Everything You Need to Know About Freemium Pricing
Freemium in SaaS is old news. The much-discussed pricing strategy took over the SaaS world and helped fuel the phenomenal success of pioneers like Dropbox, Evernote, SurveyMonkey and Hootsuite.
These successes then spawned a number of copycats who bet big on freemium only to see free offerings become a resource-draining distraction. I actually wrote about the phenomenon in an article titled “The Slow Death of Freemium” back in 2016. Freemium appeared to be declining in popularity and, when it was in place, drove next to zero new annual contract value (ACV) for most SaaS companies.
Flash forward to 2020, and freemium once again feels cutting edge. SaaS companies have gotten much smarter about when to apply a freemium model to their products—and how to do it. They also better understand how to measure the success of freemium and strategies to convert free users into paying customers (hint: product qualified leads are your friend).
Clearbit, for instance, has seen great traction from tailored, hyper-specific free products that appeal to their target buyer without cannibalizing their paid products. One of those, their Logo API, went viral on both HackerNews and Product Hunt, creating tremendous buzz and brand awareness.
HubSpot offers freemium versions of their CRM, Marketing and Sales products. CEO Brian Halligan describes their revamped go-to-market motion as “a flywheel where the customers are the main driver that pulls new prospects in” and boasts that half of HubSpot’s new customers use the free product before they buy. SVP of Product Christopher O’Donnell emphasizes that they’re following a PQL strategy—not traditional freemium. “I would argue that freemium fell short in B2B and from its ashes rose the PQL,” he explained in a recent post.
With the emergence of product led growth, a business strategy that puts the product front and center in how companies acquire, convert, expand and retain their users, it’s more urgent than ever to revisit freemium. Product led businesses need to get their products in the hands of would-be users as efficiently as possible–hopefully at near zero CAC. Freemium, free product and free trial strategies are particularly important in propelling non-linear growth.
Not satisfied with reaching $1 billion in annual revenue, Atlassian furthered its commitment to product led growth by jumping on the freemium bandwagon. Co-founder Scott Farquhar mentioned as much during the company’s July 2019 earnings call, saying that, “What we’re talking about here is moving many of our products from a free trial to a freemium approach.” The company now offers free versions of its popular products like Jira, Confluence, Opsgenie, Trello and Bitbucket.
Here’s a list of the top freemium pricing strategy resources:
Table of contents
- When is freemium the right strategy for your business?
- How to optimize your freemium model
- Freemium success stories
- The dark side of freemium
- Stories of ditching a freemium model
When is freemium the right strategy for your business?
Freemium or Free Trial? The 2020 SaaS Product Benchmarks Report
It’s one of the questions we hear the most at OpenView. This year’s report found that freemium products convert customers without sales 25% more often than a free trial model. Download the entire, free 41-page report to read even more data-backed insights on going freemium.
2/6 Freemium or Free Trial?
– Free Trial generates more paying customers, but salespeople are needed as fewer customers are self-serve.
– Freemium generates more top of funnel leads and more convert without ever talking to sales.#SaaS #B2B #MarketingStrategy pic.twitter.com/6Xn0OnqXT3
— Michele @REVgabba (@revgabba) August 19, 2020
Now’s the Time to Revisit Your Pricing
Thanks to COVID-19, many businesses are trying out innovative pricing plays. This post guides you through 10 to consider—one of them is to go freemium—along with high-profile examples of companies who are testing them.
Is Freemium The Right Business Model? 10 Questions To Answer
Is freemium an effective lead generation, conversion, and revenue driving strategy for your recurring revenue-based business? Or, is it a high risk, dead-end approach likely to burden you with runaway costs and few paying customers? This guide, by LinkedIn’s Head of Global Monetization Strategy Josh Gold, is intended to teach subscription-based businesses how to evaluate whether the freemium model will drive revenue and lead gen for their business or result in failure.
According to this 2018 research report by ProfitWell, companies using freemium have 50% lower CAC with NPS scores nearly double those of non-freemium businesses. While the data seems to suggest serious benefits, businesses should keep in mind that freemium plans work best once a company has figured out their unit economics.
Can the ‘Freemium’ Model Work For You? Here’s How to Know.
