Insight: SaaS (12) Freemium is fantastic, but not for every SaaS company.
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‘Insight: SaaS (5) Find PMF before the scale’
‘Insight: SaaS (6) Calculate the sales team’s gross margin.’
‘Insight: SaaS(7) Standardize the sales process’
These previous articles discussed how SaaS companies scale after obtaining PMF. Today, we’ll discuss a popular business model for SaaS products — — Freemium.
Freemium is a free plan offered by SaaS companies. It is a strategy that customers upgrade to a paid plan after using it due to demand. It is not at all like Free Trial. Free Trial will set a trial period. After this period, the customer’s trial qualification will be invalid unless it is upgraded to a paying customer. Customers who use Freemium are encouraged to always stay in the free plan.
Freemium is an effective means of acquiring customers and is often used by PLG (Product-Led Growth) SaaS companies. It can allow customers to purchase more on their own, where product usage is the primary driver of user acquisition, conversion, and expansion, in addition to customers’ in-depth use of the product. It is a very effective way for PLG to acquire customers. Many businesses use the FreeMium mode. MailChimp, Slack, Zoom, for example, are among them. You can start with the free plan they provide and then upgrade to a more advanced plan based on the use effect and your specific requirements.
SaaS companies that adopted Freemium accounted for 18% of the total in 2019, and 25% by 2020. By 2020, 52 percent of PLG businesses had adopted Freemium’s strategy. Freemium appears to be a popular trend in the SaaS industry, but is it appropriate for all SaaS companies? The answer is an unequivocal no.
The following are some of the reasons why Freemium is so popular:
1. Freemium has a high customer acquisition efficiency.
As a customer, when selecting SaaS products, I will prioritize those that offer free plans, because companies offering free trials create a nervous atmosphere, and I am anxious that their salespeople will contact me at any time. I won’t pay SaaS if I didn’t use the product before. The risk is too high for me. As a result, SaaS companies that offer Freemium have a much better chance of acquiring customers. The threshold for obtaining free users is low.
Since the customer is in the process of using the product, the customer has stimulated the willingness to upgrade and purchase, and the customer has already understood the product, and the difficulty of sales has been greatly reduced. There is no need for sales participation if the customer can complete the purchase himself through the Self-service channel, which greatly improves the company's overall marketing efficiency.
Freemium has clear advantages in terms of sales efficiency. Best-in-class companies that sell primarily through freemium can keep sales and marketing costs under 20% of ARR. Only a few can reach below 10%. The indirect marketing rate can be reduced to a very low level because the sales costs are transferred to the partner,. It is very common to achieve less than 10%.
2. Paying customers are more sticky and have a higher NDR.
Customers are only willing to become paying customers when necessary because a free plan is provided. In other words, the customer will only become a paying customer after achieving Customer Success. It is equivalent to the customer having a high level of satisfaction with the product and intending to upgrade the plan. This kind of customer’s purchasing behavior is entirely rational, and they appreciate the value your product provides. How can a customer like this not be sticky and have a low NDR? With the development of the company, he will purchase more.
Successful Freemium products, on the other hand, are not easy to create. Freemium has distinct features. It is not the original product plus a free plan or Freemium; it is not only ‘Free’ but also has the ‘mium’.
Free plan features must be carefully designed.
What functions should be included in the free plan, and which should be included in the paid plan? This prompts entrepreneurs grasping the magnitude. The free plan must fulfill a basic requirement: it should include a function that reflects the core value of the product. For example, the free Zoom plan can be used for video conferences, and the free Slack plan can also be used for team communication. These underlying functions must be placed in the free plan.
Users will be eager to upgrade if there is a significant functional gap between the free and paid plans.
Other functions that are extremely valuable and attractive should be added to the paid plan. Items like a business dashboard or seats based on the number of users, for example, can be placed in the paid plan. Keep in mind that paid plans’ functions must be significantly improved over free plans, and users have the motivation to upgrade and pay.
The cost of free plan users is controllable
Before equipping the Freemium model, the team should evaluate the product’s various costs. If every customer using the free plan must pay dearly and there is no upper limit, such SaaS should not use the Freemium, because most free customers will not upgrade. Mailchimp allows customers to send a certain number of emails for free each month, which is equivalent to controlling the maximum cost of each free customer.
Also, there are SaaS products that are ineligible for Freemium mode:
For example, the value of enterprises’ large-scale systems (CRM, HR, BPM) lies in the overall experience. Customers will not perceive the value of your products if you only reserve some of the functions in the free plan. There is no such thing as a design path from Free to Enterprise. This product’s price will be very high. The ACV will be greater than $100,000, and some are not suitable for Mid-market. For SaaS products in vertical industries, use the Freemium model with caution. Seeing as your market has a limited number of customers, especially if the majority of them are free customers, your revenue may be very limited. Only 14% of Freemium products have an ACV of $50–250k.
SaaS products adequate for Freemium are frequently aimed at SMBs. Individuals can use it right away. When the company’s usage is extensive, it can purchase an upgraded version. 64% freemium products have an ACV of less than $1,000. If the functions can be easily quantified and charged based on usage, it is ideal for the Freemium model, as used by Mailchimp.
The FreeMium business model is a relatively successful SaaS business model that integrates products and pricing. Is Freemium a good fit for your SaaS products?
The next article ‘Insight: SaaS (13) Inbound sales & content marketing.’ is published. Simply send me some claps and feedback if you enjoyed my article.
