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SaaS Pricing: When to Use a Freemium Model

Updated: Jan 17

A freemium model for attracting new customers can be a good match for SaaS businesses. Freemium works by enticing a large volume of users with a free offering, some percentage of which then pays to access enhanced or premium services or features.

Freemium Pricing Model for SaaS

SaaS and freemium often play well together because it costs virtually nothing to offer each new client free access to an existing core software offering.

There is one big caveat, however: You must have the infrastructure in place to deal with a high volume of customers, including nonpaying ones, or the cost of giving away your core offering for free will not be low enough and in fact will rise to unsustainable levels over time.

Freemium Model FAQ

Freemium Model FAQ for SaaS Startups

If your infrastructure can handle the load, then you may be well positioned to use a freemium model to drive SaaS sales.

Before doing so, get familiar with the following frequently asked questions to help you decide when (or if) it’s a good time to use a freemium model:

“Are people comfortable using our product for free?”

Some products make better giveaways than others. Complexity is an issue; a free product is ideally something easy to install and use without much fuss. Trust is also a concern; a product that requires investment of a lot of personal or business information may not be a good match for freemium.

“Can you design a freemium offering that is attractive but still leaves room for premium?”

It’s a matter of “striking the right balance,” according to Lighter Capital partner Chargebee, a billing software company. The freemium plan has to solve a real problem so that people are moved to sign up for it, but it can’t solve all their problems or they won’t opt to pay for the premium plan.

“Is your product sufficiently sticky?”

The best candidates for a freemium business model are companies whose products and services naturally keep their customers in place. This can be due to a high cost of switching once a customer’s info is loaded into the system, a lack of other options that serve similar functions, or a system that benefits the customer increasingly with use, among other things.

“Can your product attract a large audience in a huge potential market?”

Since the freemium model relies on converting a small percentage of users — 1 to 4% on average, according to Chargebee — into paying customers, it won’t work unless you have a very large number of users to target for conversion. Obscure, niche, or hard-to-understand offerings only applicable to a small audience will not work well with freemium.

“Are your customer acquisition and customer service costs reasonable?”

If acquiring new users is hard and expensive — such as in the case of products that target a narrow niche — then freemium is not going to work well. Likewise for customer service costs that are particularly high. If you have to spend too much time attracting and servicing non-paying customers, you won’t have the resources to convert enough people to paying and serve them well once you do.

“Does it cost close to nothing to provide your free plan to each new customer?”

This point is related to the one above – not only must it be cheap to acquire new users for your free service, the cost of provisioning the service must be negligible to make this model function well. This is why high customer-service costs are a no-go, but the point also applies to the more technical costs of running the service that users enjoy, such as server space, engineering, and overhead.

“Can you make a clear and compelling case for the premium plan?”

Once you have the free-service users in your orbit, they are your prime audience for marketing your paid offerings. You need to be able to articulate straightforwardly and convincingly why paying for the extra features will help their business. If you can’t do it in a sentence or two, think again about how you’re structuring your business.

If your answer to most (or all!) of these questions is “yes,” then your business is likely a good candidate to try a freemium business model. When you do, however, just be sure that you have the right infrastructure in place to handle an extremely large volume of users. Otherwise, you may end up losing them due to dissatisfaction before you’re even able to make your case for the premium offering that will actually support your business.

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