As a B2B SaaS startup, you and your team will have to choose a pricing strategy for your product at some point. Is my monthly price too high? Is it too low? How should I break it up? These are some of the important questions that will help shape your marketing strategy and ultimately your business model.
In order to optimize their conversion funnel, many startups consider whether a freemium or free trial business model suits their product the best. Many customers hesitate to pay upfront for services and products, but if you choose the right approach they can be persuaded through these strategies.
To maximise the success of your startup, it’s important to evaluate the two models, and also carefully consider which option is best suited for the product you are trying to sell.
The Freemium Model
Freemium business models allow users access to some or all of a product or services free forever, with no time limits. There may be other limits such as features, usage, memory etc. – but no time limit. As a SaaS startup, Freemium demands your product to be designed, built and tailored around a it.
If you’re thinking of freemium as a potential, an add-on or a ‘maybe’, it simply won’t work at all and will not drive success to your business.
It’s an important model to consider, even before you start up your new business. I wrote about the steps to take before you start up your startup, and this may be worth adding.
Who is suited for Freemium?
Freemium is most appropriate when your market is huge and when free users will add significant value – preferably exponentially over time – to your business, and to the other users and paying customers of your product. It’s crucial to understand what the >97% free users (forever) of your product will add to you. Is it content, virality, data, branding? Carefully consider the answer to this.
Should you have a product that is suited for it, the freemium model can provide your business with benefits. It definitely increases the odds that a user will try your product; and thereafter it’s up to you to convince them the premium version is so much better, they will feel obligated to upgrade.
Is it worth it?
Assuming everything else is perfect, the difficult thing about the freemium model isn’t to generate users, it’s to generate revenue.
Once you have promised someone your product free forever, it becomes very difficult to charge them for access later on. This is why the successful freemium models usually have a conversion rate to premium of 2-3%.
There’s a great mental barrier to overcome when your users have signed up on the basis of accessing something free forever. The best way to overcome this obstacle is to make sure you are upfront and direct with your users about the paid and premium version of your product right from the beginning.
Choose your business model and increase revenue month after month
The Free Trial
A free trial is a business model that allows users to try out the premium features of a product for a limited period of time with two potential results: pay or go away.
If your product isn’t suitable for the freemium pre-requisites outlined above – huge market potential and significant added value by free users – it’s a safer route and you should definitely NOT go with a freemium solution.
If you have a stable and valuable product you believe you can charge money for, then you should and offer a free trial of that paid product.
Why Choose a Free Trial?
The free trial has a substantially better conversion rate than the freemium model. It will most likely increase your overall sales and revenue as modern users are very unlikely to pay up front for a SaaS offering; especially if you’re not LinkedIn or Salesforce.
The psychological obstacles you must overcome to convert a free trial user to a paid user, are also not as significant as with freemium since it’s clear the trial is for a limited period of time only. If a user wishes to continue, she must pay.
Be mindful that unsuccessful or poorly-converting free trials can cause your customer acquisition cost to increase significantly.
What not to do?
Be mindful that unsuccessful or poorly-converting free trials can cause your CACs to increase significantly. Therefore, eliminate the barriers to conversion such as asking for credit cards details upfront. I’ll do a separate post on this another time.
Freemium and Free Trials – Do they work together?
Yes! In fact, some might say it’s the most effective method to offer some use of your product whilst still making it clear that there is a difference between paid and unpaid services.
Allowing freemium users to trial premium features can encourage commitment and conversion. However, you shouldn’t force a freemium model on your business. If it’s not suited for it, go with the free trial.
Have you tested these two models with your SaaS offering? Share your experiences in the comment section below.