Freemium and free trials are common acquisition models in SaaS––but which is the right customer acquisition model for you?

 

First, let’s explore why it’s worth seriously considering a customer acquisition model with a free element and not sticking with the sales-led approach which many companies are still using and succeeding with.

 

  • Buyer behavior is constantly changing. 
  • B2B buyers prefer delightful product experiences. 
  • Buyers are doing significant research online before talking with your sales team and consulting review sites like G2Crowd and Capterra. 

 

Chances are, you already knew this. This is not breaking news.

 

For context and diligence though – here are the sources from which these statements were inspired and why I’m convinced that SaaS companies that have the best chance to succeed in the future are those that offer a product-led experience, whether that be a free trial or freemium customer acquisition model.

 

  • Nearly 75% of B2B buyers say they would prefer to buy through an app or website, rather than a salesperson. – Forrester

 

  • Companies with a strong focus on product experiences outperformed their peers on the S&P 500 by 219% over the last 10 years. – McKinsey

 

  • 81% of B2B buyers do their own research before talking to a vendor – Content Marketing Institute

 

  • Free trials remain the most popular product-led growth strategy—47% of businesses acquire new customers through a free trial, while only 17% use a freemium model. – Openview

 

This stat bomb would not be complete without a chart for my visual learners out there.

product_led_growth_stats

 

 

 

 

 

 

 

 

 

Ok, I get it – now what?

 

The big question to ask yourself when considering these facts is this: are you providing an experience that meets the expectations of today’s B2B buyer, and if not, what changes can you make before your competitors get ahead of you?

When choosing between Free Trial, Freemium and Sales-led customer acquisition models, there are many things to consider, and there are pros and cons to each.  For the sake of this exercise, we’re going to focus only on free trial and freemium. If you want to dig more into the concept of product-led vs. sales-led acquisition, read this next.

 

If you want the cliff notes, here are two simplified ways of looking at free trial vs. freemium:

 

Figure 1: Free Trial vs. Freemium Matrix

freemium vs free trial matrix

 

Figure 2: Free Trial vs. Freemium decision tree

Free Trial vs. Freemium decision tree

 

Let’s dig a bit deeper…

 

Also, keep in mind, there are some overlapping benefits to freemium and free trial models. It’s important to find the differentiators that apply to you. I’ve added the bigger differentiators in bold.

 

Definition of a Free Trial

The free trial, or try before you buy model allows users to try your product for a limited amount of time before asking them to pay – commonly 2 weeks to 30 days. 

 

While this may be a controversial opinion, if you ask someone to put in a credit card to be charged at the end of the trial period – you’re doing it wrong.  If you’re interested in digging in more on that topic, check out this opt-in vs. opt-out free trial comparison from the all-knowing Christoph Janz.

 

Benefits of offering a Free Trial

    • Lowering the barrier to entry, in this case, removing the payment barrier allows you to acquire more users.
    • This also generally leads to lower Customer Acquisition Costs including sales and marketing expenses – bonus points if your product has a viral referral element.
    • By offering basic-level services for free, companies build relationships with customers and avoid introducing sales before customers are ready
    • It provides an extra level of qualification before bringing your sales team into the conversation
    • You generally have a faster acquisition cycle (the length of your trial)

 

Potential Cons to offering a Free Trial

  • Your product takes time to prove the value and you’re not providing enough time
  • If your product is complex or isn’t easy to set up, users may be intimidated or turned off
  • You’re targeting executives who won’t be the actual users of your product
  • The cost of your product is high, especially if it’s more than you would put on a credit card

 

Definition of Freemium

A combination of the words “free” and “premium,” the term freemium is a type of business model that involves offering customers both complementary and extra-cost services. A company provides simple and basic services for free for the user to try; it also offers more advanced services or additional features at a premium. – Source: Investopedia

 

Benefits of offering Freemium

    • Lowering the barrier to entry, in this case, removing the payment barrier allows you to acquire more users.
    • This also generally leads to lower Customer Acquisition Costs including sales and marketing expenses – bonus points if your product has a viral referral element.
    • By offering basic-level services for free, companies build relationships with customers and avoid introducing sales before customers are ready
    • It provides an extra level of qualification before bringing your sales team into the conversation
    • If the market ripe for disruption, you may be able to unseat a paid competitor
    • You can test upgrade levers at a larger scale

 

Potential Cons to a Freemium offering

    • Your market isn’t big enough ←–That is an extreme example but provides good context
    • If your product is complex or isn’t easy to set up, users may be intimidated or turned off
    • You don’t understand your customers enough to drive premium upgrades through feature gating
    • Your data storage and/or customer support costs are too high to allow a free model
    • You end up acquiring the wrong kind of users
    • The cost of your product is high, especially if it’s more than you would put on a credit card

 

Wait, there’s one more option…

 

Hybrid (a little bit of this, a little bit of that)

But wait. Can I do freemium and free trial together?  Of course! It is possible to get the best of both worlds by offering new users a full-featured free trial while still offering a limited free-forever plan at the end.  This is a great way to expose users to your premium features while still providing a path to revenue. 

Every business is different and there are no hard-fast rules to how you decide to acquire users.  The key is taking a thoughtful approach to how you go about it, making sure you are prepared for the pitfalls and being open to testing and iteration.

 

I’ll leave you with this: 

“Scaling from $5 to $50 million is not the toughest part of a new venture—it’s getting your users to pay you anything at all. The biggest gap in any venture is that between a service that is free and one that costs a penny.” – Josh Kopelman, First Round Capital

 

In other words. This shit is hard.