What Many SaaS Startups Get Wrong About Freemium

Freemium is an extremely popular pricing model for software products, and on paper it looks ideal. The theory is that you’ll entice new customers with a free subscription and withhold certain features for the paid version. Ideally, your free users will love your product so much that they’ll sign up for the paid version.

What could go wrong?

Well, like so many good ideas, in practice, freemium doesn’t always turn out perfectly. It’s worked excellently for some companies, like Mailchimp, which used freemium to grow its total user base five times over and to add more than 4,000 paying users each month. But there are also freemium horror stories, like that of Baremetrics, which nearly went under after just three months of experimenting with freemium.

Thus, entrepreneurs are split over whether freemium is good or bad for web-based startups, but the truth is that it’s neither: everything depends on how you use it. Approaching freemium the right way can drive massive low-touch sales from subscribers who will stay with you for years. But approaching it the wrong way can land you in a deep hole of support tickets, infrastructure costs, technical debt and churning users.

By learning what many SaaS startups get wrong about freemium, you can avoid repeating their mistakes. Read on for my take on four key freemium mistakes to avoid, what makes them so toxic, and what to do instead.

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Using freemium as a tool for revenue

The first mistake is thinking about freemium as a revenue model, when in reality, it’s an acquisition model. Your free users are not customers who’ve already converted; they are simply leads, who are deep into a different type of funnel.

In this sense, freemium is another marketing tool for attracting interest in your product and nurturing warm leads until they convert into paying customers. Focus your efforts on delighting your free users so they’ll feel the desire to keep using your software, eventually converting to more loyal paid subscribers. Continue with your product-oriented sales and marketing tactics, like embedding your brand name and logo prominently in the free solution, because you still need your free users to strengthen their positive associations with your brand.

(Source: ProfitWell)

In this way, free users can become the long tail that supports your business and enables higher customer retention rates, as shown in the graph above from ProfitWell.

Misunderstanding your customers

For the freemium model to succeed, you need intimate knowledge of what your users are really after. SaaS startups that fail to perfectly understand who their ideal customers are will fail.

You need to know what specific pain points will convince customers to sign up for your free plan, and what will eventually lead them to switch to the paid version. This is the value that your audience needs to aspire to unlock with your product, and that value needs to have two levels to it. People should get that value as soon as they sign up for free, but they should also feel the promise of significantly more value if they upgrade.

Essentially, freemium success means striking the right balance between offering an attractive free plan and still reserving enough features to entice people to switch to a paid one. Mailchimp found this balance; the company used its free plan to differentiate it from other email marketing platforms, but it also knew which premium features would convince users to sign up for the paid plan.

A big aspect of making this work requires continually innovating and iterating to make your paid version more attractive by adding more features and improving your level of service. Reducing the appeal of your free plan is not the right approach; that will only put off your free users, who’ll feel betrayed because you moved the goalposts on them.

Related: In Crisis, What Should Entrepreneurs Make Free(mium)?

Launching a freemium plan before finding product-market fit

You should never use freemium pricing when you’re still trying to work out your unique selling proposition. For freemium to succeed, you need to be absolutely clear about the value of your free product and the added value of your premium product. You also need to be capable of communicating them both clearly to your users.

To put it simply, you must find your product-market fit before launching a freemium plan.

One element to finding your product-market fit is establishing that there’s a market for your product in the first place. In the case of freemium, that potential market needs to encompass tens of millions of potential users, so you can afford to only convert a percentage of free users to your paid plan.

The other component is ensuring that your product matches the market’s needs so that you can articulate your value proposition, convince leads to join your free plan and eventually convert them to your paid plan.

Not making sure that you can support all free users

This is the primary takeaway from the Baremetrics freemium failure story. Founder Josh Pigford has said he didn’t anticipate the impact that so many free users would have on the app’s tech infrastructure. Although 11 percent of those users converted to paid plans, free users quickly outnumbered paid users, placing an unsupportable load on Baremetrics’ servers and clogging up its customer support system.

In just three months, free users absorbed so much of Baremetrics’s resources that paid customers began to leave in frustration at the failing system.

Contrast that to the experience of Vistaprint, which was already an established printing business before it made a bold move to attract micro-businesses with free business cards. Vistaprint had all the equipment and resources in place to meet increased demand for free cards, and economies of scale meant that printing more cards for free users actually reduced their per-item production costs overall.

The moral of these stories is clear: before implementing your freemium plan, you need to either be sure that you have the infrastructure and resources to support all your free and paid users, or have a strategy to limit free users enough that they won’t place a strain on the experience of your paying customers. That includes bandwidth, storage, tech and customer support, and countless other elements.

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Bottom line: Freemium can still succeed, as long as you do it right

The bottom line is that freemium plans can still be highly effective. For example, Dropbox is still doing very well by offering a free plan alongside paid tiers. But, executing a freemium model requires careful forethought and extensive planning.

As long as you avoid making the mistakes of using freemium as a revenue tool, launching your freemium plan too soon, overstretching your infrastructure, or failing to understand user needs, your freemium SaaS experiment should have great potential for success.

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