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Strategy

Is the Freemium Software Pricing Model a Retention Killer?

If you’re a SaaS marketer, then there’s a good chance you’ve seen a lot of content about the dangers of freemium. Let’s set the record straight

Ben Jacobson
May 09 2018

If SaaS product loyalty is one of your key strategic missions, then you probably have some strong opinions about freemium pricing. It’s a natural side effect of the job. Which side are you on? Is freemium the ultimate acquisition strategy, one that affords you huge opportunities to upsell to people already under the influence of your brand? Or is it a retention death sentence, since it only attracts the types of users who will never let go of their purse strings?

There’s no denying that when it’s bad, it’s bad. The case of Baremetics’s 2015 freemium experiment is a particularly harrowing tale of a free plan causing a business to “slowly implode” over the course of three months, as founder Josh Pigford tells us. From causing performance and server issues to putting strain on the customer support team and stalling product development, freemium ultimately doubled the company’s revenue churn and had to be dropped.

But for every horror story you hear, there could be a freemium happy ending that hasn’t been told. Does the pricing plan deserve its reputation as a magnet for freebie-hunters who don’t convert? Well, it’s all in how you use it. Even in the case of Baremetrics, Pigford concedes that he might’ve seen success had he done things differently – either limiting the free plan’s features even more or requiring that free users start with trials of the full platform, making it harder for them to part with features. When you position your freemium plan the right way in your business, it can certainly help bring in new users without tanking retention else. The key is designing it in a way that brings long-term customers who eventually upgrade and consistently renew. If you want to try and make it work, consider the following:

Freemium Is an Acquisition Strategy

If you’re after paid retention and you view freemium as holding you back, it’s possible that you just need to change your mindset. The freemium SaaS funnel is wildly different from the “paid plans only” funnel. It’s a matter of securing incremental buy-ins in stages, over time – as opposed to every new user registration representing a sales conversion. As ProfitWell’s Patrick Campbell reminds us, “freemium is an acquisition model, not a revenue model.” With other acquisition tactics like eBooks and free content decreasing in effectiveness, a free version of your software is a way to get users in the door and guide them to upgrade as they become increasingly dependent on your solution. And as a nurturing tool, freemium plans can keep a user engaged a whole lot longer than a PDF can.

Image source: https://www.profitwell.com/blog/state-of-freemium

It’s a strategy best used if you’ve noticed that you’re spending too much to acquire new users. ProfitWell’s data shows that customer acquisition cost (CAC) isn’t rising as quickly for freemium businesses as it is for the rest of the SaaS industry. High CAC is, mind you, one of the most common startup killers, so you may do well to consider freemium for its acquisition power. Just remember that it only works if you have the retention and upsell rates to match. If your freemium plan isn’t working for you, look at the customer journey from free to paid user. What can be done there? Are users not upgrading? Are they not sticking around? What value are they hoping to unlock by using your product from the get-go? What extra value can you offer that they’d be willing to pay for? Your problem may not be your plans themselves, but the way you lead users to upgrade from one to another.

One of the most well-known examples of SaaS companies with a successful freemium model is MailChimp. A year after introducing the free plan in 2009, they had astounding results around acquisition and recurring revenue:

  • 150% increase in number of paying customers
  • 650% increase in profit
  • CAC decreased 8% in one quarter alone

And their results aren’t as unique as you might think – although perhaps more strategically designed. Sure, freemium is not a retention tactic by itself, but it can work with excellent onboarding and retention strategies to create long-term customers who champion your brand publicly.

Know Your Value Metric

Where freemium SaaS companies start to fall apart is when they can’t figure out how to get free users to stay and pay. If it’s going to work for your business, you absolutely must know your users, what they need from your software, and what type of experience they’ll gladly pay for, over and over.

Just a few years ago, for example, cloud hosting was a lot more expensive than it is now. So anchoring your SaaS prices to storage limits might have made good sense in 2010, but it probably doesn’t in 2018. Depending on the specifics of your vertical and tool specs, storage space is unlikely to be effective as a “value metric.” Many SaaS products bill according to user logins, or “seats,” but this only makes sense if your tool is most commonly used collaboratively.

Social media scheduling tools like Hootsuite use the number of social accounts connected as a core differentiator between free and paid plans. You can start with three social profiles and up to 30 scheduled posts for free. But once a user is sold on the value associated with using the tool, having the ability to use it with more social channels and profiles is enough of a psychological game changer to be linked to the customer’s wallet.

Image source: https://hootsuite.com/plans

So if you’re successfully retaining people on “free forever” plans but struggling to inspire upgrades, it could be that either your free plan is too robust or your paid plans aren’t being perceived as sufficient value for the spend. For whatever reason, free users will often continue to use the app without upgrading. Testing different pricing and positioning models, along with talking to your customers, can help you find the “one thing” that will have your free users pulling out credit cards.

Find Product-Market Fit First

This third point is one that’s often overlooked: many of the most successful examples of freemium software waited until they were established and had product/market fit with their paid products before introducing a free version. This ensures that you know your product and customer well enough to start widening your user base. And ideally, you’ve also got your customer lifetime processes in place, ready to scale. You know the most valuable parts of your software in order to structure your free plan accordingly, with your value metric front and center.

At that point, you’re better able to attract the right free users to become paid and retained customers. If you introduce the free plan too soon, however, you risk building a collection of users you need to figure out what to do with later.

Image source: https://www.profitwell.com/blog/state-of-freemium

Remember, the free plan is an acquisition tool to bring users into your funnel. So if you introduce it once your entire funnel and customer journey is proven and optimized, it can be used to fuel and scale your acquisition process. That’s one key reason a company like MailChimp can see such an increase in profit from starting to take on free users.

Use Freemium as a Marketing Tool

Finally, another reason MailChimp’s free plan is so effective is that freemium is used as a marketing and word-of-mouth engine for the business. The same can be said for companies like Typeform, Trello, and even ecommerce bands like Vistaprint. As Clarity founder Dan Martell says in his four rules for freemium, it can be “word-of-mouth on steroids.”

You can use your free users to spread the word and help with marketing your product with you. That means even a free user who will never upgrade can make your company money by referring others who do. This starts to give free users a new level of long-term value to your brand – value which may, depending on the way the numbers play out, counterbalance the spend involved with serving them for free. There are multiple ways to do this that can be customized to what you’re looking to accomplish. Examples like the aforementioned Vistaprint, MailChimp, and Typeform incorporate their own branding on the product for free users. Trello and other collaboration tools allow free users to invite and collaborate with other people on the platform. Or you can build referral rewards into your strategy, like Dropbox’s well-known early growth strategy.

This can even present the unique case where the right free user becomes more of a profit driver than anyone who upgrades.

Go Free With Caution

There are enough valid examples of freemium hurting a SaaS company that it’s clearly not the magic growth bullet some assume it to be. But that’s not to say it’s the short-term fix, long-term implosion others assume it to be either. For freemium to work with your business without churn going through the roof, it needs to fit into the rest of your customer journey seamlessly. That’s when it’s most useful – as the first step in creating a long-term, profitable user.

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Ben Jacobson

Ben Jacobson is a marketing strategy consultant who specializes in content, social media and influencer marketing for B2B firms. He contributes regularly to publications including MarketingLand, Search Engine Journal and the Orbit Media blog.

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