Freemium or Free Trial? There’s a Better Question

I answer this question all the time… should we go Freemium or Free Trial for our SaaS app?

And I get this question from companies of all stages and sizes, including pre-launch Startups, software companies moving to – or adding a product line based around  - the SaaS business model, or for later-stage SaaS companies that are questioning their current trajectory.

I assumed I’d covered this topic so much the answer was obvious… but apparently that’s not the case.

So now I’m going to address it once and for all… or at least I can point people to this post when I’m asked whether Freemium or a Free Trial is the better way to go.

It’s time to ask a better question.

Okay, so here’s the question I got this time:

“Hey Lincoln… We’re coming to the inflection point in our startup where we need to choose freemium vs free trial, and I’m… well…stuck. There are so many pros and cons for each. Can you help?”

Here’s my answer:

It isn’t a choice between Freemium and Free Trials… those aren’t the options.

The options are Freemium or a Premium product.

The better question to ask is which of those options is best for your company.

If you choose to offer a Premium product, then you can choose to offer a Free Trial for your Premium product, but you don’t have to.

This distinction isn’t just semantics or me trying to make an issue where there isn’t one.

Let’s dive in…

What is Freemium?

Freemium is a marketing model that should really be considered a business model, where you give away access to some or all of your product for free forever, without a time limit.

There may be other limits – features, usage, etc. – but there’s no time limit; you can use the product for free, forever.

As a vendor, Freemium is what your offering must be architected, designed, and built around.

Freemium as an add-on, as an afterthought, is basically a non-starter. It won’t be successful at all.

Though “successful” in the case of Freemium is itself a relative and hard-to-define term.

Where Freemium is most appropriate and where success is at least possible, is when your market is huge AND those who use your offering FOR FREE FOREVER will add value – hopefully exponentially more over time – to you and the other users and paying customers.

When considering Freemium, you have to understand those things and consider the quid pro quo of the free users.

What do the >97% of people that will likely NEVER pay you a dime bring to the table? Content? Data? Virality? Something?

If they don’t add value, then you’re just running a charity. Charities are great, but not when you set out to run a for-profit business.

Oh… and you have to actually build every aspect of your product to ensure your free users add whatever that value is… you can’t just hope they will on their own.

Maybe even Remove the -mium Part

Of course, if you just want to build up a massive user base and sell it for Billions like Instagram… cool.

But I wouldn’t do Freemium, though… I’d just do “Free.” Don’t worry about revenue.

See, the hard part with Freemium – assuming everything else is fantastic (market, product, experience, etc.) – isn’t getting users… it’s generating revenue.

The main reason for that is…

Psychological Barriers

Remember, when you hook someone with “free forever” it becomes almost impossible (which is why you see 3% conversion rates on “successful” Freemium SaaS ventures) to charge them for access later on.

It’s a real psychological issue.

In fact, in this post I wrote about several companies that have moved away – or will soon – from Freemium to a Premium-only (but generally with a Free Trial) model and found success.

You see, when you hook ‘em with free, their expectations are completely mis-managed.

You can try to overcome this by always being up-front that there’s a premium version that they can pay to use if they’re so inclined – a tactic I recommend to Freemium companies all the time – but you need to do that from the very beginning or you’ve anchored them on “free.”

This is where the – now ancient – idea of the “penny gap” came from… getting someone to pay – even a penny – for something they already get for free is super-difficult.

And this is why you see…

Several Types of Freemium

Freemium has been moving away from just getting you to pay for what you’re already using – what I call the Classical Freemium model – for several years.

Instead, we’re seeing more diverse Freemium models where you you are charged for add-ons, extensions, additional functionality, support, integrations, customizations, etc. instead of just “more” of whatever it is you already get for free.

You may recognize this as the model of Freemium that B2C games use to – pardon the pun – crush it.

Don’t get the pun? Get this… Candy Crush Saga, a Freemium game, generates – as of this writing – nearly $950k per day.

PER DAY.

You’re still excited about your Project Management startup, right?

Anyway, the model used by games like Candy Crush is to sell in-app virtual goods, additional levels, accelerated gameplay, etc.

Of course Candy Crush, it seems, was designed to be a “habit” and includes the necessary psychological elements to get people hooked and drive consumption of the virtual goods in-app.

Which brings up this little issue…

New Habits Required

As things have evolved, I’m starting to add another element to what I think is required for Freemium success in B2B apps, and that is that your product quickly becomes a habit that includes multiple-times-per-day interactions.

I’m not saying all B2B SaaS apps must do this… frankly – for some – a metric as granular as daily activity (or Daily Active Users – DAU) is just not meaningful.

But for Freemium B2B apps, I believe this is critical to success.

