The Importance of Freemium Models in the SaaS Industry

How can you stand out in such a saturated industry like SaaS? By using freemium models. A freemium model enables prospects to experience the value of your product using a free version and then enticing them to upgrade to paid versions with more perks. 

The freemium model has proven to be a successful marketing strategy because it generates highly-qualified leads by offering value for free. How do I know? Take a look at successful SaaS companies like HubSpot, Mailchimp, Spotify, and Hootsuite. These are a just a few examples out of many.

Freemium models work so well because they make the customer acquisition process simple. All a user needs to do is register with their email and sign up. They don’t need to spend ages waiting to book a demo appointment. They don’t need to deal with customer service to go through tons of tutorials while being monitored. Who wants to deal with that mess anyways? Not your customers.

When you make the initial sign up process free and simple, you already have a huge advantage over competitors that don’t offer that. Let your customers experience the basics of your SaaS on their own terms and they will certainly reward you with a purchase later on.  

So, if your SaaS company is not offering a freemium model, you will not survive. Period.

What is a freemium model? 

A freemium model is a marketing strategy in which a company offers a product free of charge and provides an option to upgrade to its paid version that has more perks. These perks can be useful features and additional tools that improve the efficiency of the product. A good example is Pandora. It allows users to stream music for free but gives them an option to upgrade to $4.99 per month. The paid version has the advantage of bypassing ads, so your music streaming will be smooth without interruptions by the annoying ads. 

Products that do not offer value to users unless they upgrade to the premium version should not be considered as freemium models. Freemium is a combination of two words “free” and “premium”. So, using freemium models means you should provide value (a premium) to your customers for free and then its paid version should offer an upgrade on those features. 

Freemium models are important in the SaaS industry in particular because they enable brands to build a user base for their products by adding them to their email marketing list. After a user signs up for the free version, they then become a lead that you can use email marketing campaigns to motivate them to upgrade. Freemium models also create brand awareness, which leads to even more cross-sales and upgrades. 

When SaaS companies use freemium models they generate more leads at a lower cost, meaning that their outbound marketing costs become dramatically less and they convert more customers through value.  

freemium models in saas

Why your SaaS business needs a freemium model

The SaaS industry is currently saturated with companies offering products with similar functions. The only way to stand out is to use a freemium model. Freemium models help you get ahead of the competition because users get the chance to test the value you offer for free, which means they automatically become high-quality leads because they were interested in your product. 

Here are some further reasons why you should try a freemium model. 

#1 It removes the usage barrier 

The usage barrier refers to the obstacles that prevent your potential customers from accessing your product. These obstacles can be the cost of the product or even the location of the prospect. Creating freemium models of your product allows interested people to try your product for free. And after understanding the value your product offers to their lives by solving a specific problem, they will decide to upgrade to the paid version.

SaaS companies that don’t use a freemium model will lose in the long run. 

If your customer acquisition process involves that you need to make an appointment to view a demo of your product, you are making your potential customers do way too much work to purchase from you. 

Consider this scenario: someone is comparing two social media analytics platforms. One offers a freemium model that can be upgraded once their needs grow and all they need to do to try it out is register with their email. The other makes them book an appointment for a demo and they have no access to that product until that appointment. Which one would you choose?

#2 It builds a user base for email marketing

The SaaS industry has been bombarded by many products in recent years. Offering freemium models such as a free trial of your product is the way to stand out when prospects are making a choice on which company to go with. The word “free” is appealing to prospects and once they sign up for your product they become part of your user base. Some of the people who make up your userbase will one day upgrade to the paid versions to enjoy the extra perks that your offer and you can encourage them to do so at an increasing rate with email marketing. 

#3 It reduces the costs of sales 

Freemium models reduce the cost of sales because you spend less money on acquiring paying customers. Customers that make up the userbase of your freemium will easily elevate to the paid version if the paid version has enticing features. Remember that for users to settle for the paid version, they must have also enjoyed their free trial or they would walk away and settle for your competitors. 

While your competitors who don’t have an impressive free version will expand their ad budget to attract clients, your satisfied clients will upgrade to paid versions because your free version solved their problem. 

