What’s the first thing you take into consideration when you make your buying decisions?
There are a lot of criteria that one takes into consideration when buying things. From its price to its quality, a product should satisfy customers and convince them that it will solve their problems.
But there’s one practice that comes from a simple desire that is so powerful in affecting people’s buying decisions, that is:
The opportunity to try a product out for free and compare it with another product out there.
It is a simple and natural desire, yet it is very effective.
No matter what your product or service is, you should not refrain from giving your potential customers a taste of what you offer because that’s the best way to convince them of the value of your product and therefore convert them into long-term paying customers.
What is Freemium?
Freemium is a user acquisition strategy that aims to have users use the limited version of a product for free for a limited time and have a taste of the value of the product. It is a great strategy to lower the customer acquisition costs (CAC) and convince users that your product can solve their problems.
When you want to buy a car, you would like to have a test drive, or even when you want to buy a shoe, you want to wear that shoe and see how it feels when you walk with those shoes.
The situation is no different for SaaS products. Many SaaS companies build their customer acquisition strategies on freemium models because they believe that the best way to persuade customers that their products are the one for them is to actually let them try their products.
In other words, the free features of a product are potent marketing tools. The freemium model allows new ventures to scale up and attract new users without the need to expending resources on costly ads or traditional sales strategies.
What is not freemium?
As the name suggests, freemium is the free version of products that have premium versions.
That is to say, every product that is free to use cannot be considered as a freemium model.
For example, Facebook or Instagram do not have premiums; therefore, they cannot be seen as freemium even if they are free to use.
Freemium vs. Free Trial
I believe the definition of freemium was clear up until this point. However, you may be wondering, “what is the difference between freemium and free trial,” well, let’s talk about that now.
There is generally a substantial difference between freemium and free trials.
Even though they both are offered to lower the customer acquisition costs and helping customers try the product for free and accordingly convert into paying customers:
- Free trials offer users (almost) complete access to all the features of a product.
- Freemium, on the other hand, is limited when it comes to allowing customers to use the features of a product.
What is the ideal Freemium Conversion Rate?
Ideally, freemium conversion rates are between 2-5%. Typically, the freemium conversion rate is around 1%. These numbers may seem not as high to you, but trust me, if your freemium conversion rate is too high, it may be a problem as much as a too low rate.
A low conversion rate for your freemium deal suggests a couple of things.
- First, your product may not be the one for which you are marketing your product.
- Second, you may be offering too many features, and users are taking what they need from the freemium version.
- Third, you may be failing to onboard users and guide them to finding the benefits of your product.
A high conversion rate than usual, on the other hand, may point out something other than success.
Yes, a high conversion rate reflects the quality of your product and the success of your business. However, if there is an unusual jump, you probably overpromised users during the freemium.
Once these users think that your freemium is not satisfying enough, they will convert, but they will immediately churn once they can’t find what they are promised.
How to calculate the Freemium Conversion Rate
Calculating the freemium conversion rate is simple: First, you divide the number of freemium users by the number of users that converted into active subscribers over a specific period.
Let’s say you have 100 users who started the freemium version of your product, and only 10 of them converted in a specific month, then your conversion freemium conversion rate is 10% for that month.
5 Benefits of a Freemium Business Model
There are some crucial benefits of a freemium business model that you can make use of for your business.
Let’s talk about five of the benefits of freemium!
#1 Helping users find the value in your product and increasing conversion rate
As mentioned above, freemium simply means giving your potential users the ability to try your product and compare it with the competing products.
You may be asking yourself why this is a benefit for your business. Well, it is simply because it is one of the best ways to increase your conversion rate by giving your potential customers what they need.
In today’s competitive world, especially after the COVID-19, users have started looking for products that they can try out themselves. According to research, three out of four B2B buyers would instead self educate than learn about a product from a salesperson.
Considering this research, you should offer freemium to help users satisfy their desire and decide if your product is the best one for solving their problems.
#2 Increasing exposure
Freemium is especially great for increased exposure.
Giving users a taste of what they are looking for for free will help you reach more potential long-term paying customers.