Deciding between paid and free models isn’t just about what’s appealing. It’s about big-picture strategy. Think about your budget: if you can’t afford to spend on marketing, a free offering can help acquire customers. No business model is foolproof, of course. But if freemium is right for you, you’ll need to constantly innovate, iterate and evolve – and then, hopefully, gain the traction you need to stand out in a crowded market full of other free products.
Freemium Model for SaaS – The Good, The Bad, and The In-between
The basic premise that the freemium business model operates on is this: Several hundred thousands of users sign up for the freemium plan, and then a good cohort of them will convert into paying customers. So for the freemium model to work, one specific product attribute must already be in place – low marginal distribution and production cost. Follow Chargebee’s take on the philosophy of freemium, in order to avoid pricing mistakes.
A Look at the Impact of Freemium Pricing on SaaS Products
To be free, or not to be free. That is the question. On the one hand, you want as many people trying your product as possible. But on the other, you wish to stay away as much as possible from the the lack of commitment that accompanies the concept of “free” things. Explore the various types of “free” options and choose the correct to boost your business in this piece by Brent Chudoba, COO of Thrive Global and former CRO of freemium all-star SurveyMonkey.
Freemium vs. Free Trial: How To Pick the Right SaaS Revenue Model in 2020
Selecting the SaaS revenue model that’s right for your product is truly a business decision, and it should be treated as such. The model you choose will either be based on your existing revenue model or the decision will determine your revenue model. Either way, it is a fundamental question about how you want to structure your business.
HubSpot’s Ultimate Guide to Freemium
What exactly does it mean to have a freemium strategy? What companies have successfully adopted a freemium model? What are the different varieties of freemium? Get all these questions answered and more from HubSpot. As a bonus, they’ve included a freemium pricing template.
Podcast: Freemium is About Acquisition, Not Revenue
Free products don’t produce revenue themselves. However, freemium is a really potent acquisition model. There are costs and benefits to the model—is the acquisition cost worthwhile for your company? It’s not an easy question to answer, but this article might help you get started on the right path.
Understanding Freemium Models With the Free Cookie Clicker–A UX Analysis
Maybe you’ve embraced the abstract notion of a freemium model. You then have to translate the model into suitable product mechanics. This article from UX Collective offers a thoughtful discussion of common freemium tactics from an accessible UX perspective. It should get you started on thinking about freemium mechanics in your own software.
How to optimize your freemium model
Podcast: How To Acquire and Monetize Freemium SaaS Customers
Two of the biggest challenges facing SaaS marketers who operate a freemium model is the acquisition of new users and then converting them into paying customers. In this podcast, Hubspot reveals valuable insights on how to build a successful freemium SaaS growth funnel.
How to Increase Your Payment Customers In a Freemium Model
Tomasz Tunguz of Redpoint Ventures found that on average, freemium companies convert between 2% and 4%. But you can find much lower rates—for example, according to recent stats by Dropbox, the service has almost 500 million users, but only 175,000 of them are paying customers. That means for every 10,000 Dropbox users, only four pay. The key in the whole process of improving activation from free to paid is to get your users to know the added value of your premium version as soon as possible.
7 Tips for Successfully Introducing Freemium Business Software
One of the best ways for software providers to win over businesses is to show potential buyers what your tool can do for them. Some of the top software companies in business today use freemium models to engage customers. Here are a few tips from Entrepreneur to help you make it work for you.
5 Ways to Convert Loyal Freemium & Trial Users Into Happy Paying Customers
It’s easy to get someone to want your sample (or in the case of SaaS companies, your freemium plan or free trial) when there’s no risk or loss, but getting someone to commit with a monthly price tag is a whole new ball game. Moving free users into paid service plans has long been a pain point for SaaS companies and salespeople alike. From creating a sense of urgency for your product, to offering a promotion, here are 5 ways of converting a freemium and/or trial user into a paying customer.
Yes, Freemium Businesses Need Salespeople
Low-touch freemium models can work in concert with an inside sales or field sales model. For certain customer profiles or market segments, it may be necessary to combine freemium with a sales team. Read in more detail here to figure out what makes sense for your business.
Key Metrics to Track for Converting Freemium to Paid
Even if freemium is a good fit for your business in principle, perfecting the model has to be an iterative process. In order to know what works, you need to measure the impact of experiments. Here are the metrics you absolutely need to be tracking to get freemium right.
