Freemium vs Free Trial: Which Pricing Model Suits Your SaaS Startup

The choice of your pricing model shapes the future of your brand, defines your business and marketing strategy.

Thus, it is a decision that should be made with full attention and seriousness.

When it comes to SaaS startups, freemium and free trial are the two most popular models typically used. Yet, did you know that there are dozens of other options, just as good as those two?

If you are at the crossroads and can’t decide what would be the right pricing model for your startup, we are glad to share some of our observations and first-hand experience with you.

Here is a roundup of the possible SaaS pricing models you can choose from (as well as some of their specifics to consider).

5 Proven Pricing Models Used By SaaS Startups

1. Free Trial Pricing Model

We’ve all seen those luring buttons inviting us to try the product or service for free. But what is really meant by the free trial offer?

In this financial model, a customer gets to use the full version of your product for free, but only for a limited period of time (usually 7–30 days). And it makes good sense: People free stuff.

Moreover, it is much easier to make a purchase once they get the taste of what they are paying for.

On the other hand, if your free trial users don’t convert into paying customers, it’s OK too.

You don’t need to spend your resources and time on non-paying customers.

Plus, you already have their emails, so you can further target them in your marketing and convert them later.

There are many examples of SaaS products that offer free trials such as multimedia streaming services, including Netflix and Apple Music, marketing tools, e.g. Intercom, products by Adobe and Atlassian.

2. Freemium Pricing Model

Unlike the free trial approach, the freemium model offers only a limited set of product features for free. The offering also has no time limits.

How do you make money with freemium, you ask?

You basically sell product upgrades, i.e. full version of the product or additional premium features to the existing users.

Similar to the free trial approach, the freemium pricing model is quite popular among SaaS startups.

You are probably using dozens of freemium products every day without even knowing it.

There are thousands of products that rely on a freemium model:

• Cloud storage solutions, e.g. Google Drive, iCloud or Dropbox
• Business tools, e.g. Trello, Asana, Slack, InVision
• Marketing products, e.g. Buffer, Hubspot, MailChimp, etc.

The wide adoption of the freemium model seems well-deserved. It is relatively easy to attract new users with a free of charge product, even with limited functionality.

Doing this also gets you access to a valuable source of feedback and can enable you to utilize word of mouth advertising to attract even more customers.

While user feedback and advertising are undoubtedly valuable, they don’t generate any tangible revenue.

So, how do you get your freemium users to pay in the long run?

With only 1–2% of freemium users converting to paying customers, most SaaS startups focus on increasing the number of free users to remain profitable.

If your base price is $20, you will need 500 paying customers in order to get back at least $1,000 of the amount you invested. With a 2% conversion rate, you need to acquire 25,000 free users first.

Yet, the $1,000 you get back will barely cover the hosting and storage expenses, let alone the initial development investment and ongoing customer support.

Another pitfall that SaaS startups often face with the freemium pricing model is finding a balance between quality and quantity.

With so many customers on board, even the non-paying ones, it becomes harder to maintain a high quality of customer service.

In this case, it is important to remember where your revenue comes from.

Focus on taking care of your customers first and always prioritize their feedback.

Depending on the type of upgrade offered by the paid subscription, the freemium model can have several variations:

Just like the traditional freemium model, this option allows the users to access the product for free while still offering paid add-ons.

This is the most popular monetization strategies adopted by online games. Yet, SaaS startups can also use it to earn money.

For example, many messengers like WeChat and Viber sell custom stickers, while being completely free to download and use.

Other products use the in-app currency to both monetize the product and add gamification elements to it.

For example, Canva offers premium elements that can be purchased with in-app credits.

Instead of selling in-app credit or extra stuff with a free to use app, some SaaS products offer premium services for a small fee.

These additional features add an extra layer of customization, priority support, etc.

Yet, this model is far less popular because it is usually hard to scale and it works well only with enterprise-level software.

Plus, you cannot build your product once and monetize it later, as with the rest of the pricing models.

In this case, the development efforts will be ongoing. You will need to develop new features and customize the existing ones for each customer.

Read the full article here: https://get.tech/blog/pricing-model-for-your-saas-startup/

Originally published at https://get.tech on July 26, 2019.