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Freemium vs. free trial: How to pick the right SaaS revenue model in 2020

Freemium vs. free trial: How to pick the right SaaS revenue model in 2020 Blog Feature

November 27th, 2019 min read

In business, and in life, rarely are decisions as simple as chocolate or vanilla, oxford comma or. standard, or “gif” or. “jif.”

In fact, I bet you have no problem choosing a side in any of those battles (and are likely heatedly preparing your argument as we speak).

Unfortunately, most strategic decisions are less “black-and-white” and more “shades of grey.” -- just like choosing freemium vs free trial, but more on that in a second.

One of the most memorable decisions I’ve ever faced was whether or not to start a family. There were a multitude of thoughts whizzing through my head, a million “what if’s,” and a thousand imagined outcomes.

What would be the implications for my career? Would waiting mean edging too close to the ticking biological expiration date every woman tries to ignore? Will my mom kill me if I don’t give her grandkids right now?  You know, all the truly important questions.

In a situation like this, there is no one right answer. There is just the answer that best fits your current situation and makes the most sense given your unique answers to all of those questions.

So, how do you tackle a decision like this?

If you’re anything like the rest of our data-hungry audience, you’ll approach it with feverish research. You will find out what questions you need to ask and how the different options to fit your situation.

If you’re reading this, that means struggling with whether to go with a freemium or a free trial for your SaaS product.

Well, you’re in luck! Below is a ton of information that will help you make that very decision.

What I will tell you is that there isn’t one model that is better than the other. Both models have their place, and I can’t decide which is right for you. What I can do is help you ask yourself the right questions to make the right decision yourself.

What are the differences between free trial and freemium models?

First, to make sure we on the same page, let’s make sure we understand what each of the different models is.

Freemium models

There are two common ways to structure a freemium model.

Reduced feature freemium model:

The “reduced feature” module is commonly used in mobile applications where the user can access a subset of the full feature list for free.

If they are interested in using something considered a “premium” feature, they’ll have to either pay for each individual time they use that feature or upgrade their subscription level to gain access to it.

An example of this model is Evernote. You can access some of the base features of the product on the free version, but to get access to all the nifty features, you have to be on a subscription.

The reverse side of this option is that features can be removed when you start paying. An appropriate example here would be Pandora. When you upgrade to the paid version, you no longer have to deal with the “feature” of regular commercials.

Reduced usage capacity freemium model:

The “reduced capacity” module puts limits on the number of things the user can do within the product.

For instance, B2B products that support multiple users may limit the number of users that can have access for free. Once the user limit is exceeded, payment is required to continue usage.

Additional options here might be to place limits on the amount of data a user can download or the number of times a specific activity can be completed within a specified time period.

The easiest example of this model is Dropbox. The free version of Dropbox allows users to use up to a certain amount of storage before requiring a paid subscription.

The common ground between these two models is the ability for the user to have some level of access to the product for free forever.

They may choose to use the free version of the product forever without a requirement to upgrade -- that is the definition of a freemium. (Check out a list of our favorites here!)

Free trial models

By contrast, free trial models are meant to give the user access to the full product, with every feature, bell and whistle included but for a limited time only.

When the predetermined trial period ends, they will be required to pay a subscription fee if they choose to continue usage. (This article will tell you more about the specific benefits of a free trial.)

Like a freemium, there are two ways to structure a free trial model.

Opt-in free trial:

An opt-in free trial allows a user to access the free trial without putting in any payment information up-front. Payment information is gathered when the user converts from the free trial to a paying customer.

Basecamp is an example of a company that has successfully used the opt-in model for quite a while. They require no credit card before beginning a 30-day trial.

Opt-out free trial:

An opt-out rree trial requires the user to input payment information in order to gain access to the free trial. This model typically will start automatically billing the user at the end of the trial period if the user does not cancel their subscription.

As of this writing, LinkedIn Premium uses an opt-out free trial model, where the user is required to provide credit card information before they can access the free trial.

Choosing between a freemium and a free trial model for your SaaS product

There is no one-size-fits-all approach to selecting the right model for your business.

When choosing between a free trial and a freemium model, you will have to take a good hard look at both your product and your business to determine what makes the most sense for you.

Consider these questions:

How is your product designed?

The first, and most important, question to ask yourself is how your product is designed.

Typically, to create a successful freemium product, you’ll want to design with the end in mind.

Essentially, your product should be architected from the ground up as one. Shoehorning a SaaS product that wasn’t originally meant to provide a freemium experience into one is often a recipe for failure.

If you want to do freemium, your product should be designed to provide a significant amount of value to the user with just the free feature-set or bandwidth.

If you simply take a product that wasn’t meant to be a freemium product initially and slash features, you’ll find yourself struggling to make the product valuable enough to your free users to convince them to upgrade.

If you are still designing your product, you’ll want to make your decision early in the development process so you can provide the best user experience possible.

If your product is already designed, the best recommendation is to go with the model that fits your specific product in the current state it exists in rather than trying to force a model that doesn’t fit.

How will users best experience the benefits of your product?

This question pretty much comes down to: how complicated is your product?

If users will be able to see, feel, and experience the benefits of your product with a reduced feature-set or limited usage capacity, then freemium may be a fit.

If its true value can’t be experienced without access to all of your features then a free trial is probably the right way to go.

As a general rule-of-thumb, the more complex a product is, the more likely it is to fit into the second category.

What is the cost of supporting free users?

This is purely a business question. Both freemium and free trial models will require you to provide support and access to users who aren’t paying you a dime --and this costs money.

A free trial model will more strictly limit how many free users you are supporting and for how long while a freemium model will have you supporting many of those free users forever.

So, take stock of the costs you will incur for every individual user you support and determine if you are willing to dish out the extra dollars for the freemium users.

Who are your personas?

This question goes back to the foundation of your marketing (and your product as well). Who is your product designed for and who do you want to buy it?

Take some time to consider how your desired customers will respond to either model.

Will they be turned off by what they perceive to be a “nickel and diming” mentality of a freemium model? Will they be frustrated by the time-limited nature of a free trial?

Do some research and find out!

What do freemium benchmarks tell us?

Ok, so now the information you really care for; what do benchmarks tell us is the best option for converting people into paid users?

Again, the answer is a resounding, “it depends.”

For the most part, benchmarks place freemium conversion rate in the low single digits, around 1%. This may be all you need for a successful product depending on how you structure your revenue model and your product would benefit from a high volume of users.

Free trial benchmarks vary even more. Depending upon the type of model in use (opt-in vs. opt-out), well-structured Free Trials typically convert somewhere in the 10-30% range.

If your revenue model is such that each user has a high customer lifetime value, this model makes more sense.

Final thoughts

Selecting the SaaS revenue model that’s right for your product is truly a business decision, and it should be treated as such.

The model you choose will either be based on your existing revenue model or the decision will determine your revenue model. Either way, it is a fundamental question about how you want to structure your business.

While it may not be quite the same as choosing whether or not to have a baby, we can all agree that most business leaders have a similar fondness for the products they share with the world.

So give the decision all the tender loving care it deserves, and select the path that is right for you.

Regardless of what model you use, this free guide will help you start converting those free users into happy paying customers. Get your free copy by clicking the button below!

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