How Freemium SaaS Products Convert Users With Brilliant Upgrade Prompts
It’s pretty well understood that companies like Dropbox, Slack and Spotify have nailed the freemium model. What’s a little harder to grasp is exactly what they do right. It turns out that the key product principles are hiding in plain sight, in the details. Check out this article from Appcues to see how exceptional companies execute the freemium model with smart in-app cues.
Nurture Free Users Into Paying Customers: A Smart Campaign for ‘Freemium Businesses’
Getting started with freemium from a strategic angle is one thing. Actually executing against a freemium strategy is something else altogether. This guide from Intercom gives a thoughtful set of templates for running a campaign to upsell free users. It’s tailored for Intercom customers, but the messaging in the templates is helpful for a broader audience as well.
Freemium to Premium: 6 Conversion Techniques
In keeping with the theme of freemium tactics, this great post from Paddle offers six examples of freemium conversion techniques executed nicely. It includes screenshots from strong PLG brands like Wix and how they communicate the value of a paid product to free user. If you’re looking for some inspiration on campaigns or looking to understand the business logic behind successful campaigns, this article may be a helpful resource.
How 20+ Freemium SaaS Companies Increased Signup-to-Customer Conversion Rate
This article from Databox is rich with insights from top freemium companies like Dropbox, HubSpot, Buffer, Trello and MailChimp. It distills the many insights from freemium SaaS experts down to 20 tips. If you’re able to incorporate even just a few of these 20 learnings into your offering, you’ll have greatly improved your freemium execution.
Freemium success stories
Product is the Future of Growth—Here’s Why
The future of growth belongs to product led companies. HubSpot realized this a few years ago, which is why they disrupted their own business model before anyone else could. Learn about their journey to product led growth here.
"#Zoom’s '#freemium' strategy — dangling a free product to get users hooked, & then persuading a good percentage of them to upgrade to paid plans — has made this a wildly successful year for the company."https://t.co/CPWBakpkar #LogMeIn #videoconferencing
— Stephen Loynd (@loyndsview) August 22, 2020
How These Freemium SaaS Companies Are Redefining Customer Success
Spotify reaches millions of people who are uncertain about paying for music every day. But they’ve cracked the code on converting those skeptical users into paying customers. Learn how they and other successful freemium companies make it work.
What Makes Freemium work? Lessons from Dropbox, Evernote and a Lemonade Stand
In his book, Free, Chris Anderson explains that Freemium works on the 5 Percent Rule—where 5% of premium customers support the remaining 95% of free users. Get freemium success stories here.
SaaS Freemium: How to Succeed and How to Fail
While freemium can propel a company to success, it can also suffocate a company’s financial and labor resources. In Chargify’s early days, the company suffered freemium mistakes early, but in the end achieved success with the strategy.
The Best Way to Win the Freemium Model Is by Challenging the Very Model Itself
In their freemium plan, AWS offers a year’s worth of micro instance for free—a time-bound freemium model. AWS needs adequate time to get a skeptical developer to understand the value that they offer, to get the developer hooked on the product and build on top of it, and to eventually recommend AWS to a fellow developer. Pick the wrong value metric for your freemium plan and you’ve found yourself headed straight for disaster. Learn how to avoid catastrophe here.
Moving Customers From Freemium To Premium: The Art Of Monetizing Virtual Products
When online language learning platform busuu.com started business in 2008, they paid close attention to what people were asking for in additional features to understand what they could eventually charge for. They ultimately gated those features to convert more customers. Learn how here.
Atlassian Launches Free Tiers for All Its Cloud Products, Extends Premium Pricing Plan
Late in 2019, Atlassian introduced free tiers for all of its cloud products. It’s an interesting case study both in what it looks like for an established software company to adopt freemium and also how a company can pursue a freemium model while pursuing enterprise customers in parallel.
How Vidyard Uncovered a Multimillion-Dollar Growth Lever by Moving Downmarket
Companies that succeed with freemium typically start by offering freemium products from day one. Vidyard went about freemium in a very different way; the Vidyard team started out by targeting large enterprises and didn’t have a free product at the outset. Find out here how Vidyard supercharged its growth by moving downmarket and led with a freemium model.