And this makes even more sense when we go back to the idea of a quid pro quo with the free users – that they must deliver value back to the app.

Given that requirement, we can probably assume those who use the app multiple times per day are MORE likely to bring value to the app – and other users and customers – than people that use it only once per week.

So if your SaaS app can’t become a habit – and let’s not kid ourselves, changing behavior is INCREDIBLY difficult – then Freemium is probably not the right model for you.

And when there are SaaS companies out there that have paying but inactive customers (for a while… until they realize what’s going on and cancel), it becomes obvious that actually paying for something isn’t even enough motivation to get started or switch from the previous solution if the switching cost is too high.

Freemium or not, you must remove barriers to entry, reduce friction, and get your prospective customers to a point where they realize – or at least recognize the potential for – value as quickly as possible.

This means letting them sign-up for your trial quickly and easily… and maybe even letting them experience your product without signing up (like Optimzely or Gliffy or Codecademy).

No matter what, you must…

Understand What You’re Displacing

Back to the game scenario for a second… there are zero switching costs to start playing Candy Crush if I’ve been playing Clash of Clans.

I just install it (probably from an ad IN Clash of Clans) and get going.

Now I have two games.

Games are awesome – from a business standpoint – because they’re an AND… not an OR.

I can have this game AND that game AND that other game. I very likely won’t have this CRM and that CRM and that CRM… it’s this CRM – OR – that other CRM.

Which is why it’s easier to get people to try a game (then it’s up to you to get ‘em hooked, quickly) than it is a B2B SaaS app.

Games are impulse installs… no procurement process, committees, RFPs, migration, re-integrations, etc.

No switching costs.

But your SaaS app is a harder sell – even just to try it – because you’re probably an OR in your Product Category.

Like I said… people/companies only use one CRM or one HR app or one POS system or one… whatever.

Yes, different departments might use different software or SaaS apps to do the same thing, but they each only use one at a time. Perhaps there’s an Enterprise opportunity to consolidate everyone on a single product… but that’s a discussion for a different day.

So you have to know where you stand in your customers’ world.. what are you displacing if they were to choose your app?

Commercial competitors, home-grown solutions, open source products,… or nothing (which is a thing you need worry about).

The more you displace, the more valuable you might be… but the higher the switching cost and the less likely you are to become a habit at scale, meaning Freemium might not workout so very well for you.

Freemium or not, really consider what you’re displacing and how they’ll on-board with you while dealing with, continuing to use, or otherwise working around their existing solution. That’s not easy to figure out.

And if you’re not displacing anything – meaning they don’t currently do anything related to what your product does – just know that now you’re inventing a market.

While this is possibly very lucrative, it is 100% guaranteed to be difficult, expensive, and time consuming (though could be perfect for Freemium).

And…

Wait… there’s something else… I forget

Oh right… I forgot to say this earlier because, well, I’ve got a lot going on and got side tracked…

People are perpetually distracted these days!

While an argument could be made that the distractions are self-induced (like maybe I’m trying to beat level 70 in Candy Crush while updating customer records and sending emails and tweeting and…), the reality is we just are.

We all suffer from time and resource scarcity to some degree, so understand that you’re entering their world with a great deal of cognitive overhead already in place. You need to work with it, roll with it, compete with it… whatever and however, but just know it’s there.

If you really want to really understand how this cognitive overhead affects people – humans… your customers and prospects – read the book “Scarcity: Why Having Too Little Means So Much” … but be aware that it’s really depressing the way our minds work sometimes. Good to know, but tough to take.

Okay fine, but…

What about Free Trials?

More accurately, what about Premium + Free Trial?

First, just about everything I said above about switching costs, scarcity, habits, etc. all apply to Free Trials as well.

But with Free Trials, there aren’t any of the Freemium psychological issues (assuming you manage expectations properly) since it is what it is… a free trial of a paid (commercial, premium, valuable) product.

As I outline in the video below, Freemium is free-forever to use, while Free Trials have a time-limit with two potential outcomes: pay or go away.

So, if your app doesn’t fit into the “rules” for Freemium success I outlined above – it’s specific to a smaller target market, there’s not a lot of value free users can bring (they won’t really spread the word and network-effect data is of limited value), and the path to becoming a habit for them is a bumpy road at best… then you may want to go the more traditional route and avoid Freemium.

That means, if you have a solid SaaS offering that you think you can charge money for and build a nice little $100M business off of, then just charge money for it out of the gate… and then offer a Free Trial of that PAID product.

And I talk about FREE Trials specifically because I believe that’s the best route to take… if you’re considering doing a $1 trial or even asking for a Credit Card up front, read this post immediately.

That all said, Free Trials are not simple, nor are they a guarantee that you’ll get more customers.

