The journey new users go through when using your product directly affects how the product is evaluated and how it is perceived. The business model you choose strongly influences the entire funnel, enabling or preventing you from engaging certain types of users.
This article will examine whether the freemium model is right for your business and how it compares to two other models: free trial and sales driven.
The three key models: freemium, free trial and sales-led
Conventional wisdom says that you should choose one model and stick with it. The following diagram shows a choice between the three typical models: Freemium, free trial and sales-led.
Image Credits: Konstantin Valiotti
Freemium models allow you to target a wide audience and retain them in your product even if users do not have a budget for the solution. The core idea is to create value for the end user and turn the resulting credibility into revenue by selling them something more advanced.
The free-trial model creates a time limit and positions the product in a way that shows off its full value, but requires a decision at the end of the trial period. Users can no longer extract value from the product on a particular day and will have to judge whether the perceived value outweighs the purchase cost.
The sales-led model routes all new inquiries to a sales representative. The first impression of the product and the anchors related to pricing are set in a conversation. The sales-led model introduces friction at the top of the funnel by prompting users to have a conversation, but it aims to significantly simplify the path to conversion whereas a full self-service experience would have too much friction.
Given the obvious differences between these models, choosing one should be fairly straightforward. For example, you should choose the sales-oriented model if you work in a market with big deal sizes and complex products.
However, current market conditions do not support having just a single model. Asana offers a free plan, a trial of the paid plan and a “Contact Sales” motion. At HubSpot, you can use the free products or talk to sales about advanced product packages. Calendly has a free plan, a trial, and a “Contact Sales” motion. The list goes on.
A freemium model allows you to grow by differentiating yourself from your competitors by offering the basic use case for free.
When to introduce a freemium plan
Introducing freemium is an investment that you should evaluate in the same way as other projects. It requires (sometimes significant) engineering investment, marketing support and organizational changes in sales, finance and operations.
There are three good reasons to introduce a freemium model:
- Retaining an acquired audience in case they can’t upgrade right away.
- Expanding product-market fit.
- Improving market share by hitting competition.
Retaining an acquired audience
When you have a free trial, your newly acquired audience will have to decide if they want to pay right after the trial expires. There will be an audience that loves your product and has the budget to pay, and they will do so unless a competing offer is more attractive to them.
However, there will always be many users who are either skeptical about the product itself or do not have the budget to pay. When faced with the dreaded paywall, they will go through all reasons to postpone the decision. The longer they hesitate, the less likely they will buy the solution.
Freemium helps you retain the users you acquire by allowing them to do the use case. The retained audience at the free plan keeps you at the top of their mind, so when the time comes to buy the paid version, the chance they will choose you is much higher.
Expanding product-market fit
There are almost no products that are aimed at everyone. Especially for B2B, an ideal customer profile could be defined. Startups try to attract a certain target segment, but at some point, they have to expand to other target groups either with existing products or by developing new products.
If you are not exclusively targeting SMEs, freemium could help expand your product-market fit by providing a new use case for the SME audience or making an existing use case accessible to all via a freemium route.
Improving market share by hitting competition
Over time, the basic service you offer becomes a commodity. Newer entrants will offer lower prices, and customers will find it difficult to differentiate between products.
A freemium model allows you to grow by differentiating yourself from your competitors by offering the basic use case for free. This is a risky bet, because your value proposition will no longer focus on providing this basic use case but will address a higher-level pain point, problem, need or desire of the target group.
You will be able to communicate that the basic use case is not worth charging but the advanced services are. For products that do not have direct incremental costs of servicing — for example, a communications platform as a service (CPaaS) will have incremental costs for each message sent) — this will happen anyway. The only question is who will do it first.
When to avoid investing in freemium
Every strategy is unique and depends on the company’s idea of how it wants to proceed. Therefore, you should consider freemium as an extension of your strategy and see if it is right for you.
Just as there are good reasons to enable freemium, there are also situations where you should postpone or avoid introducing freemium altogether. These are (not an exhaustive list):
- Your strategy is to go upmarket.
- You see freemium as an easy way to boost metrics.
- Your user acquisition depends on paid channels, and there are no easy ways to enable other types of acquisition.
Your strategy is aimed at going upmarket
While not necessarily applicable to every product, freemium is usually aimed at individuals, smaller companies or specific teams within a company. If your product becomes more complicated and you are looking to serve larger companies, you can allocate your resources elsewhere with a higher return on investment.
When you move into the higher-end market, you typically need to invest in security, performance, additional features and use cases, and human touch (both sales and customer success). Freemium does not help you go upmarket.
