The numbers that power SaaS businesses can be complex. There is often talk of AARRR funnel metrics (insert obligatory pirate joke here or just see below and to the right). AARRR stands for acquisition, activation, retention, revenue and referral and is used as a framework to describe different stages of the customer funnel for SaaS businesses.
The thinking goes that if you can move a customer from the top of the funnel (acquisition) towards the bottom of the funnel (revenue/referral), and you can do it in such a way that a your cost to acquire a customer (CAC) is lower than that customer's lifetime value (LTV - or the total revenue you receive from your average customer over their lifetime), then generally you might have a good business. Might being the key word. There is another piece called churn, which is an even bigger factor in a company's success. But we'll leave that for a different time.
Now, of course, the business' customer LTV has to be greater than it's CAC in order for the business to be viable. This much is obvious. When it comes to pricing models, however, choosing between the different options is not so obvious. There are many pricing models available to SaaS businesses, but today we will focus on the differences between freemium and free-trial pricing models. The pricing model that will work best for a given company depends entirely on the business itself and the product. This is article simply meant to bring into consideration the implications of these two pricing models.
This model has been popularized with consumer SaaS tools such as Dropbox and Evernote and has recently found its way into mobile gaming apps. At its most basic, freemium pricing models enable consumers to access a limited piece of a product for free. Generally, access to certain features are gated unless you pay a subscription fee. What considerations should be made when deciding on this pricing model? Freemium product must haves:
- A large install bases to be successful
- An inherently viral factor to bring in referrals from existing users
- A short time-to-value
- A strong product-driven (or touchless) experience
Not every freemium user will convert. In fact, most freemium models convert at a low rate from free to paid tiers of service. A Harvard Business Review article on freemium pricing suggests a normal conversion rate of 2-5%. As such, it's important to have a large install base, one that is constantly generating referrals. The mindset here is that the product and existing user base will do the work for you and bring in more users and ultimately customers. Both these pieces require a large user base and viral factors to drive growth (check out our post on top converting freemium services).
Additonally, users need to see a short time-to-value in the product. This often means the value derived from using the product needs to be seen almost immediately, otherwise the user could be lost forever. With freemium, the focus has to be on solving with product - this is the only way to quickly grow freemium because having a detailed onboarding or complex product wherein a lot of education is necessary will make it challenging to bring on a mass of users.
Free Trial Pricing
Free trials are more frequently seen with enterprise SaaS businesses. With free trials, unlike freemium, the entire tool suite is available for a short period of time like 10 or 14 days (generally speaking). As such, the user can experience get a full product experience for a limited time. Free trial products generally have the following attributes:
- Full product experiences for a limited time
- Concierge onboarding or support during a trial period
- Generate a sense of urgency around product usage and adoption
- Require additional education of a user to see full value
If you have an enterprise SaaS business that requires some level of onboarding or human touch, a free trial might be the way to go. A company's sales goals in this case may be focus on generate free trials, and a customer success team may deliver onboarding to enhance the trial experience and customer education. In some cases, thoughtful email onboarding can improve free-to-paid trial conversions without the need for speciality onboarding or hefty customer education. A SaaS product that can deliver a seamless trial experience and generate a sense of urgency will be sure to convert many users after the trial period.
Choosing a model
So, which pricing model makes the most sense? Keep these key questions in mind when determining which model to go for:
- How does your customer use your product today?
- How quickly do your customers see value in your product?
- Is there an inherent viral factor to your product?
Ultimately, when deciding whether to go with freemium or free trial pricing models, the key is to truly understand the target customer and how they typically adopt the tools being offered. Knowing your customer personas, their level of sophistication with similar software in the space, and their overall willingness to adopt a potential solution to their problem will help determine the right model to choose.