The freemium SaaS model, where you offer limited free use of your product to promote a premium version, has become common in the tech industry. But is it the best way to sell a SaaS product? We’ll take a closer look at what the freemium SaaS model is and what its pros and cons are. We’ll also consider how technology can help you optimize a freemium model to maximize its advantages and minimize its weaknesses. Use this information to help you decide whether a freemium model is right for you.
What Is the Freemium SaaS Model?
As the name implies, the freemium model combines a free offer with a premium offer. This combination of free and premium elements can take a variety of forms. Different models include limits based on:
- Number of users
What these various forms of the freemium SaaS model all have in common is that they take product-led growth approach to marketing and sales. Your product itself serves as your main promotional tool, selling itself by demonstrating value. This is a high-tech variation on the classic sales strategy of offering prospects a free demonstration, illustrated by the proverbial test drive used for selling automobiles where salesmen turn a quick test drive into a weekend test to a purchase.
This approach is also user-centric. It gives the individual user an opportunity to experience your product for themselves. It also gives you an opportunity to deliver them a data-driven, customized experience and demonstrate how your product meets their individual needs.
What Are the Pros of a Freemium SaaS Model?
The freemium sales model has become widespread in the SaaS industry. A January 2021 survey by the Technology and Services Industry Association (TSIA) found that 55% of technology providers now use freemium offers. Why is it so common? A freemium model offers a number of important advantages for SaaS providers, benefiting your marketing and sales efforts as well as providing important business intelligence for optimizing your product and operations.
Increases Opportunities to Promote Brand Awareness
A freemium model provides a powerful marketing tool by giving you opportunities to build brand awareness. A free version of your product can be promoted on search engines and social media. Since there is no risk to accepting a free promotional offer, this makes it easy to attract users to your app. This has a ripple effect, in that the more users you attract, the more word-of-mouth spreads.
Removes Barriers to Trying Your Product
By removing price barriers, a freemium offer makes it easier to get prospects to try your product. You can let them focus on the value of your product before they start considering the price. This helps them make a more informed decision as to whether the value of your product justifies the cost.
Creates Upsell Opportunities
A free version of your product gives your sales team an opportunity to extend an upsell offer. This can be an offer for your basic premium product or an offer customized based on your prospect’s usage patterns and needs.
Promotes Customer Loyalty
Freemium models promote customer loyalty. When users derive value from the free version of your product, their satisfaction with your brand increases. This sets the stage for greater loyalty after they become a buyer of your premium product. Have a positive experience with your brand can have a long-term lingering effect.
Differentiating You from the Competition
Extending a freemium offer can help differentiate your brand from competitors through the user’s tangible experience of your product. Instead of receiving a sales-oriented demonstration, users get to try your product for themselves and directly experience what’s unique about your brand.
Provides Insight into Product Usage
Allowing prospects to use a free version of your app gives you an opportunity to collect data on the usage of your product. You can use product analytics to gather vital business intelligence about what freemium users are doing with your product. This can help you identify which features of your product are most popular with new users, as well as what bugs they’re encountering. Having this information can help you deploy iteration to optimize your user experience as well as your sales strategy.
Informs Your Product Roadmap
By collecting information on how freemium prospects use your product, you can develop a better understanding of which behaviors lead them to either purchase your premium product or fail to do so. This can help you refine your understanding of your customer journey map, helping you optimize your customer experience and sales process.
What Are the Cons of a Freemium SaaS Model?
Despite the advantages of the freemium model, converting free users to paying customers is not automatic. TSIA’s survey found that 61% of technology providers converted less than 15% of freemium users to customers. To use a freemium SaaS model successfully, you must address several potential drawbacks which can hinder this approach.
A Free Version May Fail to Showcase the Value of Your Product
One problem a freemium model may encounter is that a free version of your product may fail to deliver enough value to compel a purchase. For example, if you only allow freemium users to access a limited range of features, they may fail to appreciate the full value of your product. They may also experience a lack of value if they have difficulty completing your onboarding process.
To address this, it’s critical to design your freemium user experience so that it delivers enough value to sell your product. It’s important to ensure that your freemium offering includes features for multiple different types of users. This will help you get buy-in from more members of your team to upgrade to a paid version.
Use market research and user data to find out what type of value and how much value you need to deliver in order to make a sale. This can be informed by product analytics data you gather about freemium customer activity. Such data tends to be voluminous, so in order to put it to practical use, it should be segmented to enable you to scale your ability to identify behavior patterns and design corresponding automated engagement strategies.
Implement user onboarding best practices to ensure that new freemium users start using your product and deriving value from it. Totango Spark’s Digital Onboarding SuccessBLOC provides tools for automating best practices that promote successful onboarding.
Freemium Users May Not Convert
A second problem is that freemium users may fail to convert to paying accounts, either because they remain freemium users or they simply stop using your product altogether. This can stem from the first problem if the reason they fail to upgrade is a lack of perceived value from your product. At the other end of the spectrum, some users may derive enough value from your freemium product that they see no need to upgrade. For example, this can happen if your freemium user level has an unlimited duration.
To address this, take care to strike a balance between offering too little value to freemium users and so much value that they don’t feel a need to buy. One strategy to ensure that freemium users derive the right amount of value from your product is to map out which steps lead a freemium user to become a paying customer and to implement automated processes that promote these steps. The Totango Spark Convert Freemium SuccessBLOC helps you monitor the key performance indicators which signal progress toward conversion. This lets you set up automated procedures which encourage users who are on the path to conversion while pointing at-risk users back in the right direction.
Supporting Freemium Users Costs Your Company Time and Money
A third potential drawback of the freemium sales model is that supporting freemium users requires an investment of time and money. To make this investment worthwhile, start by understanding your costs to support each customer so you know how many freemium users you need to convert into paying customers to offset your costs.
To make sure your freemium program is meeting your revenue goals, it’s critical to monitor your key performance indicators. The Convert Freemium SuccessBLOCs provides the KPIs, dashboards and reporting features to help you evaluate whether your freemium SaaS strategy is achieving your objectives. You can instantly see stats about user sign-up volume, free-to-paid conversion rates, product usage and consumption, freemium user retention, account health and other essential metrics.
Follow Best Practices to Make Your Freemium SaaS Model Work
A freemium SaaS model offers a number of attractive advantages for marketing, sales, and business intelligence. These include increased brand awareness, reduced barriers to buying, greater customer loyalty, and deeper insight into how prospective buyers use your product. However, to enjoy these benefits, you must overcome some hurdles, including the challenge of communicating value during freemium trials, the risk of failing to convert freemium users, and the cost of maintaining freemium programs. You need access to data on your freemium users, the ability to automate to handle volumes of freemium users at scale and the ability to iterate to improve and optimize your freemium experience. Technology can help you overcome these obstacles by automating best practices that address these issues.