The 3 things your startup needs to make freemium work (IMO)
Lately, I’ve been contacted by a few founders and marketers, specifically about freemium models and whether their startup has what it needs to make freemium work.
The thing is, over half of them come to me with a different view on what freemium actually is. (They won’t mind me saying this, honestly).
They think:
it’s a pricing model (which it is not)
their platform has enough to convert users to paying customers...
which means they’ll just turn on the switch and sit back; they won’t need to get involved in any selling.
Before exploring these thoughts, let’s quickly recap what a freemium model is:
“The freemium model isn’t about giving your product away, (it’s about) just revealing enough of it to entice people to pay for a full-priced version”
‘Just revealing enough of it to entice people to pay’ - that’s the important part.
Why freemium works for SaaS and tech platforms:
Freemium works because it’s rooted in the endowment effect and to some extent, loss aversion.
We are more likely to place value on things when we are bought into them or we own part of them compared to if we owned nothing at all.
Wait, freemium isn’t a pricing model?
‘Freemium is a two-tiered user acquisition model that splits users into either a free tier or a premium tier depending on whether or not they pay for an account’ (HubSpot).
Hang on… user acquisition model?
Yep, sorry to break it to you but… freemium is not a pricing strategy, it’s a customer acquisition strategy.
It’s about getting people to your platform, signed up and using your product. Pricing is a totally different conversation. I won’t go on about this part, as I’ve written about this here.
I’ll just turn freemium on and won’t need to do any selling.
Maybe not. Setting up a freemium model that works is all about acquisition and retaining those users with the aim of nurturing them to become paying, loyal customers.
The thing is, you may have a number of segments signing up… but do you know which features they value most and are likely to pay for? Are you willing to get involved in selling to expand their usage?
How your customers derive value from your platform will change over time, you can’t afford to sit back and wait. Ever.
The three things you need in place to make freemium work
A bloody good free tier experience.
For those users who don’t end up upgrading and becoming paying customers you still need to provide a great experience. These are your people that’ll continue to come back and will tell their mates.
Think about the services you’re signed up for and using, but aren’t quite paying for. Take Spotify. I was a ‘free tier’ user of the service until recently. Before becoming a paying customer, I still felt I had an excellent experience. I could still listen songs, create playlists… I just got fed up with the adverts and not being able to skip songs.
2. An understanding of what part of your product a customer is willing to pay for.
Chances are, there are parts of your product they like but it’s not a dealbreaker if they didn’t get to use feature A or B.
Work out what this feature is - and this is the feature you’ll probably end up putting behind the paywall.
3. An onboarding experience that is optimised around the aha! moments.
Don’t take time showing users different feature sets - show them the good stuff as soon as possible.
You want to get them to a stage known as value realisation - the aha! moment - where they can see what they need to do, and how your product is going to make their life better.
Why I wish we’d used freemium in the latest startup I worked at
I am part of the founding team of Careercake, a subscription-based video learning platform.
A few years ago, we moved to a subscription model to support our B2C customer base.
When deciding the acquisition strategy we should explore, we - like many startups catering to a specific audience - had the option of pursuing the free trial or freemium route. We opted for the former as it made sense for our customers at the time.
A free trial worked because, following on from the customer development work we did, we learned gating particular video titles would have caused friction in the signup process.
(The way the platform and customer experience was structured meant it would have taken our customers longer to reach the aha! moment.)
Another reason why we opted for free trial rather than freemium was that free trials are typically more effective at converting users to paying subscribers.
We offered a 14 day free trial, where the user wasn’t restricted by the feature set, but you needed to pop your credit card details in upon sign up.
Industry figures into SaaS conversion rates suggested free trial products that required a credit card have a trial to paying conversion rate of 30%.
So based on this, why would I still go for freemium?
> With expanded usage comes more selling opportunities.
Now - in hindsight, and with a far more developed product - a freemium model would have made much more sense.
We had a better understanding of why our different customer segments were subscribing and the features they’d pay for. This means we’d be able to optimise the experience and expand their usage.
As Profitwell puts it, ‘true growth in SaaS comes from existing customers’...
I mean, acquisition is great, but have you ever seen the result of retention?
> There’s a benefit to the word of mouth marketing that startups need.
You’re not going to make money from every person that signs up. But make sure that the experience someone feels when using your free tier… the chances they go on to recommend your product will increase.
They’re likely to be your word of mouth marketers.
Brand awareness is something many startups leave to end because they have trouble quantifying it. The thing is, it’s precisely the thing they need to grow.
Are you considering using a freemium strategy for your startup?
If you’d approached me to discuss if your startup has what it needs to make freemium work, these are the suggestions I’d likely start with:
1. Consider the different customer segments that are already signing up to your product.
Think about what they are signing up to do and arrange features around their experience. (Here is where strategies like customer-led growth for startups and CX mapping can help you to visualise this process.)
2. What’s ‘good’ for one business isn’t necessarily good for yours.
There are those who are keen on telling you you need to keep an eye on daily users and monthly users.
Let’s face it, if you’re an early stage startup or at the beginning of your journey - chances are, your traffic isn’t going to be huge.
I’d focus on active users. There are many tools out there, such as unbounce, Profitwell, HotJar etc, available to you to help you see how they are interacting with the site.
Look at your conversion rates. Specifically, trial to paid conversion rate. (Take your number of free trials that have converted to active users.)
It’s been reported that Spotify’s use of freemium and 27% conversion rate means that out of its 75 million monthly users, 20 million are paying customers.
Whereas Evernote has reportedly said only 1% of its users turn into paying customers.
What percentage of converted users do you need at a minimum?
These are just a few different ways to reconsider freemium and whether or not it would be a good acquisition model.
If you’d like to learn more, check out my other article on freemium or get in touch to learn about my one-day sessions.