In my experience, offering a Free Trial alone – just offering a trial – will increase overall sales; but having a poorly converting trial – one that does little to facilitate on-boarding, engagement, and conversion – can be frustrating and a drain on Customer Acquisition Cost (CAC) efficiency.

There’s a lot to getting your Free Trial right, and here are a ton of free resources to help you do that, but overall, Free Trials are a simpler approach if for no other reason than the lack of psychological hurdles present with Freemium.

And if you’re curious about offering both Freemium and a Premium Product with a Free Trial, I wrote a post a while back that specifically covers that crazy idea.

So… Which is Best?

I can’t make the decision for you in this post – though I’m happy to setup a consulting engagement to help you make this decision- but I will say this…

Ultimately – whether you engage me or not – this is one of those decisions that really calls upon your inner entrepreneur, because at the end of the day… it’s most likely a gut-level decision, even if you have a lot of market data to go off of.

The reality is, if your target market does little to no sharing of any kind (i.e. it’s hard to even make a linkbait article go viral with them, let alone an app), you may not be able to change behavior with a large enough swath, fast enough, to generate the critical velocity required for Freemium to really become a viable model for you.

On the other hand, just because it hasn’t been done before in your market, doesn’t mean it won’t work…

I encourage you to go back to the drawing board one more time and make sure you’re looking at things the right way.

And then I hope you make the best decision and crush it.

I hope this helps a bit, though if you need more help…

Should you Go Freemium or Go Pro?

For immediate consultation and advice on your use of the Freemium model, schedule at least a 15-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.

Lincoln

Comments

  1. Again – great read Lincoln. Curious to hear your thoughts on a 7 day trial (or even 3 day trial if onboarding is done extremely well) versus a 30 day trial? I planned on testing, but my feeling is that if the user is onboarded and engaged in those first few days the conversion to paid would be HIGHER than if you gave a longer free trial. Have you had any experience playing with trial durations?

  2. Hi Lincoln, nice post, as always (we read ALL your posts!).

    I thought I’d just add our experiences about Freemium. Really Simple Systems is a Cloud CRM provider, largest European CRM provider as it happens.

    Firstly, we do both Freemium (Free Edition and Premium Edition) and offer a free trial for our Enterprise Edition.

    On the question of what we are displacing, in many cases our potential subscribers aren’t using anything apart from spreadsheets.

    As to the cost of carrying Free users, we’re running at about 7:1 Free to paying, and the cost of that doesn’t have to be much PROVIDING the users don’t need support, ie the product is so simple to use they don’t have to email us. We have many customers that have been using a Free system for years, that’s fine, our job is to find good enough reasons for them to upgrade and pay us. Some of that will be driven by their success – if their business grows, they’ll need to add more users and more data. If they’ve been using the system for a while, they like it and trust us, the idea of the “penny gap” isn’t so daunting for them after all.

    Many people have never used as CRM system, so don’t know if they’ll actually find it useful, or work out how to use it, so a Free Edition works well as subscribers won’t feel that they are being pressurised to make a decision. It is noticeable that many CRM providers offer a Free Edition, but few Accounting providers do, probably because people know that they need an Accounting system but are less sure about CRM.

    So, as you always say, it depends on your business, but for us Freemium works just fine.

    Have fun playing Candy Crush!

    John Paterson
    http://www.reallysimplesystems.com

  3. Hi Lincoln. I enjoyed reading your post, but I have a question and I hope that you can offer some insight. We offer a Free Trial, which is great but only when people actually activate it! We often find that potential clients (even those who are really interested and engaged us rather than vice-versa) literally don’t have the time/resources to devote to an evaluation. I would wager the next comment is “make the trial simpler”, so that it doesn’t take as long to get a feel for the product, but unfortunately the nature of our software and its complex application means that’s not really an option. Can you offer any thoughts? Cheers.

    • I’m glad you like my posts… but you might not enjoy my comment.

      Having complex software isn’t a bragging point… or a selling point. Make it simpler. You answered your own question (even if that’s not the answer you like).

      That said, there are generally things you can do in the interim to improve engagement outside of the app – often having to do with leveraging channels beyond the app (email, Customer Success initiatives, IRL training, etc.) – but dollars to donuts, if your app is incredibly complex, you’ll have to do some engineering work at some point if you really want to move accelerate customer acquisition at scale.

      That’s just the way it is… again, whether that’s what you want to hear or not.

      The main thing to remember is that everything you do – whether re-engineering or working on “engagement hacks” – should be considered from the customer standpoint.

      Check this post out as it might help you think about this the right way:
      http://sixteenventures.com/free-trial-metrics

      I hope you continue to enjoy my posts… but I’d rather make you angry and get you thinking about this the right way than win you over with kindness.

      Good luck out there.

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