SaaS: Freemium or Free Trial? (Complete Guide)

This question is among the most important decisions to make for a SaaS and should not be taken lightly.

At first glance it might seem like a trivial question, but with a little digging you will see how it can tremendously shape your marketing, brand and even your very business…

Let’s start with the definitions (if you are familiar with them, jump straight to the breakdown)

What is Freemium and Free Trial

Freemium: In essence it’s a light version of your SaaS, which the user can use for free, forever.

An example is when the SaaS is offered for free, but has a limit in users, data or features you can use.

Free Trial: In this case the user who signs up can use the full version of the product for a limited time, usually 7, 15 or 30 days.

Let’s move on to the benefits and disadvantages of freemium and free trial SaaS models.

Freemium SaaS Model — The double edged sword

When you start a SaaS nobody knows you. Naturally, most people are reluctant on asking for money from their early adopters who are using their product. So, they turn to freemium; giving their SaaS for free until they feel comfortable or need to start charging their users.

In some cases that’s ok since early SaaS are usually full of bugs and your early adopters are offering their time and feedback to help you make a great product that people will happily pay for. So, you go with the Freemium model.

At first things look great, *especially* if no competitor is using the freemium model yet.

People are signing up, using the product, giving feedback and reporting bugs, thus making the feedback cycle very short. All the while your brand creates immense goodwill in the market by not charging people who can’t afford it and growing as its customers/users grow.

Word of mouth starts taking off, people start searching for your brand, you start getting mentioned in articles as a free alternative and that people can start for free. There is a steady, up and to the right traffic and sign ups, along with (hopefully) some paying customers. SaaS heaven.

But as you guessed, it’s too good to be true…

Freemium is like a credit card, it’s a lot of fun until you get the bill at the end of the month.

As your company grows the support tickets grow as well… including tickets from people who are not paying! Now you have to either slave away supporting users instead of growing the business, or hire someone to help you with the customer support.

But, if you don’t have enough paying users, how are you going to afford such a hire?

You are trapped.

And that’s only one of the ways you are paying for the quick early traction.

The second way is that as you grow, people are going to know and mention your SaaS as the “free solution” or the “free alternative”. This will bring some paying customers, but it will also bring a lot of freeloaders who will be using your SaaS and support for free, for ever.

This brand perception (the “free solution”) will be very hard to change later on and chances are you will never be able to charge premium prices, regardless of how good your product is.

The third way in which you are paying the price for the early traction is that your product roadmap might be influenced in the wrong (unprofitable) way.

This is very simple, you are receiving feedback about your product and adjusting the roadmap accordingly. But, if you are getting a lot of feedback from free users and value it equally with the feedback from your paying users, you are building a product for the freemium users and not your paying customers.

That’s a sure fire way to bankruptcy.

It’s like voting for the presidential elections of a country you don’t live in!

You must always value the feedback of your paying customers more than that of the free users. A freemium model can blur the line between valuable and useless feedback, but now that you know it, you can avoid it.

The fourth way in which you are paying is that you are forgoing revenue from very small accounts.

That’s because if I like your startup and want use it just for me (1 user), I would normally need to pay a very low amount, like $9/month to use it, but now I don’t have to, since I get it for free as a lite version.

These are all the cons of the freemium. I must stress though that you will get a lot of mentions, PR and users without much effort, that otherwise you might didn’t get.

As you see it’s quite a gamble, especially if you are not funded…

If you are funded it’s usually a safer gamble, since you can burn cash until you build a couple major features available only to paying users, thus enticing more people to pay for your SaaS.

Free Trial SaaS Model — There is pressure in a good and a bad way

Free trial…. Where should I start…

First of all, in the early stages of your SaaS, unless you have a really groundbreaking solution to a common problem, you will struggle *immensely* with having people taking your free trial.

Nobody knows your product and the percentage of people who will take your free trial will be very low. You will need strong copywriting and be great at how you present your product to get free trials.

Why?

Because all successful people in B2B are busy and don’t have the time to try yet another product that nobody has mentioned before.

Not only that, but these people will have a limited timeframe (7, 15, 30 days) in which they have to block out time in order to try the product and make it work for them, all the while having to do their regular job!

You see where this is going…

To make this work your onboarding must be personalized and in essence you must take extra care of your first free trials. If you get only a few free trials, at least do all that you can to make them stick around and become passionate early adopters.

Now, the problem is that if you can’t present your product effectively and people don’t take your free trial, you might have a promising product, but it might die, just because not enough people tried it…

In later stages of a company, a problem is that many people who see the free trial think “Hmm I have x days to get the grasp of this SaaS, but lately I have been pretty busy. Maybe another time.” and they leave.

Time is scarce especially for B2B decision makers. You need to stress out that it won’t take long not only to sign up, but also to see results by using your product.

