The SaaS Freemium Model – A Recipe for Success

The SaaS industry has seen staggering growth in recent years with 99% of all companies using one or more SaaS solution as of 2021. Digital transformation and cloud migration across various sectors offers your SaaS business a hearty potential for growth. But it can also be a double-edged sword – after all, no matter what product or service you are offering, the competition for the same consumer group is growing rapidly. This means your business needs to push the limits of the value it adds or your consumer will simply take their business elsewhere.

This is where the freemium model has become a shining star for many SaaS companies offering an 8-10% conversion rate, compared to the 1-2% conversion associated with the E-Commerce industry.

Let’s get into what the freemium SaaS model is and why it works so well!

What is a Freemium?

A freemium refers to a pricing strategy where a business provides consumers free access to some basic features and charges them a subscription fee to access some highly valuable premium features.

This strategy has competed well with the free-trial and demo-based models, offering SaaS businesses easier customer acquisition, better retention and, ironically, also cost saving! The freemium SaaS business model adds tons of free value, which is exactly what consumers want in the highly competitive SaaS market!

Some of the most successful businesses thriving off freemiums include LinkedIn, Skype, Dropbox, MailChimp, Evernote, Spotify and many others. To exemplify how well this model works MailChimp has managed a whopping 150% increase in premium subscription and a 650% increase in revenue within a year of offering a freemium. They are great case studies for anyone wondering how giving away something for free can, paradoxically, earn you a whole lot of money!

The Benefits of a Freemium Model for a SaaS Enterprise:

Offering a freemium will promote the growth of your SaaS business by pushing KPIs such as customer acquisition, conversion rate, customer retention and user experience in positive directions. The following are some of the ways in which the SaaS freemium model offers your business sustainable and scalable growth potential.

1. Easy Customer Acquisition

Efficiently acquiring new customers is the greatest edge your business gets from offering a freemium. After all, who doesn’t love a free service and a service that stays free for an unlimited period of time is simply irresistible!

Fred Wilson, a venture capitalist and blogger, explains how this happens organically through word-of-mouth, referral networks and search marketing etc. An invested target audience can easily be nurtured into paying consumers by first making the product or service invaluable to your consumer, and then continually underscoring how much they stand to gain from accessing an enhanced version of it, in exchange for a small fee!

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Take the example of Spotify.

Signing up for free music is a no-brainer and when your consumer has to tolerate repeated interruptions from advertisements and random shuffling, before you know it, they are happily willing to pay $9.99 for an improved experience! This transition is much smoother than an on-the-spot commitment or a free trail that may sneakily expire and charge their card.

2. Provides Key Insights for Product-led Growth

Offering a freemium also gives your product an opportunity to develop and really shine compared to your competitors who may not be offering one. This is because SaaS companies offering freemiums can get feedback from a much larger pool of users leading to more fine-tuned data analytics allowing you to closely monitor what works and what doesn’t!

A demo will not let your customer actually experience your service hands on unless they subscribe and a free trial may not be long enough to convince your customer to want to pay for the product or service. This results in a loss of customer insights that could be pivotal to product-led growth!

3. High Conversion Rates

Through the freemium your consumer enters a low-pressure exploration that makes them feel more in control. Consistent signposting of what your consumer stands to gain from upgrading to a premium subscription drives your conversion rate.

A word of caution, however, that this reminder should be handled gracefully. If your subscriber ends up getting no value from the freemium and feels harassed to upgrade, they might lose interest entirely or get irritated and seek out a competitor. The freemium should be good enough for them to stick around and the premium must offer a solid improvement in the means to the same end. In the correct proportion this creates the recipe for success using the SaaS freemium model!

4. Improved Customer Retention

The free-to-paid user pipeline also means the consumer who decides to upgrade knows exactly what they stand to gain and are making an informed decision. This is a customer with a higher lifetime value (LTV) than someone who has to make an on-the-spot decision without first exploring what your software is really offers!

As your subscribers shift to higher LTV customers, customer retention is sure to shoot up as compared to customers using free trials many of whom will abandon your product as soon as their trial expires. A positive impact on customer retention and churn ultimately translates into revenue retention and scalability for your SaaS enterprise!

5. Cost Effective

In the book, “Free”, Chris Anderson explains that the freemium model operates off a 5 percent rule where the 5% paying subscribers support the 95% free users and the cost of servicing the 95% is reduced to almost zero.

Psychologically speaking a consumer using your freemium doesn’t expect the same service as a premium subscriber and is satisfied with slowly exploring the product on their own. What this means for your business is that your developers and support team doesn’t need to invest a lot of time and energy in breaking down the product functionalities for your customer through traditional sales-driven marketing.

This cuts the cost of the whole operation as customers are empowered to explore the features of the product themselves, in their own time, and any necessary communication can be done through automated emails and other forms of pre-written support. Pretty sweet right!

As is clear from this discussion, freemiums are a great way to boost your SaaS sales and revenue while decreasing churn, promoting retention and scaling up your enterprise! Plenty of success stories are testament to this and can help unravel the real potential of this business strategy!