Freemium Can Work at Any Stage of Growth if Anchored to Value
March 11, 2019
I’ve been a part of building freemium strategies at three companies: Pure Chat (seed round), Profitwell (bootstrapped) and Pluralsight (Nasdaq: PS). I only work at companies that start with the letter “P.” Just kidding.
I’ve learned that freemium can accelerate growth after you nail product-market fit. In this article, I’ll share with you my three freemium insights learned through personal experience:
- Why customer value is key
- Why freemium is an acquisition strategy, not a revenue model
- Why you need a lot of data before testing freemium
Why Customer Value is Key
After leading product management and product marketing at a $100M software company, I thought I’d put my product led growth strategies to the test at Pure Chat. My hypothesis was that if we applied customer-driven product development and value-based messaging, we could accelerate growth. After a ton of qualitative customer interviews, it was clear that our target market was true small businesses under 50 employees. We learned that while most of the live chat space was focused on customer service (logging tickets, etc), small businesses and startups were using live chat on their websites to talk to prospects. In other words, the value metric for our customers was new leads.
At the time, our pricing was built around the number of live chats (real-time conversations). If you got more than 15 live chats in a month, you needed to upgrade. And when you weren’t available to have real-time conversations, our chat window switched over to a simple form.
If you’ve ever met a small business owner or a startup founder, you know this – they don’t have a lot of time. This means they really don’t have a lot of time to wait for the serendipitous moment when a prospect on their website happens to have a question.
Next, we started looking at usage data with this lens. It turned out that we had a decent amount of customers who hit the live chat limit each month and converted. We had even more free customers who got way more than 15 leads each month using our software and the pop-up form!
The product was delivering tangible, measurable value beyond the initial intent, and with this insight, we optimized the business for this metric. Aligning customer value to the product and go-to-market was key. Conversions from free to paid grew immediately when we changed our packaging. For the year that followed, annual recurring revenue grew 230%.
Why Freemium is an Acquisition Strategy, Not a Revenue Model
When I joined ProfitWell, they were much further down the freemium path. The problem Profitwell was solving in the early days was accurate SaaS metrics all in one place. Very few companies had really figured out how to calculate accurate SaaS metrics in real-time based on all the nuances of different billing system APIs, subscription models, etc. Once you had a clear picture of your SaaS metrics, you could see where you needed to improve. And if you happened to need help with churn, ProfitWell had a paid product to help with exactly that. The free product helped identify what the paid product solved.
What happens when you give away a superior product? Happy customers. And what do happy customers do? They tell their friends. Word of mouth is the most effective marketing channel on the planet.
How do we know it works? Research from Profitwell has found that customer acquisition cost (CAC) is up 50% in the last five years across B2B and B2C. Comparatively, CAC for freemium businesses is only up 25%.
Why You Need a Lot of Data Before Testing Freemium
We know freemium done right works as a terrific product led growth strategy. It’s important, however, to get really clear on what I mean by freemium. Traditional freemium is an acquisition strategy. It’s an offering that’s free forever – giving access to limited, yet valuable functionality. It is not a free trial. Free trials are typically time-bound (i.e. Spotify or Netflix) and may or may not give access to limited functionality.
No matter the stage of growth of your business, it’s important to get clear on objectives before testing into a freemium strategy. If done correctly, freemium allows you to create a wider top-of-funnel, creates a more cost-effective path to paid (in-product conversions, automation, word of mouth) and enables usage and data collection to inform further product insights.
There are a lot of examples of freemium gone wrong (sorry Evernote, I use you daily but you’ve given me no reason to give you any money). And there are a lot of examples of killer freemium strategies from giants like Dropbox and Slack.
Before you test this strategy for your own business you’ll want to consider a few key components and analyze a lot of data sets.
- Cannibalism: Don’t build your packaging in a way in which your free offering cannibalizes your paid offerings. Don’t give away the whole meal. Give an appetizer. And if you don’t know what your target customers value most about your product, don’t do freemium (yet). Collect survey data or conduct some interviews to understand value.
- Customer Experience: Intentionally design your free experience so that it maximizes the speed to value and makes it easy to upgrade. Also, if you’re a small startup, make sure you have an infrastructure built to scale. A slow or disruptive experience will work against you. Gather data through prototype testing first!
- Channels: Make sure you track and understand which acquisition channels (paid ads, paid social, organic social, content syndication, etc.) are most effective. Not all channels are created equal, so some channels will work better for freemium than others.
- Conversion: The paid product and message should be aligned with the customer value in the free offering. The upsell should be compelling. Be prepared to optimize conversion paths using in-product CTAs (without being annoying), nurture sequences, re-targeting, etc.
- Funnel metrics: If you don’t have a predictable upsell model in place (segmentation, automation, and even sales reps when applicable), don’t try freemium. Make sure you have clearly defined stages of your marketing funnel and processes built and working to convert prospects through each stage.
Based on all of these lessons I had learned, it became fairly clear how to test freemium at Pluralsight. We had acquired technology that allowed users to measure their tech skills in 5 minutes or less. We knew that this functionality was truly unique and vastly superior to anything else in the market. Conventional thinking might argue that we should have kept it behind the paywall, but we didn’t.
Once we had an idea of how we wanted to implement, we went to work! It took a few months (and a little convincing) for the product teams to separate this feature from the rest of the platform in a way that we could securely permission it for free users. We also needed a few months to test this strategy from a marketing perspective. We had this free offering available (and unbranded) in the market for several months before our official launch. During the testing period, we gathered data around usage, conversion rates and the percentage of net new contacts to our database. We officially announced Skill IQ, the first member of the Pluralsight IQ family, in August 2017 at Pluralsight LIVE.
We made it possible for anyone, anywhere to measure their proficiency in more than 130 technologies for free with Skill IQ (and get access to a few free courses from our experts).
Using Skill IQ, more than 1.6 million technology skills have been benchmarked worldwide (as of Q4 2018).
We have now launched two major freemium products – Role IQ and Skill IQ – that feed the marketing funnel in a substantial way. These products, which include a social-sharing component, have also contributed to brand awareness.
I hope these three real-world experiences highlight why getting customer value right, intentionally building an acquisition strategy and leveraging a ton of data to inform freemium can help your business accelerate growth at any stage.
Build a business first, then make (part of) it free.