all formula when it comes to choosing between a free trial and freemium model. One model might work great for one company, but yield no results for others. However, there are a few key questions to ask and answers to these can help you pick the right model.
- Is the target audience B2C or B2B? Free trials and freemiums don’t usually work well for B2B
- What is the average CAC (Customer Acquisition Cost)? The cost of offering a freemium is usually higher, especially when the customer base is narrow.
- Can a business afford the cost of sustaining free accounts (freemium) over time?
- What is the size of the target market? Freemium offerings require a significant customer base to become financially viable
- The competition, what are they offering, do you have a differentiating factor?
- How are your products priced compared to the competition?
- How complex is your product and is it easy to get onboard with it?
Pros of Free Trial
- SaaS companies can offer a software/service for free for a limited time, enabling them to attract customers who are picky and want to fully realize the benefits and value of a product
- Free trials can result in leads that are more qualified than those who sign up for freemiums
- Less resources are required to sustain free users
- Users get a complete product experience in the real-world
- Free trials create a sense of urgency, prompting users to take timely action
- Works well if the users actually need all the features a solution has to offer
Cons of Free Trial
- The sign-up rate is usually less than the freemium model
- May result in less organic referral sources
- Sales efforts are needed to convince users to switch from a free trial to a paid subscription
- Limited buzz and virality because of the time factor
- More customer information is needed during free trial sign up, which can cause disengagement
A free trial model is the recommended option if:
- A company is offering a fairly simple, but costly product
- The customer base is narrow
- The customer base is highly specific with well-defined needs
- The CAC is high
- A SaaS company is new to the market and cannot afford offering a freemium option
- The product itself is premium and is not being differentiated based on features, capabilities and functionality
Pros of Freemium
- Makes the product available to a larger customer base and helps them make a decision early on
- Enables businesses to undercut the competition and helps them reposition themselves
- Provides valuable insights for improving the product and can serve as a feedback loop
- Encourages users to share their experiences with others, they become organic referral sources
- Companies offering a freemium get priority over others that don’t
- Helps determine the ideal customer profile
- Some solutions such as email marketing rely on habits and once everything it setup, users find it hard to switch to another platform
Cons of Freemium
- The cost of serving a freemium is high and has to be balanced with an adequate number of paid subscribers to sustain a business
- Customers may perceive your product as a scaled down version, resulting in an inferior user experience and a failure to communicate the real value of the product
- Freemium users usually require more marketing efforts to convert
- ROI is low if the customer base is low or CAC is high
- If the users are intent with the limited functionality, there is no incentive for them to upgrade to a paid subscription
The freemium model can cost a lot to serve a large number of customers for free, which is why many SaaS businesses don’t support it. Freemiums also don’t work well when it comes to B2B SaaS businesses. That’s why it’s important to evaluate the type and size of the target market because in most cases, millions of active users are needed for a freemium model to work.
Less complex and low-priced solutions have a larger addressable market compared to complex, high-priced products. The following is a brief outline of the recommended options (higher price correlates to a high cost of servicing):
Less complex and low price = Freemium
Less complex and high price = Freemium
Highly complex and high price = Free Trial
In the end, it ultimately comes down to the type of product you are selling. Paid upgrades from a freemium should be enticing and irresistible, while free trials should be focused on developing habits that are hard to change.
Things to Avoid When Offering Free-trial or Freemium
SaaS companies need to avoid the common reasons that can turn free trial and freemium models into a failure and result in a very high churn rate, including:
- Offering little or no incentive to update to a paid subscription, which is often a result of giving away too much for free
- Failing to deliver enough value or offering features that have little value for the user
- Failing to create a sense of urgency in the freemium model
- Failing to engage and nurture the prospects
- Failing to analyze and track free users and understanding how and why they convert
- Failing to deliver a great onboarding experience
- Failing to evaluate the real costs of servicing free users
The Hybrid Strategy
Depending on the product and the business environment, established businesses can also consider implementing a hybrid strategy. The hybrid strategy works well for products that include a lot of features. SaaS companies can layer a freemium version with free trial upgrades through landing pages that showcase how blocked features can deliver even more value. This encourages users to check out new features, but only for a limited time period.
Another option is to offer a free trial followed by a freemium version. For example, users who don’t convert at the end of the trial period can continue using the software with limited features or functionality.
The decision to choose between free trial and freemium depends on some key factors, including the business type and market, its products and the target audience. A free-trial model offers software products for a limited time period, sometimes with certain limitations, while a freemium model provides partial access without a time limitation. Both models provide a taste of what the product can do, the value it offers and how it can help solve customers’ problems.
Businesses should not restrict themselves to choosing only one. There are many SaaS companies that combine both to gain market traction and drive growth. What works for one business is not guaranteed to work for another, so businesses need to carefully evaluate their unique circumstances, long-term objectives, customer preferences and the competition to make the right decision.