How Startups Use Freemium Models To Acquire Paying Customers
Freemium models seem like an easy way to get new customers to fall in love with your product. But freemium models aren’t for every business.
When they work, they work like magic, locking the customer into a value proposition that’s harder to give up than if they never experienced it at all.
When they don’t work, those same models can become an economic albatross of costs that don’t generate any revenue, and eventually sink the company.
The important thing is knowing which camp your product is going to fall into before you carve out that tricky free tier.
Should your product even have a free tier?
First, let’s dispel the conventional lure of the freemium model.
The truth about free is that it’s actually harder to convert a customer from free to paid than it is to convert that same customer from nothing to paid. Once you give someone something for free, you put yourself in the losing position of constantly having to ask them to pay for that thing.
So the decision to include a free tier comes down to four factors.
The mechanics of your product. Right away, most products that have a physical element, like hardware or a retail product, should not be in the free tier business.
The economics of your product. You’ll need to answer this question: Is there enough capacity in the functionality of your product such that you can carve out a free tier that minimizes costs to you while maximizing perceived value to the customer?
The lure of the trial for the customer. This is the other side of that question: Is the free tier going to move the customer towards purchase? Your free tier is worthless if nobody wants it.
The use cases. Last and most important question— Are the primary use cases of your product complex enough that they require the customer to be hands on before they discover the value in your product?
That complexity doesn’t have to be rocket science level complexity, but let’s talk about how the use cases mandate what your free tier should look like.
How to create a free tier
The current trend in freemium is to provide a tier that gives the customer a bare-bones-usability subset of use cases “forever.” There’s usually some sort of marketing badge or label attached to any output from that customer. This happens most often in software-as-a-service (SaaS), especially when that software is used to create something that’s ultimately shared with other potential customers — Bubble, MailChimp, Auth0, etc.
I’m not totally against this kind of freemium model for the average startup, but it’s very difficult to pull off.
First off all, just to get the viral benefit of all that sharing, the company needs to have enough capital set aside to take on a ton of costs related to providing infrastructure for usage that doesn’t generate a direct return. In other words, you need a war chest to fund all those free accounts.
Here’s the most complex issue. It takes a surgeon’s dexterity to cut a line between a free tier that is usable forever and one that isn’t. This is true whether you’re selling B2B software or a mobile app or business card printing services or whatever.
- If the customer’s trial use case is to test your product, the trial is useless if the customer can’t retain their work and eventually take that test case to the real world.
- If the customer’s trial case is to provide real world functionality, that functionality can’t be limited, or else it will hamper their evaluation of your product.
- If the customer’s trial case is to prove the viability of real world functionality, your product needs a method and mechanism to test that viability.
All that sounds great, except each step gets more expensive on your end, not only in terms of customer usage costs, but in building out your own infrastructure out to support a more expansive free tier.
So where do you draw the line?
You have to have limits, not only for your own bottom line, but for maintaining the perceived value of the product.
What I mean by that is you should never give anything away for free. It immediately devalues your product and gives the customer an excuse to use it wastefully. But there’s a difference between devaluing and discounting, and where you put the limits on free make all the difference.
Basically, you have three axes you can play with.
Limit the time period. This is the easiest cut to make, but also the least useful in leading to a paid customer. You’re gambling on the fact that your prospect will discover the value that leads them to payment within an arbitrary time frame.
Limit the usage volume. This is a smarter way to set limits, but still not a decision that should be made arbitrarily. In other words, the number shouldn’t only be based on what you can afford, it should be selected based on that number leading your customer to find success in their use case and thus, value in your product.
Limit the feature set. This is the most useful cut to make, but also the most difficult to implement. You’ll constantly be drawing lines around parts of your product or application or service, with customers constantly bumping up against those limits. Those bumps have to be gentle, explained well, and should ideally lead right to the customer’s decision to move to a paid tier.
A final thought on limits. In many cases, it makes sense to set requirements on accessing the free tier at all. For example, the customer might have to be in a certain industry, job function, part of the country/world, or even within a certain demographic.
These are the limits that will help you, the product maker, determine the viability of the customer. Because nothing is ever truly free.
Always get something in return
The primary goal of a free tier is the conversion of that customer to a paid tier. But there are secondary outcomes you should be chasing, and for that, you’ll need to make sure you have what you need from the customer before handing access over.
You should have the majority of the agreement done. Before free-tier access is granted, you should have everything in place for conversion to be a push-button process. Depending on how you transact, this could be a credit card, a name and address, a digital signature on a preliminary agreement, whatever it takes to make the conversion process painless.
You should have the majority of the onboarding done. Onboarding is expensive, and a free tier can be a great way of administering and even developing a cache of self-service onboarding options. By the time they’re ready to use your product for real, they’ll already know what they’re doing, and might even be halfway done doing it.
You should have an open line of communication. This could be as simple as an email address, where you can check in, prompt, and remind the customer of the added benefits of a fully paid membership. This messaging will mean more to them as they gain a better understanding of how to use your product and where they’re finding value.
You should be building a better product. Feedback from the customer, whether direct through that open line of communication or indirect via measuring their usage, should be telling you how to serve the next customer better and convert them quicker.
Even if your free-tier customer never converts, your free tier should allow you to walk away with something that’s going to help you grow your company. If it’s not revenue today, make sure it means revenue tomorrow.
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