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

David Sacks
Dec 9, 2019 · 6 min read

“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 Slack, which adopted a similar model 5 years later, employees signed up for free and were placed in their company network based on a verified email domain.

The product urged employees to invite their coworkers. Once the network hit critical mass, our sales team would reach out. We built a dashboard for the sales team called Mission Control, which surfaced active networks. Sales reps couldn’t see the content but they could see which users were frequent contributors (our likely champions at the company) as well as VPs and C-level execs (our likely buyers), making it easy to prospect into the company.

Because Sales was prospecting into our own free accounts, every lead was “warm.” This was so much more productive than cold-calling that we stopped outbound altogether. We relied exclusively on freemium leads.

Because Sales was prospecting into our own free accounts, every lead was “warm.” This was so much more productive than cold-calling that we stopped outbound altogether.

We also did no paid marketing, although we spent a lot of time on earned marketing (evangelism) to encourage the initial employees to join their company networks. Once that happened, viral growth inside the network took hold.

Companies would buy Yammer for the admin features, to get control over the network and derive more value from its use. Some critics denounced this model as “blackmail”; we saw it as a proof of concept that employees would actually use the product — unlike a lot of the “shelfware” bought by IT. The fact that Gartner and other industry analysts considered IBM to be a leader in “social software” tells you a lot about the state of enterprise software at that time.

Yammer was well timed to ride the wave of the “consumerization of enterprise,” appealing directly to employee end-users instead of going through IT. We started off virtually begging for our first $25k deals in 2009, but by 2012, we were closing million dollar deals and had dozens of Fortune 500 customers. The fact that Yammer achieved a unicorn exit less than four years after launch is a testament to the power of that consumerized Freemium approach.

Pros and Cons of Each Model

All of that said, there are a few significant drawbacks to the Freemium model.

First, although our sales team liked the ability to prospect into warm accounts, they complained that there was little urgency to buy. Most of our users were quite happy on the free version. Our sales reps often said that their biggest competitor was “Yammer Free.” They were constantly asking us to adjust the paywall and make it more restrictive.

Our sales reps often said that their biggest competitor was “Yammer Free.”

Second, a lot of product management goes into creating and maintaining a functionality-based paywall. Every time there’s a feature release, the product team has to decide what’s free and what’s paid. This is not a one-time decision as the team will want to measure the results and constantly tune the paywall. A time-based paywall is simpler and saves a lot of brain damage.

Third, paid marketing is much more complicated with a Freemium model. It’s hard to assess the ROI of a paid marketing campaign when it can take many months or even years for a lead to convert into a revenue-generating account. It’s easier to determine the value of a lead or channel when you can force a decision and measure the results within a defined time period. As with all critical data in a startup, there’s huge value in knowing quickly whether a campaign, channel, or type of marketing is working.

The Free Trial doesn’t suffer from any of these limitations. First, the urgency is built in. The paywall is based on a time limit, say 2–4 weeks. During that time, the SaaS product puts its best foot forward by giving the user all the functionality it has to offer. Moreover, when possible, it puts inertia on the side of the sale by asking for a credit card up front, when the user is at a critical moment of intent.

Free Trial risks user attrition in a way that Freemium doesn’t, but at least Free Trial forces a decision in a reasonable amount of time. Freemium causes procrastination, as users try to get by on the free version as long as possible. A time limit is more compatible with the sales process, which tries to reduce cycle time at each step in the funnel.

Free Trial risks user attrition in a way that Freemium doesn’t, but at least Free Trial forces a decision in a reasonable amount of time.

So why did Yammer use Freemium? At the time, the buyer of corporate collaboration tools was IT. Our users, especially the early adopters, didn’t control the budget so it didn’t make sense to try to force them to pay. These users could contribute content to their network and invite their coworkers. As the network effect grew, it strengthened our case with IT and our chance to win the deal. Because of the viral growth, and the fact that we never had to spend any money on user acquisition, we could afford to be patient with conversion. It just never made sense to kick out any users.

In Summary — How to Choose

As in the case of Yammer, the Freemium approach works best when some or all of the following factors are in play:

  • User adoption is bottom-up and/or viral.
  • Free users contribute to UGC or network effects.
  • The product experience would be materially diminished for buyers by kicking out free users.
  • Free users have low willingness to pay so trying to tax them would be unsuccessful anyway.
  • The likelihood of a sale increases over time with the growth in free users.
  • The functionality demanded by buyers is different than that demanded by free users so it’s relatively easy for a functionality-based paywall to distinguish between them.

By contrast, Free Trials tend to make more sense when:

  • Users are provisioned by an admin.
  • Lead gen typically occurs through paid marketing.
  • There’s no reason to believe ex ante that signups for the free trial couldn’t be potential buyers.
  • A time-based paywall creates urgency for the sales process that might not otherwise exist.
  • The product experience of paying users doesn’t meaningfully suffer because of the attrition of free users.

In either case, free strategies are a great way to generate leads for SaaS startups — which is the whole point of giving something away for free in the first place. A well-crafted free strategy has the potential to rip through the market far faster than traditional enterprise sales.

Craft Ventures

Craft Ventures is an early-stage fund dedicated to the…

David Sacks

Written by

General Partner and Co-Founder of Craft Ventures. Previously: Founder/CEO of Yammer. Original COO of PayPal.

Craft Ventures

Craft Ventures is an early-stage fund dedicated to the craft of building great companies.

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