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This is the first in a series of posts to help operators choose the right freemium strategy. I’ve been thinking about this series for a while and it’s borne out of my work with clients at ProfitWell. Over the past couple of years, free-to-paid conversion has quickly become one of the top pricing challenges our clients are facing.
My goal with this series is to provide a structured way to think about the freemium decision, so operators can implement an effective free-to-paid strategy.
Today’s post defines the 3 primary free models and introduces the idea of a key constraint. Next week, I’ll introduce the Freemium Decision Tree, a framework to navigate the options and determine the key constraint that makes the most sense for a given product.
First, some context…
One question I've been getting more and more from subscription clients is how to properly execute free-to-paid conversion.
Since platforms like Dropbox, Slack, and Zoom paved the way with freemium strategies that fueled rapid, product-led growth, a free product experience has become table-stakes for subscription companies of all stripes.
While offering a free product experience has become increasingly common across all markets and products, there isn’t a uniform way to do so. One of the questions we get most frequently at ProfitWell is how to execute a freemium strategy without cannibalizing revenue from the paid offering.
With that in mind, most companies I speak with want the Freemium Dream, which looks something like this:
Step 1: Get a ton of free users
Step 2: Convert those free users into paying customers in regular, predictable cohorts
If only it were that easy…
The other side of the equation, the Freemium Nightmare if you will, looks something like this:
Step 1: Get a ton of free users
Step 2A: Struggle to convert those free users to paid plans
Step 2B: Lose revenue as paying customers downgrade to the free plan
The mere possibility of experiencing the Freemium Nightmare can paralyze a product team. I've seen it first hand with several clients.
To some extent, I do believe operators need to shift how they think about freemium strategy and embrace the benefits beyond the balance sheet. In her post, The Hidden Freemium Advantage, Elena Verna highlights 6 indirect growth effects of Freemium strategies, including Increased Network Effects, Stronger User Habits, Growth Loop Acceleration, and Better Product Insights.
While I firmly agree with these benefits, I also empathize with the operator that has numbers to hit in the short term. Not every subscription company is in the position to delay monetization for years on end.
With that in mind, I believe most companies can benefit from a free offering without cannibalizing revenue - the key is picking the right model. Without a roadmap, this can be difficult - there are a number of options to choose from, and many successful SaaS companies mix and match between them.
The first step to choosing the right freemium strategy is understanding the options. Today, let's define the 3 primary free models, highlighting examples of each.
At its core, any free product experience is going to be constrained on at least one axis. The 3 primary constraints are:
Each constraint anchors its own free product model. Determining which key constraint is most appropriate for your product takes some context - we’ll dig into that next week. Today, let’s walk through the options and highlight a B2B and Consumer example of each.
1. Limiting Time: The Free Trial
The first constraint, time, is better known as a Free Trial. Typically, a Free Trial will allow access to most or all of a product for a defined period of time. Popular options range from 7 to 14 days, up to 30 days, and sometimes even longer. The general idea is that a user can get full access to the product for enough time to determine if it’s right for them. At the end of that time period, they need to upgrade to a paid plan to continue using the solution.
You’ve probably seen a number of free trials in the wild - they’re everywhere.
On the B2B side, my favorite example comes from my time at Hubspot. While I was there, we offered a 30-day free trial for the Hubspot marketing platform. This allowed prospects to set up a live Hubspot portal for 30 days to simulate the customer experience. Importantly, we did not limit the number of users or place restrictions on core features. Within that 30 days, prospects could essentially use the software as a customer would - the only restriction was the 30-day window of access.
On the consumer side, Apple Music offers a 3-month free trial.
While this may seem like a long time, it makes sense. Three months gives a user time to check out Apple’s dedicated playlists, build their own, and also gives Apple Music enough time to tailor recommendations to the user’s tastes. Similar to Hubspot, Apple doesn’t cap usage or features within the trial period, letting users access the product exactly how a customer would.
The time limit on the trial period naturally guarantees that users can’t cannibalize revenue. When the trial window is up, customers either move forward with a paid subscription or move on.
2. Limiting Usage: The Faux Free Freemium plan
The next constraint, usage, underpins what we at ProfitWell call a Faux Free freemium plan. Faux Free freemium plans allow access to a core product within a specific usage limit. Users will typically get access to most or all features and functionality for as long as they want, but only within a predefined usage threshold. When their needs stretch beyond the usage limits, they have to upgrade to a paid plan.
Last week, I wrote about Miro and Figma, both of which offer Faux Free freemium plans.
Miro offers a Faux Free freemium plan limited to 3 boards. Users have access to Miro’s core functionality for an unlimited amount of time with unlimited users, but if they need more than 3 boards, they need to upgrade.
Figma’s free plan is limited on two axes - Editors and Projects. A user can play around with Figma’s core functionality for free, but if they need more than 2 Editors or need to work on more than 3 Projects, they need to upgrade to a paid plan.
On the consumer side, a great example of a faux-free freemium plan is Headspace. Headspace offers 10 free meditation sessions before prompting users to upgrade to one of their paid plans.
These limits ensure Miro, Figma, and Headspace aren’t cannibalizing revenue by allowing users to continue with the free plan in perpetuity. This is a nice segway into the last type of free model…
3. Limiting Features: The Perpetual Value Freemium plan
The last constraint is features or functionality. At ProfitWell, we call this a Perpetual Value freemium plan.
Perpetual Value freemium plans typically provide core functionality for free but monetize additional features, products, or services separately. These plans are often billed as free forever, intentionally giving away core functionality in perpetuity.
A great example of a Perpetual Value freemium plan on the consumer side is Discord. Discord offers core functionality for free and monetizes additional features through its paid Nitro subscription.
Another example is YouTube. Core YouTube usage is free, but if you want to remove ads, play videos in the background, and unlock other features, you need to upgrade to YouTube Premium.
On the B2B side, we offer a Perpetual Value freemium plan at ProfitWell.
Our subscription metrics platform is free forever, but if you want to use Retain to reduce churn, Recognized for seamless revenue recognition, or Price Intelligently to optimize your monetization strategy - you need to upgrade to paid plans.
Often, perpetual value freemium plans will cannibalize revenue purposefully, so they require a higher tolerance for delayed monetization than the other options. We’ll unpack this further in next week’s post.
Navigating the Options
To determine how to anchor your free product experience, you need to choose a key constraint, which is where the Freemium Decision Tree comes in. Next week, we’ll navigate the Freemium Decision Tree and unpack the factors that make each free model a good fit for a given product.
Big shoutout to the Pricing team at ProfitWell, whose members past and present have helped shape these ideas. Special thanks to Wilson Sadowski, my former partner-in-crime (now working on Cloud Pricing at Google), who helped define these terms and was always willing to riff endlessly on freemium strategy.
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