Freemium is a Go-To-Market (GTM) strategy as well as a pricing strategy.
Basically, a client can use the software in its fundamental variant for free.
But why would any company give away their software for free? Well, there are quite a few reasons that might make freemium an excellent strategy to market software products.
Why to consider Freemium
The main idea behind freemium is the following: Instead of having salespeople talk leads into buying the software, the companies grant free access to their software so that interested leads can figure out if the product fits their needs.
If we think on freemium, apps like Zoom, Typeform, Loom, Spotify, Trello, or Google Docs come to our minds.
They invested millions of dollars in developing their products. Why wouldn’t they charge everyone who wants to use it?
Here are some reasons why freemium could be an interesting go-to-market strategy for SaaS businesses.
1) CACs increase industry-wide
Software, especially SaaS, is on the rise. Competition increases faster than most markets grow, which means supply exceeds demand, resulting in higher CACs that will increase further and further.
Freemium is a proper way to get a foot in the door without spending hundreds of dollars for customer acquisition.
2) Lowering the friction at signup
“I’m not sure if this fits my needs yet. But hey, I can use it for free!” - Every potential client on the signup page
In his book “Don’t make me think”, Steve Krug writes about the importance of, well, don’t make the user think.
The decision to try or not try the product is a lower obstacle if the lead does not have to put in his credit card details.
Freemium is like a 100% satisfaction guarantee at the checkout. If you don’t like it, you do not have to pay for it.
3) Gaining market-share
In a high-competition market, the company that lowers the barrier to entry with freemium can gain a higher market share.
Potential buyers want to reduce their risk. If two companies offer the same value with their products, the one with the lowest risk is on the best way to win the battle.
Having said that, freemium is an excellent tactic to gain momentum.
With a proper upsell strategy, companies can monetize active freemium users at a later stage.
This is especially valid for products with a high lock-in effect like messengers or accounting software.
4) Respect different onboarding-speed of customers
Most SaaS businesses offer a fixed period of a free trial. This is way better than providing no access at all (like in the old days where we bought software on CDs)
Free trials are fair but have some significant drawbacks.
Imagine two potential clients.
One of them has done a lot of research and has a clear expectation. He needs to quickly check the product and tick his boxes to make the final decision.
The other potential client is at the beginning of the buying process. He’s not exactly sure what he is looking for and wants to play around with several products to decide.
The first person will need only a few hours to decide, whereas the second person will need weeks if not months.
A one-size-fits-all free trial is not a perfect fit for either one of them. It is a compromise.
Free trial has the potential risk of cutting out the ones that would take longer to make the decision, now reducing the conversation rate or accelerating the support efforts to extend trials.
With a proper freemium setup, every potential client gets the right amount of time he needs to make his decision.
Two rules of thumb apply here:
1) The more complex a product is, the more significant the difference in needed onboarding-time gets.
2) The more decision-makers are involved, the longer the time-span, the longer the decision will take.
5) Freemium is getting common-sense
As mentioned before, many big companies use freemium to attract millions of users.
This is why people get used to freemium. Even high ARPA Software like JIRA nowadays can have self-service onboarding.
The expectations of buyers have changed. They want to see the value before they have to make a decision.
If a company would start a kanban-tool like Trello today, it must have a very strong USP to ask for money right after the free trial. Otherwise, where is the point of not using Trello?
6) Data Collection & Word of Mouth
Most SaaS businesses are developed to be used by thousands of people to benefit from the economics of scale. To make their products better, they rely heavily on data.
To collect this data, they need active users. And freemium is the best way to get people to use a product.
Besides the collection of data, the increased word of mouth accelerates the product’s adoption.
The more people use the software, the more will tell their friends about it. Which, of course, will decrease the overall acquisition costs.
7) Helping vs. Selling
People don’t like to get sold.
With freemium, the idea is to show off the value without convincing anyone on the phone or on-site.
Automating the onboarding and getting the user to the AHA-moment without anyone being involved is more effective and creates more time for the sales department to focus on education and consulting.
8) Lock-In Effect
To make use of a product, a user needs to put in his data. In most cases, it’s quite time-consuming to move from one software to another.
And people are lazy. Before they put in a lot of work to move to another software that has mostly the same value, they stay.
This is called the lock-in effect.
The harder it gets to move to another software, the higher the product’s lock-in effect.
Since a user can use a freemium product until a certain threshold for free, this will increase the chances that he won’t move to the competitor because of the lock-in effect.
When a user reaches the freemium threshold, two more effects besides the lock-in effect are on your side:
- Sunk costs ("I put in so much work, to leave now because it will cost me a few dollars isn't worth the effort"!)
- Laziness of the people (see effect one :))
Requirements to implement Freemium
What’s needed to make use of freemium? We need three things: Enough market-volume, proper self-onboarding, and a strategy to monetize freemium users.
1) Enough Market Volume
Why is this important?
We need a large market volume because we need to factor in freemium users’ conversion rate to paying customers.
And this conversion rate is with 2–5% kind of low.
Let’s say we have a product that sells for 20$/month, and we aim to get to 1M$ MRR.
To get there, we need 50.000 paying customers.
With the given conversion rate of 2%, we need 2.500.000 freemium users that eventually will turn into 50k paying customers.
In this case, it would be smart to check if the market volume exceeds 2.500.000 before starting with a freemium strategy.
(And not to forget: If the market volume is exactly 2.5M, this would mean that we need to have a 100% market share!)
2) Self-Service Onboarding
Looking at those numbers above, it’s not a good idea to onboard them manually one by one.
What we need to smoothly onboard that many users is self-service onboarding.
Giving the user the right information and options at the right time is what it takes to build a successful self-service. This is no easy game but worth the investment. Since the CACs with a freemium model are way lower, it’s good to shift the budget to improve the self-service onboarding.
The faster we can automatically get the user to his individual AHA-moment, the better the self-service onboarding is.
3) Strategy to Monetize
Last but not least, we need to know how to monetize freemium users to make money.
The key here is to find trigger points in the product to make the user see value in upgrading to a paid plan. It’s a good idea to rely heavily on data for those decisions.
A product in a highly competitive and large market with low complexity can be a good fit for freemium when homework like a self-service onboarding and a monetizing strategy has been done.