SaaS

The Evolution of the Freemium SaaS Tier

Elizabeth Connett | November 8, 2022

Ah, freemium! Since the term was coined back in 2006, it’s been the source of many debates. Is it the perfect pricing fix—the secret strategy sauce? Or is it a disaster in disguise, waiting to sink unsuspecting SaaS businesses?

Depending on who you ask, you’ll get wildly different responses. Canva, for example, has made history with its use of the freemium pricing model and is now one of the highest-valued startups led and founded by a woman, at a cool $40 billion USD.

Then there are the not-so-successful stories, like the LMS business Docebo which trialed a free plan back in 2014 and didn’t get one single conversion from 7,000 signups. Absolutely zero. (Don’t worry—Docebo since found its groove and now turns $138.2 million in ARR).

It seems that many businesses are finding the cons outweigh the pros when it comes to the freemium business model. Have we seen the rise and fall of its popularity and efficacy? Are its glory days over?

Related: How to Run Pricing Strategy Experiments with Your SaaS Billing Software

What is a freemium + upsell strategy?

Freemium is a portmanteau of the words free and premium (or a “werge”—word merge—as I like to call it).

The freemium business model is simple: attract more users with free product access, then hope that enough of them will convert to paying customers once they’re hooked.

There are a few common ways to convert users:

  • Withhold premium features on the free plan (how Mailchimp does with A/B testing)
  • Implement a usage limit for freemium customers (like Dropbox’s 2 GB of storage)
  • Offer an ad-free experience for upgrading to the paid plan (as Spotify does)

In practice, turning freemium users into paid users is tricky. Many people are happy with just the basic features—especially when they’re free. It’s one of the reasons many people view freemium as more of a marketing strategy than a revenue model. It can be great for customer acquisition, attracting many new users. But with low conversion rates, those users don’t necessarily translate to profit.

The freemium model is a numbers game. As Phil Libin, Evernote CEO says, “The easiest way to get 1 million people paying is to get 1 billion people using.”

Jason Lemkin of SaaStr has done the math, too: he reckons you need at least 50 million active users to reach $100 million in annual recurring revenue (ARR) with a freemium strategy.

Freemium or free trial?

They might sound similar, but the freemium model and free trial strategy are very separate things. Free trial users get unpaid access to a product, or part of it, for a limited time only. Freemium users, on the other hand, get free access indefinitely.

For opt-in free trials (no payment details required on sign-up), a benchmark conversion rate is around 25%. In an opt-out free trial scenario (credit card details required from the get-go), that number is even higher—up to 60%. By stark comparison, the freemium strategy offers up average conversion rates of just 2-5%.

Other differences between free trials and freemium pricing include their compatibility with go-to-market (GTM) strategies, blue vs. red ocean businesses, and target audience.

How has the industry’s view on the strategy evolved over time?

One VC firm described freemium as “dying a slow death” in 2016, only to do a 180 and tout the strategy as “cutting edge” in 2020. But OpenView isn’t the only one to change its mind.

Back in 2015, Lemkin of SaaStr said, “The pendulum has definitely swung back away from freemium to enterprise. Most of the B2B IPOs that have been successful, like Salesforce and Workday, are all enterprise-y. They’re not freemium.”

His tune changed in 2022, when he announced, “Freemium is back!” albeit with the caveat that “Freemium alone is not enough.”

Once seen as the absolutely essential SaaS model, responsible for the success of unicorns like HubSpot and Wix, it feels a bit like the Golden Age of Freemium is over. In recent years, as more and more SaaS businesses were drawn to the freemium model, failures were inevitable. The SaaS industry started to see the dark side of freemium emerge.

A major pitfall of the freemium model is its inability to bring direct revenue. Your paying customers must generate enough revenue to carry your free users.

Well, either that or you need to go running to your investors every time the cash dries up. That tends to get real old, real fast—especially in the current economic climate, as we face soaring inflation and recessionary risks. The venture capital bull market has run its course. Startups can no longer afford to lose money for the sake of growth.

Thankfully, the industry is realizing freemium isn’t the only way to successfully employ a product-led growth (PLG) strategy. Innovative solutions like no-code demo platforms have made it possible for SaaS businesses with complex or privacy-heavy products to focus on product-led growth too, even when freemium isn’t an option.