When users find what they are looking for in your product in your freemium option, they will spread the value of your product through word of mouth.
If you can help users make the most out of your product with a satisfying onboarding experience, you can make sure that they will want their family and friends to benefit from your product too.
#3 Reducing customer acquisition costs (CAC)
You need to know that freemium is more about reducing customer acquisition costs rather than bringing more revenue in the first place.
It does not only help you reduce the money spent on acquiring new customers, but it also helps you save much-needed time and energy.
Here is how much freemium would help you save from customer acquisition costs:
You can see that customer acquisition costs have gone up compared to 5 years ago with or with the freemium model. However, you can see that the percentage of the increase speaks up for the benefit of a freemium model.
#4 Creating loyal customers for your business
Even if a user doesn’t immediately convert after using the freemium option of your product, they will be accustomed to your product.
And when the time comes that they have to use a paid product, they will be more likely to use your product rather than other products they are not accustomed to.
This is very much related to spreading virality through word of mouth. One significant benefit of creating loyal customers is that they will be loyal to your product and use it and encourage their peers to use it.
#5 Collecting user data and feedback
Collecting user data and feedback through your freemium option is a perfect bonus of having a freemium model.
This is a win-win relationship both for your customers and your business.
By evaluating the user data and the feedback you can get from them, you can segment your users much better and create user personas to target your potential customers better.
It does not only help you improve your marketing or sales strategy, but it also helps you improve user onboarding, eventually helping you retain your customers.
When you consider all of these benefits of a freemium model, you can better understand why many companies have started to adopt product led growth and offer freemium options for their products.
Freemium Model Statistics and Benchmarks
Companies using freemium have 50% lower CAC.
Net revenue retention is 15% higher for freemium companies.
NPS is nearly double for freemium companies.
Willingness to pay for tiers above freemium has increased over 500%.
Source: Statistics and Benchmarks
Examples of Successful Companies with Freemium Models
There are some companies that make the most out of their freemium models that you can take as an example for your own strategy.
Spotify is an excellent example of nailing the freemium model.
They do not hold themselves back from providing value to their customers, but at the same time, they give them some reasons to upgrade their membership to the premium option.
Even if the customers do not upgrade to premium, Spotify will benefit from the Ads.
Let’s talk about how Spotify nails the freemium model:
When you use the freemium version of Spotify, you will be exposed to ads and, you will only be able to skip six songs per hour.
Once you reach the limits of your chance of skipping songs, Spotify sends you a notification:
This way, Spotify creates a need for users to upgrade their freemium membership to premium.
Once you reach your limit of skipping songs, you are encouraged to upgrading your membership to the premium version.
You will still be able to use the freemium version regardless; however, you have to admit that the premium version is very tempting in such situations because it can really bother to be exposed to so many Ads and only having six chances to skip songs.
And this is how they prevent their users from getting frustrated:
The option to dismiss will prevent users from feeling forced to switching to premium, therefore prevent frustration.
The numbers speak for themselves:
Spotify has an almost 26.6% of freemium conversion rate!
MailChimp is another company that nails the freemium model.
Their approach is to allow users to create an account with basic features with 2,000 subscribers and 12,000 emails per month for free. If a user wants to benefit from more features, the pricing is $10 per month, and the pricing for more subscribers beyond the first 2,000 ones begins with $30 per month.
There are two reasons that their freemium model works:
- First, you can sign up for free. However, like Spotify, they create a need for email marketers to upgrade to a paid plan. Some features such as automation are only offered to paid account subscribers that users would need to make the most out of the product.
- Second, as I said before, when users are accustomed to your product, they will be more likely to keep going with your product. For example, switching to a different service is too costly for your time and resources to set up an email list. You have to change all of your opt-in forms when you want to switch, set up your autoresponders and automation, and export or import your subscribers.
First, knowing that Dropbox has been fixing a critical issue, you can understand why they are another successful company with their freemium model.
Just as Spotify and MailChimp, Dropbox also does not hold back from providing value in their freemium option, but they also create a need for the users to upgrade their membership.
Dropbox offers a freemium option of up to 2GB of space for backups and simple file sharing. However, if you want to use the product consistently, then you will need much more space than 2GB.
