7 Reasons Why Companies Fail with Freemium (And How to Actually Succeed)

Editor’s Note: The full version of this article – Freemium vs Free Trial vs Hybrid Customer Acquisition Model in SaaS – appears on Medium here.

What is the most effective process for acquiring customers? This is one of the most important decisions that companies have to make in the early stages. Customer acquisition strategy often covers the media channels and tools used to attract new customers. However, SaaS companies not only have to get prospects to their website but they must also design the initial interaction between prospect and product – how prospects will engage with your product for the first time.

Freemium and free trial customer acquisition models are the most popular in SaaS industry. So what’s the difference?

Freemium provides access to part of a software product to prospects free of charge, without a time limit. Free trial on the other hand provides partial or complete product access to prospects free of charge for a limited time. Typically, a free trial runs for 14 or 30 days.

Even though some of the fastest growing companies in SaaS use a freemium model, designing an effective freemium plan that not only allows prospects to use your product for free but also entices them to convert isn’t easy. But it is possible. Just look at industry leaders like Slack, Dropbox, Asana, Atlassian and others.

While it can be very effective, freemium is often criticized because it doesn’t always create the sense of urgency for free customers to pay for the product. The cost of servicing free customers is another factor that should be carefully examined. But more often freemium fails because its use is flawed from the beginning. Companies often overlook the importance of the type of freemium to offer, and fail to properly nurture newly signed up prospects, onboard them efficiently and provide clear a path for a customer to grow towards a paid subscription.

Let’s review a few of the most common reasons why SaaS companies fail with a freemium model.

1. Provides little or no incentive for free customers to convert

Giving away too much of the product is one way to fail with freemium. Assuming that the cost to service free customers is low, companies must strike a careful balance. They need to provide access to just enough of the product to continuously derive value but not quite enough to eliminate the incentive for users to buy the product. The goal of freemium is to entice customers to increase product usage and ultimatley convert to a paid subscription.

2. Does not deliver enough value

If you provide features that are of low importance to the user, or limit you free version to the level where no value can be extracted from the product, you will most likely fail. Even if you provide your product free of charge, users still have to derive some value from it. For example, if SurveyMonkey allowed just one question per free survey, it’s unlikely anyone would find enough value to use the tool. What’s more, fewer survey responders would be exposed to the SurveyMonkey product and brand.

3. Does not create a sense of urgency

One of the main criticisms of the freemium model is that it doesn’t create a sense of urgency. A free trial expires, which creates urgency for users to invest the time to use and learn about the product value. However, companies can craft freemium plans that highlight the urgency factor.

Analyze your freemium users and categorize them into three buckets:

1. Not an ideal customer (not likely to ever get full value of product)
2. Too small, lacks budget
3. Ideal customer with budget, but low usage

No matter how good your product is, it will never be the case that everyone finds enough value to buy it. Thus, not everyone is the ideal customer. Plus, not everyone has the budget. These free customers can still love your product and share positive reviews. They can be influencers and promote your product and related content across social media but conversion to a paid customer might never happen. Therefore, focus on building urgency with the third category of free users who fit your ideal customer profile, have budget, but most likely do not yet use your product enough to pay for it.

You can create the urgency by communicating new premium features that deliver more value or by highlighting the value missed by not having access to a premium subscription.

4. Does not nurture nor engage continuously with prospects, resulting in a lower free-to-paid conversion rate

Too many companies overlook the importance of nurturing free customers while highlighting the differences between their free and paid versions. Instead, they rely on the idea that free customers will understand the product value and will convert themselves over time or as their needs grow. Companies have to continuously educate users on how they can get more benefits from the paid version of the product. It’s worth it to educate freemium users about new releases and product upgrades.

5. Does not track nor analyze insights on how and why customers convert

This is related to the previous point. Companies need to outline a clear path to take free users to paid customers. It’s a mistake to think that free users don’t need to be analyzed or tracked. First, tracking free users can help you understand target customers better and create data-driven research content. For example, say your product tracks mobile app performance and collects uptime and the most common issues related to downtime. Your company could use this data to create an industry report showcasing uptime for each mobile app category. This type of customer usage-driven content is extremely effective in marketing and PR.

6. Does not provide an appropriate onboarding experience

Even with the free version of your product, users will need to learn how to use your product. Remember, “empty state” or “zero data” is what prospects see during their initial signup process when no data is available in the product. Providing free access to your product that looks empty isn’t going to help you convert free users to paid customers. This is all part of onboarding, which is critical for successful product adoption and can also guide prospects through the steps to generate more data so they realize even more product value.

7. Does not evaluate the cost of supporting free customers

We talked about the cost of a freemium offering – it can quickly add up when considering all your costs, everything from cloud storage to support. Communicate to your users what’s included and excluded in the free version of the product. Ensure that your costs are manageable in the long term.

Don’t look at a freemium model as a thing of the past. Freemium can boost your product growth especially in the early stages of a startup. It can put your product in front of more people early in the buying process. And freemium can help SaaS companies get critical feedback from large number of users. But if you are going to try freemium, remember the 7 mistakes to avoid.