SaaS

Should a Free Plan Be Part of Your B2B SaaS Business’s Pricing Strategy?

Adolphus McKoy | January 25, 2022

Traditionally, forever-free subscription plans are one of the only pricing strategy examples that belonged in the realm of B2C subscriptions—think Spotify, YouTube, Todoist, and more—while the B2B market preferred offering free trials.

After all, free trials put a hard limit on a person’s use of the product or service, compelling them to upgrade and pay the premium pricing after a set period of time if they find the product or service indispensable. On the other hand, with free plans allowing for forever-free use of a product (with or without minor feature limitations), users could potentially put off the purchase decision indefinitely.

But the tide is turning: The freemium pricing model, where users can use most product features for free while others are behind a paywall, is slowly but surely becoming a competitive pricing strategy in the B2B SaaS world.

Just check out the websites of Airtable, Zoom, HubSpot, and many other SaaS giants. Chances are, you’ll spot shiny call-to-action buttons inviting you to “sign up for free!”.

Seeing this, you might get FOMO and start to wonder whether your own business should incorporate a freemium plan as one of its pricing strategies as well. Well, let’s take a look at the pros and cons of launching a free plan, and how to decide whether it’s worth it to greenlight a free plan pricing strategy.

Running a free plan pricing strategy: what are the pros?

It’s obvious why users love free plans: they can start out for the low price of $0 and only upgrade to a paid plan if and when they need to. But from a B2B SaaS business’s point of view, offering a free plan can act as a form of penetration pricing and bring about these other benefits:

Boost your sign-up rate, conversions, and revenue

Put out a free plan, and you might see new users sign up in droves. People tend to value something more when they feel a sense of ownership of it, so offering a free trial can increase the customer’s perceived value of your product.

For example, performance and availability monitoring software New Relic 10X’ed its sign-ups after launching a new—and generous—free plan.

Not only that: as more leads are exposed to your product, the higher your opportunity of converting more target customers—and increasing your revenue—becomes. According to Chad Savoy, then-Vice President of North America Sales at IT management platform SolarWinds, 20% of the platform’s overall revenue came from “leads that were remarketed to in the freemium context.”

Your business might not have to significantly invest in more sales and marketing resources to convert free users, either. That’s because…

Your product helps sell itself

When a user tries your product, they can see first-hand how it works. From there, they can decide whether they need to shell out for the additional features not included in their free tier.

If yes, they’ll upgrade to a paid plan. Score!

Multiply this scenario by the number of free users you manage to sign up, and you could potentially bring in a lot of new paying customers.

And here’s the clincher: You didn’t have to get your sales team in to engage users through lengthy sales calls or demos. Your customers basically convinced themselves to convert, solely from using your product for free.

“By having your prospects onboard themselves, you can significantly reduce your prospect’s time-to-value and sales cycle,” writes Wes Bush, founder of product-led growth community ProductLed. “Once people experience the value of your product, the next logical thing to do is upgrade.”

And when users get to try before they buy, you also stand to…

Reduce your customer acquisition costs

With users converting thanks to the strength of your product alone, your sales reps might not need to get involved in closing customers at all. This reduces your customer acquisition costs (CAC) and frees up resources for other operations.

Take business communication platform Slack for instance. An organization may have many staff members using Slack for free. However, Slack’s free plan lacks certain security features, such as OAuth and SAML-based single sign-on, which may be concerning to the organization’s IT department.

“For a traditional sales and marketing organization, they may spend weeks or months emailing, calling, or spamming them from multiple touch-points to book a demo,” writes Luke Thomas, founder of digital planner software Friday.

But Slack doesn’t have to do that. Instead, its sales team can simply send a “well-targeted email” to the organization’s IT department to:   

  • inform it that some of its staff are using Slack, and then 
  • ask whether it wants to ensure the organization’s data is secure (by upgrading its staff to a paid plan).

