The freemium model is a proven model to boost customer acquisition. Instead of asking customers to imagine using your product, you let them use it for free. Once they see the value, they will happily pay more for added features. Last year, I briefly used Duolingo in the freemium version before paying for the premium version to remove ads and access a better learning experience.
Freemium Model: A Simple Definition
Also known as the freemium business model, the freemium model is a digital spin on one of the oldest marketing ideas: the free sample. For more than a century, businesses have given away free samples of their products to attract customers. The logic is simple. Sidestep the discussions of price and risk of loss and let a customer directly experience the product. Once a customer sees the basic version’s value, they are more likely to be open to paying more for a premium edition.
In the tech and start-up world, there are many different kinds of freemium business. Older readers might remember the days of “shareware” in the 1990s. The modern freemium model has deep roots. If you’re still skeptical about its merits, multiple high growth companies have used this model successfully.
For further reading on the free as a business model’s fundamental principles, I recommend reading “Free” by Chris Anderson. I recommend picking up the book at an airport bookstore years ago, and it made quite an impact on me.
Which Companies Succeed With The Freemium Model?
There are multiple software and start-up companies currently using the freemium model. My favorite example is Mailchimp, which offers a free email marketing plan. Mailchimp’s freemium strategy has helped it become the default choice for many email marketers. Other marketing automation companies like Yoast SEO, HubSpot, and Yesware have used the freemium model to attract attention.
The freemium model has exploded in popularity in part for economic reasons. Thanks to cloud computing resources, the marginal cost for one more simple user account is close to zero. On the other hand, the value of acquiring a customer (i.e., converting a free user to a paying customer) is high. To demonstrate the value of the model, check out these examples.
- Evernote. The note-taking app used multiple strategies to achieve tremendous growth. One of the company’s most successful strategies focused on acquiring free users. In a 2010 article in Fast Company, Evernote CEO Phil Libin said, “the easiest way to get 1 million people paying is to get 1 billion people using.” Later on, Evernote developed multiple tiers where users can pay for additional features.
- Dropbox. The cloud storage company’s growth is legendary. One aspect of the company’s growth lies in referrals – the company rewarded users with more free storage for each new user they brought to the platform. However, that referral engine worked so well because Dropbox offered a free user account that provided real value.
- Mailchimp. Best known as an email marketing platform, Mailchimp has grown fast, thanks partly to its decision to offer free user accounts. Mailchimp’s strategy is to limit the free account in terms of volume (i.e., a maximum number of subscribers) and access to advanced features (e.g., want to send advertising postcards directly from Mailchimp? You’ll need to pay for the premium version of the product).
From Freemium to Revenue: The Key Marketing Challenge
Giving away a basic product is a starting point. It is not enough to establish a business. At a certain point, customers need to pay you, or you will not cover your costs. Let’s look at some of how software companies have developed a premium service to grow their customer base. Pay careful attention to the presentation of different features, users, and volume restrictions. A user on a free account needs to experience some value and satisfaction certainly. However, there also needs to be clear benefits to upgrading to a premium plan.
Notion’s Freemium Model
Free Plan: the free plan is named “Personal,” and it is limited to sharing with “5 guests.”
Premium Plan Difference: the company offers three premium plans, including “Personal Pro” ($4 per month), Team ($8 per user per month), and Enterprise (pricing on request). Aside from the premium plans offering better collaboration options, the distinction between the free and paid plans on the pricing page could be better. For example, the Team plan offers “advanced permissions.” Why is that valuable? It is unclear. As a result, the company’s limited presentation of its premium features may reduce the number of users who upgrade to premium.
Mailchimp’s Freemium Model
Free Plan: the free term is labeled “Free,” and it has both volumes (i.e., 2,000 contacts) and features limitations.
Premium Plan Difference: there are three paid plans: $9.99 per month and up to $299 per month. The Mailchimp pricing page does a great job explaining the differences in features and volume limits that distinguish between the different tiers. Bonus points for using “New” to highlight recently added features to each plan.
Freemium Plan: 5 Key Growth Challenges To Solve
Like any customer acquisition strategy, there are risks associated with using a freemium plan, even though it is a popular model. It is critical to understand these risks so that you can manage them effectively.
- Analytics. Before you can answer questions about acquisition cost and your pricing strategy’s effectiveness, you need analytics—specifically, the ability to track free users and their conversion to paying customers. In the long term, you will have enough data to evaluate Tactic A (e.g., send an email sequence) vs. Tactic B (e.g., ask customer success to offer one on one help to free users) to see which measure grows your customer base faster.
- Cannibalization. The risk that customers will use your free product to achieve their goals and never pay you for anything. This risk can be managed in a few ways, such as making a clear value distinction between free and premium plans (e.g., limits on the number of users, data volume, reporting, automation, or support)
- Conversion Rates. Converting a free user to a paying customer is a crucial challenge for a freemium business. Without a conversion process, the economics of the freemium strategy doesn’t make sense. Hope is not a strategy for your freemium acquisition model. If you’re unsure what to try, I suggest using a volume limit (e.g., free account limited to 100 records while a premium account is unlimited). For more guidance on SaaS conversion rates, see my article: How To Increase Your SaaS Conversion Rate: 7 Practical Ideas.
- Customer Success. If a million people sign up for your freemium product, should you celebrate? It depends on whether you have a conversion process to transition those users to paid plans. There are multiple problems to solve here. Start with the first step – getting users to log in to the product and use it to complete a task. There are an entire customer success and onboarding challenge involved to help new users successfully onboard. Hands-on training from customer success can quickly get expensive. If you are funneling hundreds or thousands of customers through your free to the paid conversion process, choose carefully where you apply customer success attention.
- Email Marketing. When new users sign up for your freemium product, they are probably excited to solve problems. However, your users have plenty of other activities and habits already in place. Therefore, it is essential to use best practices for email marketing to engage new users. Even if a free user isn’t paying you yet, there is still a marketing challenge at play. Email marketing is the best approach because it can be customized (e.g., one email sequence for free users and one email sequence for your entry-level premium plan and so forth).
By the way, you can use other marketing assets like your Facebook posts or a new blog post in your email sequences. The content you published last year as part of your organic search marketing campaign can be repurposed to help free users get to know the product.
Growing Your User Base With Referrals and Affiliates
Once you have a proven process to convert free users to paying customers, you need to get as many free users as possible. That’s why so many freemium software products include referrals and affiliate options. These programs give your current users a reason to spread the message. You could offer a financial reward like Freshbooks and ClickFunnels. Alternatively, you can take a page from Dropbox that offered additional product access (i.e., additional free storage) to customers who referred other users to the platform.
What To Do Next
You’ve learned the fundamentals of making the freemium model work. However, this model is just one part of a successful customer acquisition strategy. You also need content to attract the right people to your brand. Contact me today to discuss your content marketing strategy.