In this regard, the Pro plan for a bigger space (1TB) is $9.99 per month.
Their approach in nailing their freemium model is to allow their users to see how easy it can be to backup and share their files.
It works because it is very easy to backup files from anywhere, including your mobile device, and if you want to make the most out of the product, 2GB of space will never be enough.
Even though their freemium conversion rate is not as high as Spotify’s (which is a very different case), dropbox had a 4% conversion rate.
Steps to Making your Freemium Model Work
1- Provide value to users in your Freemium (but give them a reason to upgrade)
Throughout the article and the examples, I emphasized that providing value is one of the most crucial points in making your freemium model work.
As much as it is essential to help users find what they are looking for in your freemium, you should also remember that you shouldn’t give too much to users. If you give users more than a taste of the value of your product, then your freemium conversion rate will upset you.
It would be best if you gave your users a reason to upgrade to premium; that is to say, you create a need for that.
You can take all three examples above as a benchmark for helping your users enjoy your product and not providing too much value to your potential long-term paying customers.
2- Help users make use of the value of your product through an excellent User Onboarding
Not a lot of companies pay attention to their user onboarding to increase their freemium conversion rate.
This is where you make a difference to get a big step ahead of your competitors!
Here are two essential reasons why your user onboarding should be flawless if you want to increase freemium conversion rates:
- 63% of customers said that user onboarding is a crucial aspect in their buying decisions.
- And 55% of users have said that they had returned a product before simply because they didn’t know how to use it.
Activating Freemium Users with UserGuiding
Here is how CitizenShipper increased conversion rates by providing a perfect user onboarding experience with the help of UserGuiding 👇
User onboarding will help you increase freemium conversion rates and help you retain your existing customers.
Through a perfect onboarding process, you can attract users to your product, reduce customer acquisition costs, increase retention, and reduce churn!
3- Collect Feedback
Collecting feedback is another helpful step in turning freemium users into long-term paying customers.
Even though it is a part of user onboarding, it should be evaluated in another step because it is through user feedback that you can understand the needs and expectations of your users and therefore give them a better experience so that they have another reason to convert.
Collecting feedback is an art, and you need some knowledge about user behavior to do it most effectively.
Here is how you should collect feedback from your users:
- Do not ask for too much information (only ask for what is necessary)!
- Ask for feedback at the most relevant point (for example if you want feedback about a feature, you should ask for it right after a user uses that feature).
- Encourage users to give feedback (maybe you can offer some rewards every once in a while to encourage users for giving feedback).
- Use NPS surveys to have the ultimate feedback for the success of your product.
Here is a good example of collecting feedback from free version users:
You can see that they provide the necessary information about how long the survey will take, and they also make users sure that the feedback will be for the benefit themselves.
4- Utilize Product Data
Collecting and utilizing product/user data is an intertwined process with the freemium journey.
The more users you have using the freemium option of your product, the more data you can collect, and the more data you collect, the more you will have to understand user behavior and offer a much better experience accordingly.
By segmenting the users and looking at product engagement, you can better understand their behavior.
Product data will tell you where your users are struggling, where they spend most of their time, and what features they use the most.
By identifying the pain points and the best features of your product, you can improve your ability to attract and retain users.
All in all, freemium can help you reach your desired goals. However, if you want success with freemium, then you should do it the right way. From reducing the customer acquisition costs to increasing the virality of your product, a successful freemium model may be what your business needs.
Now, it’s your time to take the proper steps and level up your freemium game!
Frequently Asked Questions
What is freemium monetization?
In its simplest definition, freemium monetization is earning money through the users of your product’s freemium option. For example, you can do this by running Ads just as Spotify is doing.
Why is freemium so successful?
Freemium is successful for the purest reason of answering the needs and expectations of users, that is, giving users the opportunity to try your product out and letting them decide if your product is the right one for them. There are other ways to monetize your freemium model too such as content subscriptions.
Is YouTube a freemium model?
Yes, YouTube is a freemium model and they are one of the best to do it alongside other companies such as Spotify, MailChimp, and Dropbox.