How businesses’ execution of freemium models has changed over time

Is it really “RIP freemium”? Let’s have a look at the behavior of some B2B SaaS businesses that have recently used, considered, or dropped the freemium business model.

Qualaroo, who removed its freemium offering entirely

Qualaroo discontinued the free version of its product after realizing it wasn’t right for its target audience. “Our free and low-cost versions were anchoring our solution at a price point that did not support our revenue growth objectives,” explains Sam Ellis, founder and CEO. “New customers are now happy to pay the higher prices because they haven’t been conditioned to think of it as a cheap or free solution.”

Ellis is right: from a psychological perspective, potential customers associate cost with value. At the other end of the spectrum, it’s why premium pricing strategies work so well.

Qualaroo hasn’t shied away from all things free, though. While the entry-level plan now starts at $100 per month, it comes with a 15-day opt-in free trial and includes a 100% money-back guarantee. This satisfaction guarantee removes the risk for an audience who is more concerned with the quality of the product and service than saving a few bucks.

If you do end up going down the freemium pricing path, the lesson here is to know your target customers and their journey through and through. Understand your user personas, what they want, and how they want to get there to ensure your offering is aligned.

Qwilr, who switched from free trial to freemium and back again

The folks at Qwilr have been through their fair share of freemium blunders. After rolling out their freemium product, COO Mark Tanner noticed a few things. Firstly, virality went up, and the user base increased—which initially seemed very positive.

However, as Tanner points out, “Free users are very viral for other free users. Paid users, even though their virality is maybe not always as high, are much more likely to be a referral engine for other paid users.” Qwilr’s increase in free users didn’t translate to more profit, as is often the case with the SaaS freemium model.

Another thing that happened was the sales cycle elongated from around 14 days (including a free trial period) to around 60 days with the freemium model.

“There is a little bit of magic with the 14-day trial, in that if you go on [the app] and you know that you’ve only got 14 days, the amount of time that you spend in the app […] is 50% longer on average,” notes Tanner. There was no longer any urgency. Making the cycle over 4X longer negatively impacted everything from cash flow to conversions to the sales team’s confidence.

Tanner also warns against freemium products’ influence on brand trust and reputation. “If freemium is just a downgraded version of your core product, [customers’] first impression of your product is not as good as it could be. And so I think you need to be careful about that.”

If free plans only provide access to core features, users might assume that advanced features are not available. These “missing features” could be the reason they decide not to pay the subscription fee and convert to premium users.

The future of freemium

SaaS experts have conflicting opinions about whether freemium works anymore. The general consensus is a freemium pricing model (or, more accurately, a customer acquisition model) can be successful in the SaaS world, but only when certain specific criteria are met.

For example:

  • the product must be easy to deploy and simple to use,
  • typically, it should be in the B2C space (though not always—think Zoom or Slack),
  • the business should have been around for a few years,
  • the business should have low marginal costs,
  • the saas freemium model should not replace sales agents,
  • it should follow a disruptive GTM strategy, and
  • your platform should have the infrastructure to support a mass audience.

So, is it better to stick with the 86% of B2B SaaS businesses that prefer to offer a free trial over a freemium plan? Maybe. Or, you could ditch freemium, increase your prices by 10X and be more profitable with happier customers than ever before!

So what about historically free apps and services, like WhatsApp, Quora, and Firefox, who have recently joined the freemium product club, then? Do they know something we don’t? Or do the same rules not apply to these large, legacy software vendors? (Hint: when you’re owned by Meta and you’ve got hundreds of millions—or even billions—of users, things do look a little different.)

As usual, there is no singular answer when it comes to what’s best for your business. The freemium trend is not dead but has evolved. Where there are successful examples, there are also terrible failures: the trick is finding the right balance for your unique business.

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Written by:

Elizabeth Connett
Elizabeth Connett
Director of Marketing, Stax Bill

Elizabeth is Stax Bill’s Director of Marketing. She is passionate about growth marketing with a focus on SaaS companies, building brands that resonate with their target audiences, and telling the stories that connect brands with their future and current customers.