Is the Freemium Model Right for Your SaaS?  

The freemium-to-paid model for client acquisition is commonplace in the PLG SaaS industry playbook, but many founders struggle with how to build offers in such a way that:

1. The free model attracts prospects and keeps them until they’re ready to move up.
2. The paid model offers enough upgrades to convince free users to make the move.

Some consider a free trial (limited time access to a full product) a version of the freemium model. However, the true freemium model gives users FREE lifetime access to the product with basic features and functionality. However, to access advanced features, the users must upgrade to a paid subscription. Customer service and support, customization, collaboration, and integrations are commonly kept behind a paywall.

History of the freemium

The freemium model dates back to the 1980s, although the term wasn’t coined until 2006. It’s a modern-day example of King Gillette’s Razor-Razorblade model, where a dependent good is sold at cost while the paired consumable good generates the profits.

King Camp Gillette, inventor of the disposable safety razor and founder of Gillette, popularized the two-part pricing strategy in the early 1900s. Many significant marketers still rely on the model today, in categories ranging from printers and coffee pod machines to game consoles.

Benefits to SaaS businesses

On the surface, the freemium model provides a multitude of benefits to the SaaS business. The freemium can help prove early product value, as well as organically spread brand awareness of the solution, and potentially provide actionable market intelligence. Successful freemium model executions provide enough warm users that a company can convert to paid subscriptions.

SaaS companies must still invest to find prospects to sign up

Some founders are surprised to learn that most businesses still must pay to get users to try the product for free. The “If you build it, they will come” philosophy doesn’t generate as many users as anticipated. As such, startups still need to invest in marketing to find ways to tell prospects about the new tool and encourage signups. As ClickFunnels co-founder Russell Brunson says about marketing traffic in his book Traffic Secrets, “you either buy traffic or earn it.”

Freemium metrics

A pricing strategy survey by the Harvard Business Review concluded that a typical conversion rate for freemium to paid subscriptions is 2-5%. To determine freemium metrics, SaaS companies must consider their Customer Acquisition Cost (CAC) to include not just the marketing to acquire the free user but the incremental cost to support those on the free model. These costs are then compared to the Annual Contract Value (ACV) or Total Contract Value (TCV) to determine the time to payout.

How do SaaS businesses nail the freemium model?

Many SaaS companies have successfully launched subscription businesses beginning with the freemium model, including all of the following well-known SaaS companies.

• Zoom offers 40-minute video call plans for free. Yes, the global pandemic in 2020 accelerated their success as their name became as ubiquitous as Kleenex is for tissues. Still, the service was downloaded 485 million times.
• Slack users can sign up and begin messaging immediately for free. When you want to customize policies or integrate add-ons, users must move to the other side of the paywall. Today, 43% of Fortune 100 businesses pay to use Slack.
• Both well-known team organization tools Trello and Asana offer a freemium model to users. Each platform has enough functionality to keep free users, but essential integrations and customizations are only available in paid subscriptions.
• Canva uses the freemium model to attract new users to the platform. There, users discover how simple the platform makes it for users to create useable graphics, from Instagram posts to sell sheets. Eventually, the user finds a photo, graphic, or template they want to use but can only unlock with a paid subscription. At a paltry 10-ish dollars per month, it’s an easy sell.
• HubSpot leverages the freemium model to attract users to different parts of its growing ecosystem of CRM, sales, and marketing tools. They even offer a free sales pricing calculator to help users set their pricing strategy. HubSpot’s freemium model strategy excels at leveraging content and free educational resources to attract new users. This investment in content and valuable tools lowers their CAC and may increase conversion rates. In short, HubSpot has made themselves so likable because they provide so much value in their free quality training on related relevant topics (like Russell Brunson, the bootstrapped unicorn) that users want to become part of their ecosystem of paid subscribers.

How Get Latka Interviewees leverage the freemium model

In 2020, the Get Latka team interviewed HotJar competitor Smartlook about how they converted 100,000 Freemium users into $2m in ARR. According to founder and CEO Petr Janosik, he offered early SmartLook users the session recording tool for free with no usage constraints. Although Janosik admitted that most early users were small and churned a lot, the company launched a paid version asking $10-$15 for 100,000 session recordings. As of 2020, they catered to 2,000 customers paying an average of $80 in MRR. With a CAC of $200, their payout is 2-3 months.

Earlier in 2022, the Get Latka team interviewed CEO Julien Delange of Codiga, a freemium tool for developers. Codiga is burning $55,000 per month to build its automated coding assistant. Delange, formerly of AWS and Twitter, explained to Latka that Codiga is following the Dropbox model, where only 1% of users are paying users. Codiga’s original tool quickly attracted 15,000 free users and converted 50 paying customers. Their subscription model only charges developer teams larger than 5 users. Those users currently pay an average of $300 per month for 20-30 seats. The freemium users sparked Delange to develop a new supporting product: Codiga is nearing launch of a new product that validates and makes suggestions on new code. This book of code snippets is built on free users’ generated and validated code snippets.

5 shared traits of successful freemium to paid subscriptions

1. The SaaS has a clear product differentiator, solving a specific problem for a specific audience
2. The SaaS gains value from free users without accelerating the company’s burn rate
3. The SaaS offers a clear pathway to upgrading to paid anytime
4. New users can self-direct their own onboarding without lengthy implementation or 1 to 1 training calls
5. The free version offers valuable features, but users yearn for features on the other side of the paywall

How to increase paywall conversions

After building a useful freemium model, SaaS founders can take several steps to convert free users to paid. Some of the most common and successful conversion techniques include:

• Treat freemium users like customers. Nurture your relationship, add value, get feedback, and continue to create reasons to upgrade to paid. Keep users informed of new features and changes to the paid and free plans.
• Make upgrading to paid a frictionless experience. Evaluate your processes to ensure that free subscribers can easily upgrade to paid without losing their existing preferences and login information.
• Launch promotional events to create a sense of urgency to move to a paid subscription. Some companies, like Design Pickle, create a limited-time “sale” event once a year where a set number of subscribers can upgrade for deep-discount savings, such as 35% off an annual plan. For users on the fence, this can be enough of an enticement to make the move. According to Get Latka, Design Pickle hit $21.1m in revenue in 2022 with 3,000 customers
• Unlock popular features. As SaaS companies evaluate the features most used by paid subscribers, they can further build out these features, as well as let free subscribers know about the features’ popularity; send case studies of usage by paid subscribers.
• Ad removal. If the free plan includes ads (common in phone apps and streaming services), removing the ads is a common reason for users to upgrade.

In short, remember that freemium users are effectively warm leads who know, like, and trust the SaaS more than a cold lead. Integrate them on an ongoing basis into your customer engagement plans to boost your conversion rate.