3 Famous Freemium SaaS Strategies (And Why They’re So Good)
October 6, 2020
Under normal circumstances, if you invested tons of time and money into building a product that also costs money to maintain, you probably wouldn’t give it away for free, right? I doubt anyone would.
But if giving it away for free or allowing people free access to it would help grow your business in the long run, then it makes sense to do that, right? Of course it does.
This is the logic behind the freemium model in SaaS—that a free trial will convince you a product is worth paying for.
Freemium is a portmanteau of the words free and premium. And for tech founders and execs, the freemium model is a way to say to potential customers, “Take my product for a test ride, and only pay if you’re convinced it’s worth the subscription fee.”
In an ideal world, free users should take pity on the fact that you gave them your product for free and go on to become paying customers. But, unfortunately, that’s not always the case. If convincing free users to become paying customers was easy, SaaS companies wouldn’t struggle with freemium-to-paid conversion rates of a mere 8-10%.
Today, giving free access to your product doesn’t guarantee free-trial users will end up paying for continued access. You still need strategic execution to be successful with freemium.
Let’s go over some of those winning strategies.
3 outstanding examples of SaaS freemium models (and why they work)
Use the product led growth go-to-market strategy to drive the freemium model, and you can do away with traditional, company-focused sales and marketing tactics. (Though, even if your product sells itself, you still need to hire sales.)
Going freemium means you’re putting the product front and center, with all efforts revolving around giving people a taste of how it’ll solve their problems. Taking this customer-centric approach isn’t a guaranteed ticket to unicorn status, but if you’re looking for inspiration from some of the most successful SaaS companies out there, take notes from the freemium strategies of Zoom, WebFlow and MailChimp:
Is your product in a crowded SaaS sub-sector already dominated by heavy hitters? Then you’ll need to design a freemium model with virality injected into its core use case. This way, new freemium users who need to trial your product end up inviting people in their network to try it out, too.
As more of these initial free users invite friends and teammates into the product, a viral effect sets in naturally—making your product a mainstay in their workflow.
Zoom’s growth is a textbook example of leveraging this user-acquisition motion by enhancing the freemium model with virality in its core use case.
In a SaaStr article, the company’s CEO Eric Yuan said: “In our case, we really want to get the customers to test our product. This market is extremely crowded. It’s really hard to tell customers. ‘You’ve got to try Zoom.’ Without a freemium product, I think you’re going to lose the opportunity to let many users test your products.”
But there’s a caveat for getting freemium users to invite others to your product: You’ve got to design an outstanding user experience.
Zoom didn’t miss in this area, either: “We make our freemium work so well. We give most of our features for free and one-to-one is no limitation. That’s why almost every day there are so many users coming to our website, free users. If they like our product, very soon they are going to pay for the subscription.”
In fact, their strategy is so good, it converted a former Secretary of State.
Ok, ok, I’ll upgrade. https://t.co/I3NGrPnmpw
— Hillary Clinton (@HillaryClinton) September 30, 2020
In Zoom’s case, almost everyone who communicates online needs to make a video call at some point—and in 2020 it’s become a necessity for both work and socializing. Their biggest hurdle was getting everyone—not just tech folks working remotely—to use the product.
Zoom could afford to cast a wide net by promoting their brand via traditional channels like billboards and an NBA team endorsement. But you can’t take this approach if your ideal users (and customers) are a niche audience.
Instead, you have to dive deeper to understand the needs of your ICPs (ideal customer personas) and then tailor your freemium offering to those needs.
WebFlow, the no-code web design software did this. The company’s c0-founder, Bryant Chou, in an interview with Salesflare, said: “That customer persona, for us, is a freelance web designer. And that freelance web designer is the lowest common denominator. That person needs everything. That person needs hosting, that person needs design flexibility; that person needs symbols, interactions, multiple pages. They need a CMS.”
With its ICPs nailed, WebFlow went to work, building their product and giving people who fell within its core target audience circle freemium access to grow and become successful. The company’s founder Vlad Magdalin said: “The idea is to make it much, much easier for people to build more complex websites and web applications.”
The success of these audiences meant two things:
- By using the product for free as they grew and became successful, retention was high
- With growth came the need for collaboration with other designers or developers
After meeting those criteria, WebFlow’s ICPs would need more access to the tool—and that’s when they feel the need to upgrade. WebFlow waits patiently for them to get to this point, as observed by Chargebee’s Sadhana Balaji: “The moment the freelancer grows into a company of at least two members, they directly take them to the Team plan and charge them $78 per month.
The product is designed in such a way that it keeps track of the IP addresses; you can’t log in with the same ID more than once, and you won’t be allowed to view the same folder.”
Did spicing up its freemium model this way help WebFlow to drive growth? Yes:
Free users aren’t free—it costs real, actual money to keep them. So when the economics aren’t in your favor, it’s okay to wait to offer a freemium option until your company has the bandwidth to give free users a great experience. Otherwise they’ll churn.
Take MailChimp, for example. The company didn’t start with the freemium model it operates with today—it was eight years after building a “powerful, affordable and profitable, self-serve product, and analyzing tons of pricing data,” according to their blog.