Podcast: How Freemium Helped Hotjar Grow to 21K Paying Customers in 4 Years With David Darmanin
The Hotjar founders came from backgrounds creating consumer products, so developing software for end users was a fairly natural transition. But they didn’t hit their stride with freemium right away. Check out this GrowthTLDR podcast episode to learn how the team decided to adopt a freemium model, how they optimized it, and where they settled the balance between freemium and free trial.
8 Lessons from Launching Freemium in 2018
5 years into SoapBox’s journey as an enterprise product, the team launched a freemium offering. In this article, SoapBox co-founder Brennan McEachran describes his 8 lessons from the transition to freemium. His first-hand experience identifies some of the hurdles you might not otherwise anticipate — for instance, how you handle payment in a freemium B2B product can be surprisingly tricky. Read here for more insights, both surprising and familiar.
The dark side of freemium
How Freemium Nearly Caused Our Business to Implode
In August 2015, Baremetrics introduced a Free plan…and it nearly brought them to their knees. They were adding over a dozen new accounts a day, but that’s about where the fun stopped; within a few weeks “free” customers outnumbered “paying” customers and the amount of data the company was storing and processing on their behalf had doubled.
The Slow Death of Freemium—And What Comes Next
Now more than ever, SaaS startups are under pressure to prove that they have a sustainable revenue model and can generate paying customers, not just free users who drain scarce resources. Consequently, freemium has pivoted from being at the core of a SaaS company’s revenue model to just another lead gen tool in the marketing toolbox, albeit one with some pretty significant downsides. But there are viable alternatives to “traditional” freemium options: from free trial to tailored, hyper-specific free products for lead gen, the concept of “free” is constantly evolving, in order to better suit today’s needs.
How to Rescue Your Failing Freemium Startup with Product Qualified Leads
As a freemium startup, you live and die by your ability to convert free users into paying customers. But thanks to higher customer expectations and intense competition, freemium conversion rates have been slowly declining. Migration from a Marketing Qualified Leads (MQL) strategy to a Product Qualified Lead (PQL) strategy has proven to be a powerful antidote.
Why Product Qualified Leads are the Answer to a Failing Freemium Model
Not finding success with freemium? Learn how to develop and implement a product qualified lead model here to save your struggling business.
SaaS Pricing: The Two Sides of Freemium
Not all freemium models are created equal. Here’s what to consider before implementing any one of a variety of free plans.
The ‘Freemium’ Model: Top Flaws And Potent Fixes
How to attract customers with free content without going broke in the process? Avoiding the four mistakes outlined in this piece won’t guarantee your success, but doing so will reduce your chances of failure and set you on the right path.
7 Reasons Why Companies Fail with Freemium (And How to Actually Succeed)
Even if freemium is a fit for your product, you can stumble on the execution. Avoiding these 7 mistakes in execution will go a long way toward making sure a freemium strategy works for your company.
The CFO View of the Freemium Model
This is a thoughtful critique of the freemium model from the perspective of a CFO at a company with a free offering. The piece raises several questions you will need to have answered if you’re committed to freemium. It also offers some lessons from having offered a free product over the long run.
Stories about ditching a freemium model
Scott Heiferman Looks Back at Meetup’s Bet-the-Company Moment
In April 2005 Meetup.com went from free to paid and started charging meeting organizers. Many customers were outraged but eventually relented. Learn about the journey here.
LogMeIn Kills Its Eponymous Free Service, Uproar Ensues
LogMeIn, a provider of remote connectivity services, made a name for itself offering easy-to-use, free services with the idea of eventually upselling free users to paid services. The company ultimately did away with its LogMeIn Free plan. Learn why and how here.
The Case Against Freemium–3 Reasons Why Free Is a Wrong Price
Freemium or premium, that’s the question many entrepreneurs ask every day. But determining the right model for their businesses is hard to answer. Learn why free might not be the best strategy after all.
Dropping Freemium: How One Company Killed Its Free Plan and Grew 40%—and You Can, Too
PopSurvey decided to try something radical. They dropped the company’s freemium plan, eliminated its trial period, and doubled the prices of its other plans. The result? A 40 percent increase in revenue in the first month. Learn how in this article.
Editor’s Note: This article was first published on August 9, 2018 and was updated in August 2020. Special thanks to Ned O’Leary and Laura Rosca for helping us compile this research.
Francesca Krihely, Senior Director, Developer Experience and Growth at Snyk, told us about how her company uses a freemium model to find new points of entry into enterprise organizations.