Free Trial vs Freemium: Breaking down the Pros & Cons
Free trials work.
Freemium works too.
But what model is better? The answer is… it depends.
Depending on your go-to-market strategy, many SaaS companies are fighting the constant battle of trying to convert free customers to paid.
And let’s not forget, that not converting users can make or break your SaaS company as that contributes to a rising churn rate.
To combat this problem, a lot of businesses are using one of the two options: free trials or freemium offerings. Each has a specific effect on your churn rate, and its success depends on the kind of customers you’re targeting.
Since no two SaaS companies are alike, we’ll weigh the pros and cons of both free trial and freemium SaaS pricing models. We’ll also take a look at case studies of companies who’ve used these churn-reduction options to their advantage.
Let’s keep your customers where they should be: doing business with your company.
The difference between Free Trials & Freemium
Free trials: In short, you’re providing full access to your product or service free of charge. Typically limited by a time frame. To be clear, a free trial isn’t a pricing strategy, it’s a customer acquisition strategy.
- 30-day trial
Additionally, credit cards can be required and will charge your card (if you don’t cancel) for the plan you’ve selected once the time frame expires.
Freemium: Typically customers have access to a free (limited) version of your product or service. Usually, free plans are offered forever. This allows customers to get a taste of the product and as their needs evolve they’ll hopefully upgrade to a paid plan.
The Pros and Cons of the Freemium Pricing Model
The freemium model is a quite popular pricing model these days. This is due to the fact that it’s much easier to attract new users if they can take it for a test drive before buying.
New users don’t have to commit to a recurring payment (or any payment at all) in order to test out features and see whether the product is a good fit for their needs. Watch out though, you’ll need to monitor your costs to make sure it’s sustainable in the long run.
The ultimate appeal of freemium for companies and customers alike is that it reduces revenue churn by allowing users to get used to the product, and use it out of a habit.
Once they reach the freemium feature limit, they’re more likely to upgrade as they already understand the product and know it serves them well. It’s not as hard to get them to commit financially once they reach the threshold.
With freemium, the main question is: which features should be free?
This depends on your general business strategy, your product, and your users.
If you offer too few features (and not the right ones) with your freemium model, users may be discouraged from upgrading.
The key here is providing enough value.
Similarly, if you offer too many features, there’s no reason for users to ever upgrade.
However, don’t worry. You can start with one kind of freemium offer and switch to another after analyzing your user behavior and traffic.
Another important thing with freemium is that you should make the lines clear for users. They have to understand what they get by upgrading. If they don’t know what your paid plan offers, they have no reason to upgrade.
Freemium Case Studies
MailChimp is an email marketing service provider. They allow users to schedule emails, track opens and other relevant information, and automate email marketing.
Their freemium structure allows users with basic (free) accounts to send over 12,000 emails a month to 2,000 subscribers. Once they reach the 12k email/2k subscriber threshold, they can upgrade.
Freemium users don’t have full access to email marketing automation, as that’s available with paid plans only.
MailChimp’s pricing is also very flexible, so users can upgrade from $11 per month.
Their freemium model is very successful because:
1) Users can sign up for free to test the service, but they don’t have the full variety of serious email marketing features unless they upgrade.
2) Email marketing relies heavily on habits. Once everything is set up, users are reluctant to switch to a different platform. MailChimp definitely offers a lot of features at a fair market price, so switching providers is just a hassle.
MailChimp’s tipping point came in 2009 when Chestnut made a somewhat counterintuitive decision: “Let’s just make the whole thing free.” If your customers are small businesses, make it easy and cheap for them to try you out, his thinking went. That means they’ll be happy once they have to pay for your services because it means their business is growing.
Slack has a fantastic 30% freemium-to-paid conversion rate, and it’s not surprising.
Many companies who fail at the freemium model make one critical error — their Freemium plan isn’t enough for users to actually start seeing any kind of benefit. Sure, you may have a few people sign up but if the freemium product is a dud or doesn’t solve at least one part of their problem — they won’t be motivated to upgrade.
The need for a service like theirs (messaging and communication) definitely exists, and the fact that they’re offering a lot of features for free only serves to motivate customers, even more, to upgrade to premium.
Slack also understands their audience, and the simplicity of their solution helps them attract a lot of new customers through referrals. Word spreads fast about quality communication solutions.
However, the key to their freemium success is providing value.
Like we already talked about, freemium relies on users getting benefits from the basic product in order to want to upgrade and get even more.
Slack’s initial offering is very simple: communication. And for teams who want more features like synchronization, unlimited storage, phone calls, and everything else, there are upgrades which start from $7/month/active user.
Their freemium model is successful because:
1) They’re solving pressing problems of their customers, and offering a lot of functionality for free. Their freemium model isn’t just there to attract customers – they value them as though they already paid for an upgrade.
2) When motivating users to upgrade, Slack simply reminds them that they could be getting more benefits. They don’t cut users off when they need Slack the most – instead, they show how Slack can be of even more use.
The Pros and Cons of Free Trials
The free trial is the oldest user acquisition trick in the book. Users have full access to all the features a SaaS provides, but as soon as the time runs out, they’re cut off.
This is a powerful motivator, especially if users have been very satisfied with your product.
