Freemium has somewhat of a mixed reputation in the software world. Some view it as a magic growth bullet that can help their company speed to unicorn status, while others are convinced it’s a retention killer that prevents businesses from reaching sustainability and only attracts those who will never become paying customers.
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As with most dramatic stances, the truth lies somewhere in between.
And like any other business strategy, the success of freemium pricing models lies in the context and details. For example, if you have a horribly leaky funnel and are trying to fix a retention problem, introducing a freemium plan probably won’t help much and might even make your problems worse. The unit economics are problematic for a lot of companies.
Image source: https://www.profitwell.com/blog/state-of-freemium
But when your product, sales funnel, customer satisfaction and retention are all okay, but you’re struggling to get users in the door, freemium is a whole different story. If you have good reason to believe that you can keep and monetize the new users that your free plan brings in, then offering it as a customer acquisition strategy just might be your next big growth lever.
So how can you tell if a freemium plan will be your success story or your undoing?
To help you decide if it’s the right strategy for your audience, your product and your current goals, compare your situations to those below. These are companies that have made freemium plans work, and you can use their stories to add context to your own.
Dropbox’s Referral Loop
Several parts of Dropbox’s freemium plan have been immortalized in the growth hacking playbook – meaning that the top content resources covering growth hacking love covering them. The company’s freemium plan and referral program helped them grow 3900% in 15 months in its early days.
But that was a long time ago. Any strategic marketer would wonder whether all the word of mouth and free users have made the company much money.
Here’s your answer. Recent reports show Dropbox having over 11 million paying users and posting over $1 billion in revenue in 2017. It appears monetization and retention are priorities for the company. “Growth in paying users and increased adoption of premium plans helped drive first quarter revenue of $316 million, up 28% year-over-year,” said CEO and co-founder Drew Houston last spring.
Dropbox also combined freemium with other successful strategies at each stage of the buyer’s journey, so that they’re not just acquiring users from whom they receive no payments.
Part of why Dropbox is such a canonical case study is that they do so many things right. For example, they’re in a good market for freemium products according to the first of Dan Martell’s four rules of freemium: it’s a large market with hundreds of millions of possible users. They have also positioned it firmly as an acquisition strategy, introducing it early on.
Image source: https://www.youtube.com/watch?v=WYX9VSCwc7Y
Finally, the fact that Dropbox’s freemium plans have a referral program deeply integrated into the product experience is a huge factor here. Even if users never upgrade, they might refer 10 other customers, and chances are, a few of these people will eventually upgrade.
Mailchimp’s Eight-Year Pivot
While Dropbox’s freemium plan has been thoroughly analyzed, Mailchimp’s is largely misunderstood. Many marketers don’t even realize it began as a paid app. The company started out in 2001, and had 85,000 users already paying them on a monthly basis by the time they introduced freemium plans in 2009.
Image source: https://mailchimp.com/pricing/
Within a year, they grew their total user base five times over and were adding over 4,000 paying users each month. Their freemium plan helped them increase not only the total number of users, but their number of paid users, profits and perhaps most surprisingly, the number of customers with large email lists (people who wouldn’t have qualified for the free plan).
Over the years they’ve continued to evolve and succeed with their freemium plan, citing almost 4 million new users in their most recent annual report. And Mailchimp regularly adds to its free plan by doubling the number of subscribers the free plan allowed in 2010 and adding “automation for all” in 2017.
As more and more email marketing competitors spring up in the market, its free plan is an important differentiator, especially among tools offering email marketing automation.
As stated in their own accounts of the move, Mailchimp did everything backwards regarding freemium. While many companies – perhaps mistakenly – experiment with freemium to find their first users, Mailchimp already had an established brand, a solid reputation and a humming sales funnel to make the most of customers.
Another great factor for them is that their freemium plan isn’t a hugely stripped-down version of the paid service. Even before automation was added, the freemium features were enough to run a great email marketing program for most small businesses. Users paid as they grew their lists and became more invested in the tool.
Webflow Bets on Project Volume
After the first two examples, you might wonder if freemium only works for huge companies that were early to their markets, so let’s look at the responsive website builder Webflow. They’re a smaller startup that launched in 2013, and have since grown to over 275,000 users.
Image source: https://webflow.com/pricing
Out of those, many are on the freemium plan. But with just 5% of their users paying for the tool, they were able to reach $200,000 monthly recurring revenue (MRR) as a relatively new company. The pricing structure is based on how many websites their users, primarily freelancers, build in the tool, and since a paid plan is required for going live, people are all the more likely to upgrade as design projects naturally progress and finish.
For Webflow, everything is centered around publishing and collaboration. You can easily create a website in the app for free but will face limitations when you want to go live or share it with your team or client. This is key to their pricing, since everything is centered around their value metric.
Plus, while they don’t have a formal word-of-mouth referral program, the dynamics of building websites in their target audience has a good deal of that built-in. If one freelancer introduces all the clients and contractors he or she works with to Webflow, this creates both new users and new demand for paid access.
Image source: https://university.webflow.com/article/team-plan
As the freelancer’s business grows, taking on more clients and works with more collaborators, he or she will move up to bigger plans, referring still more new businesses along the way.
It’s a bit exploitative on the one hand, but on the other, this model provides more value for lower fees when people are just getting started designing sites.
Slack Converts With Unicorn-Worthy Fairness
Finally, we have Slack, another newer kid on the block but one that’s already made the history books as the fastest-growing SaaS company of all time. But what’s as impressive as the giphy options is the company’s 30% conversion rate to paid users.
Two years into the company’s life, they’d already grown to 1.7 million daily active users and 470,000 paid seats (even with their fair billing policy). Now they’re doing more than $4 billion in annual revenue and powering gif usage in offices everywhere.
Slack’s success is largely in its ability to create raving fans and lifetime users. Once a company has used its Slack deployment enough to reach the free limit of 10,000 messages or 10 integrations, they’re in for the long haul.
It’s astronomically easier to upgrade than search and migrate to a new tool for something as crucial as team chat.
Additionally, the premium features such as more integrations and screen sharing on group calls are easy things to say yes to for companies that use other tools for those functions and already live their lives in Slack.
Image source: https://slack.com/plans
Businesses on the free plan are likely paying other people for those tools, such as a video chat app or Zapier, so bringing everything into an app you enjoy is an obvious choice.
Contrast that with when Baremetrics experimented with freemium, and the number of their free users became a strain on server resources and not enough customers felt a need to upgrade because of the quotas structure.
Freemium or Bust
Looking at companies that thrive using freemium models can help you determine whether it will be a bang or bust.
Would freemium be a band-aid to bigger problems? If so, skip it. But if you’re looking for acquisition growth like Dropbox’s or have conversion rates like Slack, and have the funnel to back it up, introducing a freemium plan can be the best choice for your business.