Freemium vs Free Trial: Which is Better for SaaS Startups?

“Free” strategies have become an essential part of the winning formula for SaaS startups. But which model is better — Freemium or Free Trial?

I get asked this question a lot because of my experience with Yammer, which was one of the first SaaS startups to spread through a viral Freemium model.

Freemium products offer a free basic tier with a paywall to unlock premium functionality, whereas Free Trials typically offer all of the functionality for a limited time, after which the user must pay or stop using the product. In other words, the choice is between a functionality-based or time-based paywall.

In other words, the choice is between a functionality-based or time-based paywall.

Despite Yammer’s success with Freemium, I usually recommend that SaaS companies go with the Free Trial approach because it’s easier to implement in the product and coordinate with sales and marketing efforts.

However, Freemium is better for viral or networked products that want to encourage user-generated content, network effects, or bottom-up adoption.

Let me relate our experience at Yammer and give you the pros and cons so you can decide which model works best for you.

Background — What Worked at Yammer

Freemium was essential to Yammer’s growth. We launched in late 2008. In 2009, our first full year, we closed $1 million in sales. In 2010, we closed $7 million. In 2011, $21 million. In 2012, the year that Microsoft acquired the company, $56 million.

Yammer’s sales grew quickly thanks to its Freemium model.

Even by today’s standards, this is pretty rapid growth, and we did it almost a decade ago, when enterprise customers still viewed the cloud as presumptively insecure. We also faced significant competition from mature on-premise incumbents Jive and IBM (who won the Magic Quadrant every year), Salesforce’s copycat product Chatter, and several other startups.

Nonetheless Yammer was able to separate from the pack because of its viral freemium model. Like…