You want freemium just to boost your metrics
Freemium is a strategic option, not a mindless way to boost metrics. The way you approach growth should support your overall business strategy. If you do not see freemium as a valuable funnel or do not expect it to contribute to growth, there is no point in introducing it.
Your metrics will likely see a boost, especially on the acquisition side. You will undoubtedly have the opportunity to report on account base growth with freemium, set baseline conversion values and work on optimizing freemium.
However, what is the point if this does not contribute to the sustainable growth of the product and if you acquire many customers that you do not want to serve at all?
Your acquisition depends on paid channels
The economics of a freemium model are not similar to those of trial or sales-led motions. Freemium allows you to reach a wider audience than is normally the case. This creates a funnel that does not convert as well as other motions.
The problem is exacerbated if you have other motions in parallel (free trial or sales-led). With the paid acquisition, you are probably already covering a high-intent audience, which means that you either have to target the lower-intent audience with freemium or experiment endlessly with routing each type of traffic.
The lower-intent audience will have a lower conversion to paid tiers by default, and there will always be tension when you try to target audiences you already serve with freemium.
Two ways to build a freemium product
There are two main scenarios for launching a freemium product:
- Offer a basic use case with unlimited usage and charge a fee for additional services.
- Offer a basic use case, limit usage and charge a fee for exceeding this limit.
While these two tactics look and feel similar, they have completely different impacts on brand, conversion rates and how you engage with users.
| Basic use case with unlimited usage |
Basic use case with limited usage |
|
Acquisition |
||
| Brand awareness | Strong | Medium |
| Enabling viral loops | Strong | Medium |
| Value proposition strength | High | Low |
Monetization |
||
| Conversion to paid, short term | Low | Medium |
| Conversion to paid, long term | Medium | Medium to High |
| Conversion driver | Advanced functionality only |
Hitting limitations and advanced functionality |
| Advanced functionality | Should make the basic use case 10x better (cost savings, revenue growth, etc.) |
Should address adjacent use cases |
| Additional monetization available | Ads | None |
Retention |
||
| Audience growth | Strong | Medium |
| Satisfaction | High | Medium |
| Preferred strategy | Maximizing market share | Growing revenue |
| Basic use-case positioning | Commodity | Differentiated |
| Incremental cost of serving the use case | No | Yes |
Providing the basic use case with unlimited usage
The scenario means that you will not monetize the primary use case that people come for. It allows users to take full advantage of the offer’s value and be completely satisfied with the free tier. The monetization model here is based on upselling this user base with other use cases or additional benefits.
Positive outcomes in this scenario are high satisfaction with the basic offering, strong retention of accounts (which can grow and start needing your advanced features), great brand exposure and continuous enablement of viral loops (as free users continue to generate touch points for viral sign-ups if your product has viral loop potential).
Negative consequences are mainly lower conversion rates to paid tiers, especially in shorter time windows. After all, you are serving the needs of users who may not need the added value or may not want your advanced features. In addition, you may leave money on the table if your competitors do not offer unlimited usage for the basic use case.
This model is better if you are more concerned with building awareness of your brand and gaining market share. If the basic use case is a commoditized product and can’t be differentiated, this is also the better strategy when your advanced functionality makes the basic use case 10x better.
With such a freemium model, you are relying on users to go beyond the basic use case and pay for additional features or benefits. In general, this can be seen as a “land and expand” strategy that works wonders if you can establish cheap user acquisition to the basic use case on a large scale.
Providing a basic use case with limited usage
Introducing a limited-use freemium model means that your users can extract value until they encounter the limitation. The limitations can directly restrict usage or be indirect, such as limiting the number of users in the account.
In this strategy, some of the benefits of the unlimited model are sacrificed, especially in acquiring and retaining users (not revenue). In return, you can monetize the basic use case directly, as users have to pay for extended use.
In B2B, companies that have incremental costs by serving the use case more will typically need to choose this model to cover those costs. For B2C companies with incremental costs of serving the use case, it is not required, as there is an advertising monetization model to cover these costs.
The tricky part is the limitations themselves, as you need to choose a point of clear demarcation between two different types of use. You want users to get used to your solution so that the friction for upgrading is minimized and the perceived value is maximized.
Limited freemium models are perceived as safer and more valuable because they directly contribute to increasing revenue. On the other hand, the unlimited model has more second-order benefits, as described above.
The unlimited model enables solid user acquisition, while the limited model is better economically from the outset.