An Ultimate Guide to Freemium Model in SaaS Business
The freemium model is somehow difficult, but it works because if you have a great product, customers will want more of it. Freemium is an integral part to growth because it allows your customers to easily extract value from any product.
Once you get the free customers, you should continue supplying them with marketing materials to encourage them to move to the paid version. To ensure a profitable model for your business, here are a few things you need to keep in mind.
1. Define the core value of your product
A company that has successfully implemented the freemium model is able to clearly identify the core value that their product provides.
For example, HubSpot, the core feature differentiating free and paid versions is the number of contacts that can be in their databases. Users who want to continue adding contacts will be required to pay for an upgrade.
The key thing to encouraging free users to upgrade is limiting that core value feature on the free version. Your pricing strategy should be based on that core value.
2. Be able to identify product-qualified leads
Product qualified leads (PQLs) are the mirrored version of sales 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 the main criteria in a freemium model is usage level. A user becomes a PQL for a paid upgrade when they’ve been using the free version so much that they’re on the threshold of needing to make additional purchases.
In other words, they’re approaching a stage where they can no longer extract additional value from the free version of your product. In order to continue extracting value, they’ll either have to pay for the upgrade or scale back their usage levels. That’s the point when your sales team will want to 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 companies have been able to reduce the amount of sales calories they’re allocating to PQLs and re-focus their sales team to chase after bigger, more challenging deals.
Of course, you want to be sure to notify PQLs when they’re approaching the limits of their free plan, but in many cases, you won’t need to invest 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 core value, 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 business model is not to convert every single free user into a paid customer. It goes without saying that any free product will attract many carefree, less-than-ideal customers who purchase the product just because it’s free — but those aren’t the people you want to market to.
On average, about 5 percent of freemium users will become paid customers. On the surface, 5 percent might not sound great, but the average lead-to-customer conversion rate in the traditional, non-freemium model is only around 0.5-1.5 percent (SiriusDecision), so freemium conversion rates are still much higher.
Why? Because in the freemium model, you’re eliminating many of the transitional stages that guide a lead into becoming a paying customer. Giving prospects the ability to tinker with your software and experience its value first-hand — before ever making a purchase — is extremely powerful. For the users who do eventually convert into paying customers, freemium enables a frictionless funnel with fewer sales and marketing touchpoints required.
Yes, not every free user will become a paid customer. Before you implement a freemium model, you should think about whether or not you’re comfortable operating under that reality. Just remember that, if you approach it correctly, the potential gains are much higher than those from the typical model. (And if you master the freemium approach, those gains skyrocket; take Slack, for example, whose freemium conversion rates are 30 percent, or Spotify, whose freemium conversion rates are about 27 percent.)
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