Pricing & Positioning

Freemium vs. Free Trial: How to Know Which One to Pick for Your SaaS Startup

October 12, 2020

It’s no secret that your product is one of the best ways to generate leads—and qualified leads at that.

Product led growth (PLG) is an end-user focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion and expansion. Offering a free trial or freemium product experience is one of the hallmarks of a PLG approach.

But letting users try your product before they commit to a purchase is hardly a new concept.

Related read: What is product led growth?

Grocery stores have been giving out free samples for decades, long before free trials and freemium software became available. In fact, the idea of the free sample stretches at least as far back as the 1300s, when the author of the 14th-century poem Piers Plowman depicted innkeepers offering customers free samples of wine.

With such a long history, you might think that companies would have this go-to-market strategy all figured out. But as we all know, that isn’t the case.

Indeed, one of the questions we hear most often from product and growth owners is: “Should we start with a free trial to generate urgency for the prospect, or just go freemium?”

The answer, of course, is that it depends.

What is the difference between a free trial and a freemium product?

Free trial and freemium are both customer acquisition models that provide limited access to software, free of charge.

The fundamental difference between the two approaches is in where the limitation to product usage lies.

Free trials typically allow users to experience a complete or nearly complete product for a limited time. This means granting free users access to all features, functionality, and use cases for the duration of their trial.

Related read: 3 Famous Freemium SaaS Strategies (And Why They’re So Good)

A freemium product, by contrast, gives users access to a limited set of features, functionalities, and use cases indefinitely and without charge. There is no time limit, but parts of the product remain off-limits to free users.

In both models, it’s common practice to require information like email and company name before letting users get started. This information allows you to identify high-value segments, and to re-target and re-engage users outside the product.

But requiring a credit card is considered old hat—freemium and free trial businesses only do so 4% and 12% of the time, respectively.

We recommend skipping this step, which creates too much friction for would-be users. (Removing barriers to product value is one of the core tenets of product led growth, after all.)

So, which approach is better?

On the one hand, freemium opens up your top-of-funnel more than a free trial or sales demo approach. Typical freemium tools generate 33% more free accounts for every website visitor—which means that if you have a viral product that generates more value as more people use it (for instance, Calendly or Zoom), freemium is probably the correct strategy.

Yet a never-ending freemium product experience also means that activation is lower for freemium products than it is for those with a free trial. (The median activation rates for a freemium vs. free trial GTM approach are approximately 20% and 40%, respectively.)

“If your business is laser-focused on maximizing paid conversion and near-term revenue, a free trial is the way to go.”

Free trials create a sense of urgency, which can translate to more conversions. The median free-to-paid conversion rate for free trial products is roughly twice that of freemium products (approximately 14% versus 7%).

If your business is laser-focused on maximizing paid conversion and near-term revenue, a free trial is the way to go.

The impact of outreach to free accounts

Most software companies (90%) augment a free trial or freemium product experience with outreach from sales, support, or success teams.

And in fact, the real differentiator for conversion rates for free trials or freemium products isn’t whether you’re reaching out to users, it’s how persistent your messaging is. Conversion rates increase as software companies add touch points with prospects—companies with 11+ touch points performed 2x higher than those with other sales and marketing cadences.

When you factor in the cost and personnel hours required for that level of outreach, freemium edges ahead of free trials in terms of resource efficiency: Without sales, freemium products convert customers 25% more often than free trials.

A freemium funnel vs. a free trial funnel

To better understand the difference between the two approaches, we cut the data between two types of companies: those offering a freemium product and those offering a self-serve free trial.

If 1,000 leads enter the funnel on any given day, the results would break down as follows (for a median organization of either type):

A freemium approach would convert four of the 1,000 leads to paid, with roughly three of those leads needing no additional outreach from sales or success.

  • 60 free signups (6% conversion from a visit to the website)
  • 4.2 paying customers (7% conversion from free)
  • 2.6 of these are self-serve (of 62% conversion via self-serve)

By contrast, with a free trial the average company would convert roughly six leads, half of which would convert without talking to a salesperson.

  • 45 free signups (4.5% conversion from a visit to the website)
  • 6.3 paying customers (14% conversion from free)
  • 2.8 of these are self-serve (of 45% conversion via self-serve)

Again, the right approach for your organization ultimately depends not only on the type of product you offer and who your users are, but also where your company’s priorities lie.

How does your company stack up?

The statistics above were all drawn from OpenView’s 2020 Product Benchmarks Survey.

Over 150 SaaS companies participated in the survey, which we conducted to help product and growth professionals hold a mirror up to their own success—and to make more strategic, data-driven decisions going forward.

Dive into the full report to gain new insights and find out how your company stacks up to your peers.

Managing Editor<br>OpenView

Kristin joined OpenView after spending over four years at InVision managing their Inside Design publication and helping build brand love as chief storyteller, lead producer and editor. Before InVision, she co-founded the digital strategy agency Four Kitchens, spent several years in the restaurant industry as a chef, and was Editor-in-Chief of the nation’s largest college humor publication, the Texas Travesty, as an undergrad at the University of Texas at Austin.