There are two types of free trial structures: opt-in free trial and opt-out free trial. With opt-in, users aren’t required to input their payment information, whereas in opt-out they have to enter it, and manually opt-out if they don’t want to be billed.
Another one of the free trial advantages is that users can experience the full functionality of your product. You aren’t forced to downsize or cherry-pick your features.
However, this can be a double-edged sword.
If your product has many features, it’s quite possible the users won’t use it to its maximum capacity. This is why many SaaS companies which offer free trials include feature walkthroughs and tutorials.
Where free trials are concerned, it’s very important to keep an eye on product usage data. If you find any places where usage stagnates or decreases, you’ll have to optimize your product (or your support) further.
It’s generally a good idea to place a lot of resources into customer support if you opt for a free trial pricing structure.
Your goal should be to acquaint users with the product as much as possible, and show them how using your product solves the problems you’re addressing.
Again, free trials rely on product optimization and innovation. You’re offering the full functionality for free, so it’s important to motivate customers to use the product as much as possible.
And make sure you monitor when their attention starts dropping, so you can cut off the free trial before that point. Time your free trial so users are at the point where they’ve gotten “hooked” to your product.
Free Trial Case Studies
Intercom is a customer support messaging system. The best feature of this SaaS is that it also ties customer support into sales and marketing. Businesses can integrate helpful articles into immediate user support requests, onboard new users, and convert prospects into customers. All with one service.
As such, Intercom has been very helpful for businesses everywhere. And when it comes to their pricing structure, they’re choosing the free trial model.
Users can try out Intercom for 14 days, and get full access to all features it offers (and there are a lot of them).
Intercom’s case shows that pricing structure ultimately depends on your product. If your product can’t be divided into multiple parts (as is the case with customer support), it makes no sense to offer freemium.
Instead, everyone can try out Intercom, and once they’ve gotten used to it and saw all the benefits it provides, it’s much easier to convert them into paid customers.
For Intercom, free trials make sense. Most users are using it to its full functionality (acquiring, supporting, and converting customers) so the $49 monthly price doesn’t seem like too much.
Their free trial model is successful because:
1) Intercom understands its users, and 90% of its users use all the features they offer. This shows them the value of the product, and it’s not hard to motivate them to upgrade and keep using Intercom for more than 14 days.
2) They communicate with their customers. This makes sense, due to the fact that they are a customer support SaaS. However, it’s a good lesson on providing as much customer support as you can during the free trial in order to ensure free trial users convert to paying customers.
If anyone re-popularized free trials in the 21st century, it was definitely Netflix. A SaaS known for innovation, Netflix knows that its product is simple, useful, and necessary.
Instead of capping the number of shows, users can watch (and lose money while doing that) with freemium, they offer a 30-day free trial.
Since the product and pricing is right, Netflix leverages their free trial again to combat churn at a later date. If a user didn’t sign up for a paid option in the previous free trial period, they’ll repeat the offer a few months later.
Netflix also encourages maximum usage of their product in the free trial period. They use email marketing to periodically send out emails to free trial users, offering them recommendations on what to watch.
Their free trial model is successful because:
1) Netflix doesn’t just offer a free trial and call it a day. Instead, they nurture the users and motivate them to keep using the product until the free trial runs out. This creates a habit, making users more likely to keep using their service even after the trial runs out.
2) They leverage their free trial as a “cherry on top” offer. Users who want to watch shows and movies for a relatively low price monthly would subscribe to it, but the fact that Netflix even offers a trial resonates positively with their customers. If a customer didn’t want to continue using the service after the trial period, they’ll repeat their offer at a later date.
Understanding how either strategy can impact your bottom line
The first thing you have to understand is when you make a choice to offer a free trial or a freemium plan is the ripple effect it can have on your entire business. After all, the average SaaS company spends just 6 hours determining their pricing strategy (according to Price Intelligently).
Secondly, either of these decisions can also have a massive impact on customer retention.
In saas, churn is completely normal and affects all businesses in all different shapes and sizes. Best-in-class SaaS companies achieve 5-7% annual revenue churn. That’s the equivalent to a loss of $1 out of every $200 each month (according to Sixteen Ventures).
But that’s best-in-class. The majority of subscription businesses have high monthly churn percentages and as you add that number up over a year, it becomes larger than you think.
Typically, SaaS churn can depend on:
- Customer type
- Product (usage) type
- Quality of service
It’s possible to predict churn before it happens with customer data gathering and analysis. With the right tools, you can understand what kind of customers are most likely to cancel their subscriptions, or never upgrade from free to premium.
Analyzing customer data will also help you define the needs of your customers, and understand which model is better for them: free trial, or freemium.
Churn happens due to many factors, so make sure you’re not assuming, but analyzing and asking.
And once you understand what your customers need, it’s can really influence your pricing model for your customers.
What’s better: freemium or free trial?
It really depends on your product.
Either choice should feel natural to you and your customers. If you can integrate your pricing structure in product design from the very start, you can have a really successful model that customers will see the value in.
Again, whichever structure you choose, the most important part is showing customers the benefits of your product and making sure that they use it.
If you’re using freemium, you should make the paid upgrade so enticing that they can’t resist the pull of full functionality.
With free trials, it’s important to focus on creating a habit with the users.
And just like your product matters for your pricing structure, so do your users. Your decision should come from that.
Everything else is just a matter of listening and improving.
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