#4 It enables differential pricing

Differential pricing involves selling variations of the same product to customers at different prices. Freemium models enable differential pricing because once you have built a user base of people with varying financial capabilities, you can offer the paid version at tailored prices. In the long run, your revenue increases because more people will be upgrading to the next versions that meet their requirements.

In addition, people like price options. When you use differential pricing, it feels like the customer has more control and it also makes lower and mid-level pricing seem more valuable in contrast to the most expensive. 

It’s also a good idea to test different pricing models to see which one works the best. Sometimes making products more expensive is actually what makes them sell better, because people assume that expensive prices mean that they products are higher quality (though this highly depends on your audience).  

Successful freemium model examples in the tech industry

Since the introduction of freemium models, many SaaS companies have used it to grow their revenue and expand their customer base within a short time. Here are few examples of top brands that use freemium models successfully. 

#1 Spotify

Spotify offers music streaming services. You can use it to create playlists, save songs, and even use the app on smartphones and TV. The free version allows a user only to shuffle play and also has ads that may interrupt your concentration. The paid version has more perks including the ability to play any track and high-quality audio. Plus, you don’t have to tolerate annoying ads because they are not there in this version. Spotify users are enticed to enroll in the paid plan to enjoy uninterrupted music streaming which is free of ads. 

#2 Evernote

Evernote has three versions of its product: freemium, plus, and premium. Its freemium version offers some of the features that people who upgrade to the paid versions will enjoy. For example, you can create and use up to 250 notebooks with the free plan just like the upgraded plans. You can also add a passcode lock on mobile apps. However, while you can only link this app to two devices with the free version, you can link to as many devices as you want with the paid versions. If you also want more storage, then you will need to upgrade to either the $35 per year plan or $70 per year plan. Evernote leverages the power of differential pricing by offering two paid versions. Users feel in control of their pricing and settle for the cheaper paid plan because it seems more valuable compared to the expensive one.  

#3 Hootsuite 

Hootsuite is a social media management platform that integrates social media networks and enables you to make the most out of social media marketing. Using this app, you can schedule posts, monitor engagement, and interact with clients in an appealing manner. Its freemium is available for businesses just starting out on social media. You can schedule posts and monitor one profile in up to three different social media platforms with this model. To enjoy more benefits, you just upgrade to a paid version. Hootsuite applies the freemium model to gather email addresses for email marketing. Once you sign up for the free version of the product, they nurture you to become a paying customer with email marketing campaigns. 

#4 SurveyMonkey

The basic plan for SurveyMonkey allows users to create surveys with up to 10 questions and collect as a maximum of 100 responses. This plan would be suitable for a startup looking to get customer feedback and is also customer-friendly. SurveyMonkey utilizes its freemium model to build a user base from which growing business owners can upgrade to the paid plans, which is a great way to attract leads and convert them later.  

#5 Mailchimp

Mailchimp has four versions of its product. Its freemium provides the basics that businesses need when just getting started with email marketing. You can have an email list of up to 2000 subscribers and send a maximum of 12000 emails per month. Other perks that you get include Mailchimp’s WordPress and Facebook integrations to help you grow your email list. It also has automation features that improve personalization when addressing leads. Mailchimp’s freemium model enables prospects to overcome usage barriers. Business owners just starting out may not need the paid plans right away, so they can start with the free version and scale up later. This tactic has given Mailchimp a wide audience base that begins to rely on their product over the long term, which enables them to consistently convert customers at higher prices.

Grow your business by adopting the freemium model strategy

Now that you have learned the benefits of having a freemium model for your SaaS company, what are you going to do next? I am an expert in technology and SaaS marketing and can grow your business by creating a formidable freemium model strategy. I know the exact methods SaaS companies require to create high-quality content that converts customers and stand out from competitors. Contact me today to get started!

Published by Adriana Stein

on June 24, 2020

Adriana Stein is an Online Marketing Consultant based in Hamburg, Germany. Originally from the US, she is a native English speaker and specializes in helping companies with their SEO & content marketing strategies, along with graphic design, brand copy and website development.

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