“As a result, the cost to acquire these customers is far cheaper,” concludes Thomas.

And what are the cons?

Of course, running a free plan pricing strategy isn’t a bed of roses. Beware of these potential potholes:

Increased load on your operations

A free plan can net you many more users, but can your business continue to deliver? Your business will have to cope with higher resource usage and more customer support requests. This can increase the strain on your teams and infrastructure, possibly to the point that your product starts to break. And not just for your free users, but also for your paying customers, who may churn if they aren’t getting the actual value they paid for.

Accordingly, be certain that your business operations can keep up with the needs of a larger user base before rolling out a free plan.

Email marketing platform ConvertKit didn’t launch a free plan until six years after its founding—and after the business had built dedicated teams to support its product.

“A couple years ago [going freemium] would have been a risky move,” writes ConvertKit founder and CEO Nathan Barry. “Now we have the scale to deliberately execute on this aspect of our mission [to help creators earn a living].”

Maintaining a free plan can (significantly) add to your operating costs

Getting new users through the door isn’t the end of the story. You’ll then need to educate them on your product and help them see the value in it so they’ll hopefully switch to a paid plan. In the meantime, they’ll be using your product and consuming your technical resources—be it API calls, bandwidth, or something else.

Users might also get stuck while using your product. In this case, they’ll write or call in to support, which may now be barraged with tickets from an influx of new users.

As François Grante, co-founder of email finder tool Email Hunter (now known as Hunter), puts it: “If you need 90 free users for one paying customer, that’s a lot of additional emails every month!”

To maintain high-quality standards, your business may need to pay for more infrastructure and staff. This leads to higher overhead costs, which may escalate as more free users sign up.

But incurring these additional costs may or may not pay off, because…

More users don’t necessarily equal a higher sales volume

Some users may be perfectly happy using your freemium offering and never decide to upgrade. On the other hand, some users may actually need your paid offering but still find a way to get what they need without upgrading.

This is exactly the problem that workforce management platform Hubstaff experienced with its previous free plan: Each free account could accommodate up to three users, and account holders were supposed to upgrade if they needed more users. However, people quickly discovered that they could add more users by simply using different email addresses to sign up for new free accounts.

So that’s what they did, causing Hubstaff to lose out on revenue until it ultimately axed its three-user free plan tier. The business has since replaced it with a single-user free plan.

How to decide whether to incorporate a free plan into your pricing strategy

Offering a free plan can help your business enjoy more sign-ups and reduced CAC, among other gains. That said, it’s not necessarily the best pricing strategy for every product. All the benefits might not mean much if you don’t see sufficient increases in revenue or can’t maintain a healthy profit margin. Don’t forget there’s no guarantee free users will go on to upgrade.

What is guaranteed from running a free plan, however, is an increase in your operating costs. So, when deciding whether to pursue a freemium pricing strategy, consider issues such as:

  • Do people need to use your product to understand its value? This is especially relevant if your product is more complex. That said, if your product is really complicated, customers may benefit from having a sales or customer success representative walk them through it, as opposed to being left to sign up for a free plan and figure things out on their own.
  • Would your product benefit from the “network effect”? This is where having more users on your platform will lead to a better experience for all users, and hence a higher conversion potential for free users.

If so, going freemium might be worth a shot to stay competitive. Pricing experimentation is necessary for finding the right pricing strategy for your product, after all.

In the end, you may decide your SaaS product or business model isn’t suited for adding a free plan to your pricing strategy at this time. In this case, you may want to venture into value-based pricing, dynamic pricing, or other common pricing strategies instead.

Tap on modern billing automation software that can flexibly support a wide range of pricing structures, so your subscription fee pricing tests aren’t hampered by manual and inefficient billing processes.

Experiment with your pricing tiers fearlessly, and experiment often, until you nail the most effective pricing strategy for your business.

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Adolphus McKoy
Adolphus McKoy
Account Executive, Stax Bill