The Freemium model is a customer acquisition strategy used to attract users to a SaaS product by providing basic features for free and offering advanced features for a fee.
Some of the most well-known examples of online service companies that utilize the Freemium model include Zapier, Spotify, Dropbox, Slack, Mailchimp, …
Freemium Model vs Free Trial Model: What’s the difference?
At first glance, the Freemium model often appears similar to the Free Trial model. However, the Freemium approach is not limited by time. Freemium users can use the basic free version indefinitely. The Freemium model allows users to experience the SaaS products and become hooked by removing initial adoption barriers. As users realize the added value over time, they become willing to pay for advanced features and higher levels of service.
SaaS companies use Freemium as a customer acquisition model to significantly increase conversion rates on their websites. However, Freemium strategies work best when there is an extremely large number of potential users and the product’s learning curve is relatively flat.
Startups in the early stages also typically use the Freemium approach to acquire initial users and test product-market fit.
A successful Freemium strategy requires a product with a shallow learning curve and a user-friendly experience. The product must continuously engage customers, eventually enticing them to upgrade to the premium version.
It’s always your product that dictates whether you choose the Freemium model or not. Never the other way around.
|Freemium Model||Free Trial Model|
|Time Limit||None (typically offered for a lifetime)||Limited duration, typically 3, 5, 7, 14, 30 days|
|Features||Freemium users have limited or reduced features/services compared to paying customers||Users generally have access to the same features/services and levels of service as paying customers|
|Conversion||1 to 10% of Freemium users convert to a paid offering||30% of users convert to a paid offering|
|Markets||Model suited for B2C||Model suited for B2B|
When to consider the Freemium model?
The Freemium model is not suitable for every SaaS business. Here are a few questions that can help you decide if the Freemium model is right for you:
- Is there truly a market for your product?
If the market size for your SaaS product is not large, it should not be offered for free. The vast majority of free users will never convert to paying customers, putting additional strain on your existing resources.
- Is your product self-serve?
If the product requires significant onboarding, sales assistance, and human contact to onboard users, a Freemium model may not be well-suited.
- Do users have a reason to upgrade to a paid version?
If your SaaS product does not have compelling and useful premium features, users may not be incentivized to switch to a paid subscription from the current Freemium version. For example, Spotify in its Freemium version includes ads, reduced audio quality, no offline playback, and shuffle-only mode.
Like any pricing strategy, the Freemium model has its own advantages and disadvantages that should be carefully considered to assess its viability.
Advantages of the Freemium model
- Allows you to quickly build a user base to experiment with new features and obtain valuable feedback.
- Increases the brand value of your product/company by attracting more users through word-of-mouth and recommendations from your existing user base.
- Helps you cannibalize your market, outpace competition, and quickly gain a significant market share.
- Reduces Customer Acquisition Costs (CAC) by minimizing expenses and letting your product drive acquisition.
Disadvantages of the Freemium model
- Failure to strike the right balance between your Freemium and premium product – if the Freemium offering is not attractive enough, you won’t attract new users, and if the Freemium offering is too close in terms of features/services, new users won’t convert to the premium offering.
- Low conversion rate from free to paid. According to “Free,” a book by Chris Anderson, only 5% of your customer base will be on a paid offering. As a result, the revenue generated by these 5% must support the remaining 95% of your free users.
- Unnecessary and ever-increasing burden on your operational resources leads to escalating costs primarily due to servicing free users.