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An Ultimate Guide toFreemium Model in SaaS Business

The freemium model is somehow difficult, but it worksbecause if you have a great product, customers will want more of it. Freemiumis an integral part to growth because it allows your customers to easilyextract value from any product.

Once you get the free customers, you should continue supplyingthem with marketing materials to encourage them to move to the paid version. Toensure a profitable model for your business, here are a few things you need tokeep in mind.

1. Define the core value of your product

A company that has successfully implemented the freemiummodel is able to clearly identify the core value that their product provides.

For example, HubSpot, the core feature differentiating freeand paid versions is the number of contacts that can be in their databases. Userswho want to continue adding contacts will be required to pay for an upgrade.

The key thing to encouraging free users to upgrade islimiting that core value feature on the free version. Your pricing strategy shouldbe based on that core value.

2. Be able to identify product-qualified leads

Product-qualified leads (PQLs) are the mirrored version ofsales and marketing qualified leads who have demonstrated buying interest.

There are different ways to define and identify PQLs  based on your company and product, but themain criteria in a freemium model is usage level. A user becomes a PQL for apaid upgrade when they’ve been using the free version so much that they’re onthe threshold of needing to make additional purchases.

In other words, they’re approaching a stage where they canno longer extract additional value from the free version of your product. In orderto continue extracting value, they’ll either have to pay for the upgrade orscale back their usage levels. That’s the point when your sales team will wantto reach out to that person — or not!

One of the unique benefits of the freemium model is that often,users will upsell themselves. Because this happens naturally, many companieshave been able to reduce the amount of sales calories they’re allocating toPQLs and re-focus their sales team to chase after bigger, more challengingdeals.

Of course, you want to be sure to notify PQLs when they’reapproaching the limits of their free plan, but in many cases, you won’t need toinvest too heavily in marketing to them. Don’t interrupt their buying process;if they’re enjoying your product and have come to rely on it for its corevalue, they’ll likely reach out to you on their own.

3. Understand that not every free user will ultimately become a paying customer

… and that’s a good thing! The goal of a freemium businessmodel is not to convert every single free user into a paid customer. It goeswithout saying that any free product will attract many carefree,less-than-ideal customers who purchase the product just because it’s free — butthose aren’t the people you want to market to.

On average, about 5 percent of freemium users will becomepaid customers. On the surface, 5 percent might not sound great, but theaverage lead-to-customer conversion rate in the traditional, non-freemium modelis only around 0.5-1.5 percent (SiriusDecision), so freemium conversion ratesare still much higher.

Why? Because in the freemium model, you’re eliminating manyof the transitional stages that guide a lead into becoming a paying customer.Giving prospects the ability to tinker with your software and experience itsvalue first-hand — before ever making a purchase — is extremely powerful. Forthe users who do eventually convert into paying customers, freemium enables africtionless funnel with fewer sales and marketing touchpoints required.

Yes, not every free user will become a paid customer. Beforeyou implement a freemium model, you should think about whether or not you’recomfortable operating under that reality. Just remember that, if you approachit correctly, the potential gains are much higher than those from the typicalmodel. (And if you master the freemium approach, those gains skyrocket; takeSlack, for example, whose freemium conversion rates are 30 percent, or Spotify,whose freemium conversion rates are about 27 percent.)