How Freemium Can Boost Your User Retention

Perfect user retention graph — drawn from Alex Schultz talk

When we were first launching Pilcro, we were advised to test out one question above all else:

Will users pay for your SaaS product?

Seems like a simple enough question — if you can’t get users to pay for your SaaS product, then you don’t have a business model and frankly, you can go back to the drawing board.

With this question in mind we decided to launch Pilcro with a per-user-per-month subscription and a 7 Day Free Trial. We already had users so we we were going to answer the question pretty quickly —7 days to be precise!

The 7 Day Free Trial worked great. We discovered that users were happy to pay for our product, and we were growing our MRR at a steady rate.

Why would a company with growing MRR launch a free tier?

As we looked into our analytics, we began to learn about how our new users were behaving, and we started to think that maybe our 7 Day Free Trial model was not performing quite as well as it could.

Onboarding funnel

This is our onboarding funnel. The conversions looked pretty good but we wanted to dive a bit deeper into the retention of users between stages of the funnel. Two questions became apparent:

• Why do only 20% of website hits continue to the app?
• Why do 90% of free trial users not subscribe after a free trial?

We interviewed groups of users who dropped out at the various stages and here is what we discovered. (For more information about survivorship bias see this blog)

1. New users, put off by the lack of free tier, don’t sign in

If you can’t get new users to try out your app, you can’t show off the value of your app. The 7 Day Free Trial was not enough to persuade many users to take the leap into trying out the app. The thought of having to subscribe can become a deterant to experimenting with a new product.

2. New users don’t want to create Artboards they might lose

We interviewed a number of users who had started the free trial but had not created an Artboard. (Pilcro is an app for creating and sharing brand Artboards) There was an interesting recurring bit of feedback —They did not want to invest time creating an Artboard, if they might lose it in 7 days.

In his Harvard Business Review piece on Freemium, Vineet Kumar notes:

Freemium is more successful than 30-day free trials or other limited-term offers, because customers … find indefinite free access more compelling.

3. Some new users didn’t see the value of the app within 7 days

We interviewed a number of free trial users who had not subscribed.

We had assumed that these users would take the time to play with the app in their 7 day trial. But for a lot of them, they got distracted, were too busy or didn’t understand something about of the app.

Essentially, a number of our new users didn’t experiment with the app during the free trial for no other reason that they were pushed for time. This is a nightmare scenario for us where potential power users have finished their free trial without trying out the app, and are locked out of the app forever.

Sorting out these issues

So, to recap, we had three issues:

1. New users, put off by the lack of free tier, don’t even sign in
2. New users don’t want to create Artboards they might lose
3. Some new users didn’t see the value of the app within 7 days

We looked into two possible solutions

1. Extend the free trial period
2. Introduce a free tier

In the end, we chose to introduce a free tier because extending the free trial does not solve issues 1 & 2 —We don’t want to deter any potential new users from trying out the app, and we want to reassure new users that they would never lose their Artboards, even if they aren’t subscribed.

There is one other reason we chose Freemium

It is tempting to to view the pricing model as part of your product. But we have come to view the free tier as a marketing device. It is giving users access to your free features who can then go out and make referrals for you.

Vineet Kumar notes in his HBR piece:

A free user is typically worth 15% to 25% as much as a premium subscriber, with significant value stemming from referrals.

Free users are great for word of mouth referrals. This can pump more numbers into the top of your onboarding funnel so you can get better analytics and more growth, and in the end, more revenue.

Last step: the business model

The final step was to do the calculation to see if a Freemium model was a viable business options. According to Vineet Kumar, around 5% of your freemium user base should be paying users. Therefore, there is a very quick calculation you can use to work out how much you can make on monthly subscriptions.

number of users   x    0.05    x    cost/user/month

For Pilcro the numbers made sense, so Freemium became a viable option for us financially.

Conclusion

Making the choice between freemium and free trial is a very difficult one. You really have to assess the value of free users for your product. How much does a free user cost you? How much value do they bring in terms of word-of-mouth marketing?

For Pilcro, the choice to go Freemium became obvious when we dived into the statistics and started asking users who had dropped out a various stages of the onboarding funnel.

Steps:

Here are some steps you can take to find out whether introducing a free tier could help out your product.

1. Map out your onboarding funnel
2. Interview the users who dropped out at different stages
3. Discuss whether a free tier would improve your chances of retention
4. Work out how much a free user would cost you
5. Do the calculations on your business model to see if you can afford a free tier.

If you liked this story, please 👏 and please share with others. Also please check out my company pilcro.com. Pilcro is the brand management app for G-Suite.