This helped MailChimp justify the 10:1 free-to-paid users freemium model it now runs with, according to Ben Chestnut, the company’s co-founder: “The question to ask yourself is whether or not your “one” is big enough to pay your bills yet. For eight years, our company never thought about freemium. We didn’t even know the concept existed. For eight loooong years, we were focused on nothing but growing profits … In other words, we’ve been laser-focused on the ‘1’ side of that 10:1 ratio. We’d never consider freemium until our ‘1’ was big enough. Enough to pay for 70+ employees, their health benefits, stash some cash for the future, etc.”
Why the SaaS freemium model is here to stay
In 2016, OpenView’s Kyle Poyar wrote about the “slow death of freemium.” He explained that the model was no longer sustainable for SaaS companies. But in his recent round up of excellent resources on the freemium pricing model, Kyle noted that now in 2020 “freemium once again feels cutting edge.”
And in OpenView’s 2020 Product Benchmarks Report, freemium, when paired with self-serve, converts slightly higher than free trials:
This should tell you something: freemium in SaaS, even though it’s not an entirely new concept, is here to stay.
I can think of two reasons why this is the reality.
1. The ever-increasing competition in SaaS
Whenever I take on a new consulting client, I always remind them that SaaS and saturated are now almost synonymous. And if you ask me why I think so, I start by showing them this:
If you have a SaaS product, know that it’s just one out of over 15,500 SaaS products competing for subscribers. In short, per the image above, the negative effect of the COVID-19 pandemic didn’t stop around 114 SaaS tools from seeking a piece of the SaaS billions in 2020.
Even if you look at specific verticals, ChiefMartec’s annual study shows that competition still abounds. By looking at the products under a category in 2020, it’s so difficult for end-users to recognize the difference between them even in the most micro-sectors.
If the pandemic couldn’t stop new SaaS companies from entering the market, that to me is an indication of more subscription businesses entering the frame in the months and years to come.
This will leave us with even more options. And with so many options for just about anything you can think of, skepticism among users who don’t want to waste time or resources on a product that doesn’t work will increase, too.
Logically, this scenario leaves new SaaS entrants to face daunting challenges, trying to appeal to prospective users:
- How do we prove our product is worth using, let alone paying for?
- How do we prove we’re better than existing (and more established) options?
Those questions aren’t obstacles a company can overcome with more features or marketing stunts. I know this because there’s hardly anything you’ll say today that we all haven’t heard before.
To stand a chance, new SaaS companies have limited options other than literally summarizing their user acquisition motion, saying: “Don’t take what we say—try it free to see we’re worth the hype.”
If you look at things from this perspective, freemium is still in its infancy. And you don’t expect established SaaS behemoths to fold their hands and watch startups disrupt them by using the freemium model to snatch their users, do you?
I don’t. So, this is the second reason why I’m bullish that the SaaS freemium model is here to stay:
2. Established (and well-funded) SaaS products are adopting product led growth
Let’s look at HubSpot for this one. The company had their footprints all over the inbound marketing category in the early 2000s. It became pretty tough to execute an enterprise-level inbound marketing strategy without using HubSpot.
Despite that huge success, they didn’t settle there. Around 2014, HubSpot adopted the product-led strategy and now offers freemium versions of their marketing, sales and CRM products.
According to HubSpot CEO Brain Haligan, doing this created a “flywheel where the customers are the main drivers that pulls new prospects in.”
And it worked. Brian confirmed that it was responsible for HubSpot’s growth, as about half of new customers tried the product for free before buying.
HubSpot isn’t an exception. Other mature and well-funded SaaS organizations are also making the switch:
But what exactly is the PLG strategy?
Per the definition above, PLG lives or dies with the product.
However, when you dive deeper, the PLG go-to-market strategy has “free” grounded in its motion. That’s because using your product as the primary user acquisition driver boils down to letting prospective customers have some free taste of it before committing long-term.
And as more mature companies adopt PLG, it further supports my stance that the freemium model is here to stay.
Earlier, we saw how new SaaS tools have almost no choice than to go the freemium route to the competitive nature of the SaaS industry. Now, I’ve also highlighted that existing SaaS companies are using some form of freemium to acquire and activate users with the PLG go-to-market motion.
In both cases, the goal is to monetize a fraction of those initial trial users. And at a meager freemium-t0-paid conversion rate of 8-10%, everyone will agree that doing this isn’t a walk in the park.
So how have SaaS companies beaten the odds?
Again, freemium isn’t going away
I’ll say it again: Freemium is here to stay.
New SaaS products need it to lure users who may already have products that solve the problems they solve to give their product a taste without any commitment.
On the contrary, established SaaS organizations are leveraging the PLG go-to-market motion to ensure new entrants don’t disrupt by opening some free access to their tools.
Add these two scenarios and freemium is likely to become a mainstay in the SaaS sector. As this happens, you can’t win by just offering a freemium plan.
You need to add to the strategy so you’re still attractive to end-users of your product. And as I’ve highlighted with examples, you can do this by:
- Chasing virality from the start (where your product has a generic appeal)—like Zoom
- Holding on to what’s monetizable (where you’re in niche market, know your customers and get them to trust you enough to stay on as they need more access)—like WebFlow
- Avoiding rushing into freemium until you’re sure you can take care of your free users—like MailChimp