Your onboarding must be great and help them get the grasp of your SaaS, with minimal effort from their part. For a great example of this, sign up and try Snip.ly.

Ideally, the first time they sign up for their free trial you want them to set up something in your product to keep them coming back.

If this doesn’t happen then you can keep emailing them to come back, along with your blog posts and product updates, but you can’t expect much in terms of short term revenue in this case.

On the flip side though and in defense of free trials, you don’t have people who don’t pay, fill up your support, guide your decisions etc.

Also, you might have higher revenues contrary to a freemium. That’s because people might like your SaaS enough to pay, whereas in a freemium, users might like your startup, but not need to pay since the lite version works well enough for them.

As you see things can get a bit complicated as to what you should choose…

These 2 (Freemium & Free Trial) are the most popular options. But, there is a 3rd one, a 4th one, and even a 5th one.

Brace yourselves because this is where things will get even more interesting…!

Neither freemium nor free trial

This is what we did with our price tracking software, Altosight. Things are pretty straightforward here: You might see how the SaaS works in a demo, video or webinar, but you don’t get to use or try it unless you pay.

This strategy is pretty audacious because it implies that the company stands 100% behind the product and the value it provides, as well as it won’t give even a lite version of the product to the audience unless they pay. It doesn’t mean the product will live up to the expectations, but that’s the feeling it conveys.

Also, it doesn’t create goodwill in the marketplace, because it doesn’t help those who can’t afford it or who want to try it in order to write a review about it.

On the other hand though, it creates scarcity, since not everyone can give it a try or use it. Since it creates scarcity, based on Cialdini’s book “the psychology of persuasion”, it also creates a perception of higher value.

This means that when you pay and get it, you feel special about both yourself and the product.

The downside is that it’s immensely hard to make this model work unless your company is really revolutionizing the solution of a problem. Examples are Baremetrics and LeadPages.

However, there is also the danger that if you choose this model and your product doesn’t live up to its promise, you might get some bad reputation pretty quickly…

Both Freemium and Free Trial

In this case the company is offering a freemium/lite product, if possible without the user even registering, and a free trial of the premium product.

To see this in action check Buzzsumo.

Buzzsumo is a great tool that lets you use it instantly for free. If you want more, you have to register and if you want even more you have to pay or use its premium version for free for 14 days.

This option might or might not work for your SaaS. Here is why:

You are leaving substantial short term cash on the table. That’s because people at first will be using it for free and it will take some time to get enough mentions for customers to find you.

On the other hand though, if your product is great, like Buzzsumo, and you are solving efficiently a common problem (like Buzzsumo), even without asking for an email, you are going to create tremendous goodwill in the market and people will promote your SaaS like crazy for free.

Here is an example of how this worked for Buzzsumo:

It’s offering a lot of value for bloggers. So, naturally when bloggers saw the value in it and that it’s free, it was a no brainer for them to promote it and mention it in their blogs (just like I am doing right now).

The reason that bloggers promoted it, is that it helps both new and seasoned bloggers find influencers, popular content etc, for free. So they provided a lot of value to their readers by mentioning it and they didn’t come off as “pushy” since it was free. Boom.

After that, at some point, influential bloggers like Neil Patel, find you out, mention you and you start going viral. That’s in essence an example of growth hacking built-in at the core of the product.

Freemium, then free trial (Blended)

The fifth option is an aggressive alternative.

It’s starting your SaaS as a freemium and then turning it into a free trial only.

Many startups either did that on purpose, getting the initial PR and traction and then turning into free trial only to make more money, or had to because the economics weren’t working out.

I consider this an aggressive alternative, because you have to cancel all the free accounts and tell your users that from now on they will have to pay to use the previously free software. This is going to create some backlash and destroy some goodwill.

If you decide to leave the free accounts in place you might find out users in the “black market” selling them…

Also, you got links and mentions for having a free option. When those authors find out that you no longer support it, you will lose some links and mentions.

However, many startups when faced with the option to either close shop or offer only a free trial, of course the opt for the latter.

An example is Dave from HubStaff and I highly encourage you to read his in depth post of how they had to go to free trial.

Conclusion

I hope you enjoyed reading this as much as I enjoyed writing it! If you want to receive more weekly articles like this, subscribe on the sidebar.

As you can see there are quite some options and there is no right or wrong. Each option has both benefits and drawbacks.

It’s a strategic decision on what you end up doing, freemium, free trial or one of the other options. There is no right or wrong.

Whatever you decide, always remember that you don’t have to marry it. If at some point the choice you made feels like it’s not serving you anymore, hold a meeting with your team and consider changing course.

Now, back to you: Are you employing free trial, freemium or something else and how it has worked out so far?


Originally published at weeklygrowth.com on September 24, 2015.