The economics of free trials

Growth hacking your user signup process

Kristin Eberth
Apr 28, 2015 · 8 min read

Every startup and SaaS (software as a service) maker has had this debate at some point: should we offer a free trial for new prospective customers, and hope to convert them afterward? Or should we just give them a teaser of our product and make them pay for access to the whole thing?

We all intuitively know that a free trial can be effective. I’m invariably super stoked when ‘Cheese Week’ happens at my local premium grocery store, and little cheese sampling tables pop up everywhere. I walk around trying premium Brie and Parrano and Dutch Maasdammer from all over the world, almost congratulating myself for scoring samples of all these expensive cheeses for free. But without fail I find one or two (or four) cheeses that are so delicious I have to buy them, even at silly price points. Next thing I know I’m maintaining a consistent stock of my favourite overpriced, pretentious cheeses — items I would never have picked up had I not had the opportunity to try them first.

Often, this try-before-you-buy sales method just works, plain and simple.

Is software really that different? Opponents of the free trial method often worry that users will abuse the system, repeatedly creating new accounts with different login details and cutting into revenue. The limited-feature-sneak-preview, it’s thought, gives people enough of a taste to leave them wanting more but clearly requires them to pay if they’d like to enjoy full use of your product.

I’m not convinced this is a better solution.

As kids, my friends and I would bring hats and sunglasses when our moms dragged us to Costco, and we’d go back around to our favourite food sample stations repeatedly, in different ‘disguises.’ We thought we were fooling the samplers, but the truth is they just didn’t care. Setting up a sample station for a day probably produced enough of a bump in sales of the product in question that repeat samplers ‘gaming’ the system just didn’t matter. (Yes, we were dorks, but that’s not the point I’m trying to make.)

How much do users who abuse free trials really hurt revenue and growth? What are the benefits of offering the free trial anyway? Let’s turn to good old fashioned science to find out.

Psychology: why we like free stuff

The fundamental principle operating here is pretty straightforward. Dan Ariely, in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions, lays it out thusly:

Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision — the possibility of a loss. And so, given the choice, we go for what is free.

The appeal of ‘free’ is so compelling, it can motivate us to choose one option over another even when it’s irrational, economically speaking. If you read Dan’s book you’ll come across some great examples of experiments he conducted that prove this.

Doesn’t a free trial dilute the perceived value of my product?

No. People inherently understand that when they’re allowed to try something for free, it usually comes at a cost and they only have free access for a limited amount of time. Think of it this way: a free trial is not giving away your product for free, but rather making your user acquisition process more effective. You’re making it easier for people who need and want your product to become paying customers. You’re bringing them partially on board without having to address every one of their questions, hesitations and concerns. And from their point of view, you’re bearing all of the risk if they don’t like your product, rather than forcing them to incur a financial risk. The free trial helps to minimize friction for users at the outset.

So how can I definitively know if my business should offer a free trial or not?

If you offer a SaaS product that relies on user payment for revenue, there are two ways to make this decision.

  1. Make some assumptions about your users and take a good guess at what will work for you and what won’t. This approach is flawed for all kinds of reasons, least of all because your competitors are probably testing and optimizing their onboarding process, and will eventually beat you at this game with the sheer power of basic math. It’s 2015. You’re only limiting your potential if you go this route.
  2. Test it and see. Launch a free trial and watch your metrics closely. If you’re not increasing the number of paid users you’re bringing on board, review the points I listed above and fine-tune your free trial offer. Measure, run tests, critically evaluate, repeat. If you’re considering a different approach (like a freemium plan), A/B test the two systems on a set of prospective users and see which one converts better. Running tests like this is so simple and affordable that there’s really no good reason not to. Why make uninformed guesses when you can make educated, data-driven decisions about your business?

Designing the perfect free trial

If I set up a free trial for my software product and my competitor doesn’t, all we know at this point is that I’ll probably have an easier time getting people to try my product than he will. In some ways, this is a good enough argument for a free trial program in and of itself. One of the golden rules of marketing is Get More People Flowing Into Your Sales Funnel. If you’re able to increase the number of people who are exposed to your product by offering a free trial, you’re already moving in the right direction. Even if your conversion process sucks, you’ll probably still get more paid users simply by moving more people through your funnel. There’s more to it, though. Free trials are incredibly optimize-able. Consider testing things like:

  1. Trial duration.
    Your goal should be to figure out exactly how long it takes for users to have an ‘aha!’ moment with your product, and optimize your free trial to take advantage of that. You’re looking for the critical turning point after which most users go from casually interested to hooked. Twitter is the famous example — when new users follow a critical mass of people, they are much more likely to become regular Twitter users. (Imagine how boring Twitter would be if you weren’t following anyone?) This is why Twitter incorporated this into their onboarding process, with great success. For more complex products, it might take a little bit longer. A project management tool like Basecamp requires more time to get an entire team to change its work habits and see the value in a new tool. Look for both qualitative and quantitative feedback from your users in order to clearly define the ‘aha!’ moment for your product, and make sure the free trial gives them just enough room to reach that point. And if your product doesn’t have an ‘aha!’ moment? You’ve got bigger fish to fry. Try reading Nir Eyal’s ‘Hooked: How To Build Habit-forming Products‘ for help.
  2. Extensions.
    What if a prospective user signs up for your free trial, gets a little busy and forgets to test your product, and then comes back only to find their time is up? It seems like a waste to turn away a good lead who’s genuinely interested in what you’re selling. A free trial extension is a good way to overcome this. shortened their free trial from 30 days to 14 days, and then implemented a free trial extension for users who didn’t find time to test their product within the first 2 weeks. They found huge success with this method, and they’ve written about it in very helpful detail.
  3. Support.
    It’s always difficult to look at your own product with fresh eyes. But it’s crucial that you make your user experience as simple and easy to figure out as possible, so that you never waste an opportunity to get a user hooked. Solicit feedback constantly from new people who have never tried your product before. Consider forcing users to take a few key steps (like Twitter’s requirement that you follow 5 other people) before granting access to the rest of the features. Test various tool tips and tutorials, and make sure your support system is as robust and accessible as possible. This is especially important in the complex world of enterprise/B2B software, where UX and simplicity often suck the most. Don’t lose good users because of bad support!
  4. Payment collection.
    Your finance department will probably argue you should get your trial users’ credit card info right off the bat and just start billing them when the trial expires. But remember, requiring that information up front just adds another point of friction to your initial onboarding process. It may be that you secure higher quality leads this way. It may also be the case that a frictionless, credit-card-free signup process brings way more potential users into your funnel. It’s worth testing to find out.
  5. First-time signup offers.
    Consider easing trial users into paying for your product by giving them a discount on their first month/year/whatever once their trial expires. To get all marketing-ninja about it, send them an email when their trial expires and offer them another free month if they refer x number of friends to sign up.

In short, if you test thoroughly and put some real effort into optimizing your user onboarding process, you should be able to truly maximize every interaction with your prospective users. A free trial is just one thing you can experiment with!

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Published in #SWLH (Startups, Wanderlust, and Life Hacking)

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