The importance of Freemium Business Models in the SaaS Industry

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Suddenly you hear, “FREE ICE-CREAM SAMPLES!” on your way inside the grocery store.

You rush over to grab yours in hopes of cooling down. That delicious coldness rushes through your whole body cooling down every cell. But quickly, it’s over and you need more.

So you purchase a double scoop of Blueberry Pomegranate, top it off with fresh blueberries and coconut shavings. 

Now, you’re satisfied, cooled down, and ready for your grocery run. 

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So, what does an ice cream sample have to do with your SaaS business?

Free samples — everybody loves them. 

They give you a taste of how your life (or your customers’ lives) could be improved in the hopes that they’ll come running back for more. 

By leveraging the power of freemium business models, you’ll prompt prospects to experience the value of your product, entice them to upgrade, and stand out in a very saturated market. 

The freemium model has proven to be a successful marketing strategy because it generates highly qualified leads by offering value for free.

How do we know? 

Take a look at successful SaaS companies like HubSpot, Mailchimp, Spotify, and Hootsuite. These are just a few examples out of many.
If your SaaS company is not offering a freemium business model, you will not survive. Period.

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Build brand awareness and customer loyalty with freemium models and a holistic marketing strategy.

What is a freemium business model? 

Okay, let’s rewind and start from the beginning.

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 with more perks. These perks can be valuable features and additional tools that improve the efficiency of the product.

Freemium is a combination of two words: “free” and “premium”. It means you should provide value (a premium) to your customers for free and offer upgrades on those features with a paid model. 

Freemium models are important in the SaaS industry because they enable brands to build a user base for their products by adding them to their email marketing list. 

Take Pandora, for example. They allow users to stream music for free but provide an option to upgrade to $4.99 per month. The paid version has the advantage of bypassing ads, so your music streaming is smooth without interruptions by the annoying ads. And, let’s be honest: ads are so disruptive!

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After a user signs up for the free version, they become a lead that you can nurture using marketing automation campaigns. 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.  

Infographic on why your Saas business needs a freemium model

Why your SaaS business needs a freemium business models ?

Now that you know all about freemium business models, let’s discuss why your business should consider having one. 

Here’s the big secret…

Freemium models work because they simplify the customer acquisition process. 

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. Say adios to wasted time and hello to more qualified leads! 

Ultimately, 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 terms, and they will certainly reward you with a purchase later on.  

Take, for example, this Tweet from Michele at REVgabba,

When you provide a generous freebie, customers instantly experience tangible benefits and convert into self-serve customers. With a highly saturated SaaS industry, the only way to stand out is to use a freemium model. In this way, you’ll get ahead of the competition.  

If you’re still not sold on the freemium model, let’s chat about some other compelling reasons. 

#1 It removes the usage barrier 

The usage barrier refers to the obstacles that prevent your potential customers from accessing your product. 

For instance, they might think: “I can’t afford this product right now” or “What if I invest in this and I hate it?” 

Creating freemium business models of your product allows interested people to try your product for free without the risk.

For instance, Zoom’s CEO, Eric Yuan, mentioned, “It’s really hard to tell customers, ‘You’ve got to try Zoom.’ Without a freemium product, I think you’re going to lose the opportunity to let many users test your products.”

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 miss out in the long run. 

If a customer is required to make an appointment to view a demo of your product, you are making your potential leads do too much work to purchase from you. With our fast-paced digital world, this could lead to a loss of sales. 

Consider this scenario→ you’re comparing two social media analytics platforms. 

One offers a freemium model that you can upgrade once your needs grow, and all you need to do to try it out is register with your email. 

The other makes you book an appointment for a demo, and you 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 is constantly being bombarded by many products. Offering freemium business models is the way to break through the noise when prospects decide which company to go with.

Let’s think about the word “free” for a moment. 

“Free” changes the way we act because when we read this word, a sense of euphoria overcomes us and thus compels us to make a quick decision to get something for paying nothing. 

When this happens, you’ll get ahold of their email address and they become a part of your user base where you can continue to nurture them and sell your awesome products.

Some of the people who make up your user base will one day upgrade to the paid versions to enjoy the extra perks you offer, and you encourage them to do so at an increasing rate with email marketing. 

#3 It reduces the costs of sales 

Freemium business models reduce the cost of sales because less money is spent on acquiring paying customers. Customers who make up your freemium’s user base will easily elevate to the paid version if the paid version has enticing features.

And remember: for users that continue with the paid version, they must have also enjoyed their free trial, or they would have walked away fleeing to your competitors. 

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

#4 It enables differential pricing

People like free and people like choices. 

With that said, differential pricing allows you to offer different price points for users with varying financial capabilities. In the long run, your revenue increases because more people will be upgrading to the next versions that meet their requirements.

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. Think about a time you demanded your child to make their bed. Maybe they did, or maybe they threw a tantrum and refused. Why? Because they felt like they had no choice. They felt controlled.

Adults are no different. When we have a choice, we feel empowered. When we feel empowered, we’re more confident and satisfied with our decisions. 

It’s also a good idea to test different pricing models to see which one works the best. Sometimes making products more expensive actually makes them sell better because people equate expensive with high quality (this highly depends on your audience and niche, of course).  

Successful freemium business models examples in the tech industry

Since the introduction of freemium models, many SaaS companies have used them to advance their revenue and expand their customer base within a short time. Here are five examples of top brands that use freemium business 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 has ads that may interrupt your listening experience. 

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. 

Spotify users are enticed to enroll in the paid plan to enjoy uninterrupted music streaming, ad-free. Convenient, right?

#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 enjoy.

For instance, 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, you need to upgrade to either the $35 per year plan or the $70 per year plan. 

Evernote leverages the power of differential pricing by offering two paid versions. Users feel in control of their spending and settle for the cheaper paid plan because it seems more valuable than the expensive one.  

Bottom line: Give customers choices and see your business blossom. 

#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 seamlessly interact with clients. Its freemium is available for businesses just starting on social media. 

With this model, you can schedule posts and monitor one profile on up to three different social media platforms. 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 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 business owners can upgrade to the paid plans, which is a great way to attract leads and convert them later.  

#5 Mailchimp

In 2009, Mailchimp converted to the freemium plan, and since then, they’ve never looked back. In fact, by executing their ‘free forever’ plan, they appealed to startups and small businesses, skyrocketing their signups by 500% (from 85,000 to 450,000).

Here’s how their model worked→ For their first 500 subscribers, Mailchimp’s features would be free to use so long as their subscriber count stayed below that number.

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. 

Users also get perks like 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. 

Can this deal get any better?

Business owners just starting 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 increasingly relies on their product over the long term, enabling them to convert customers to package upgrades consistently.

About the Author

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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