5 Epic Advantages of Freemium (And 3 Roadblocks)

Oct 10, 2022

min read

What if we told you that offering a freemium version of your SaaS product is a surefire way to boost your revenue? 📈

The freemium model has worked for giants like ClickUp and WordPress, and it can work for you too.

Yeah, you!

In this article, we’ll explore five compelling advantages of freemium. We’ll also cover three ways things go wrong with this business model and three best practices to help you ace it.

Let’s get started!

Five Epic Advantages of Freemium

Hold up… What exactly is freemium?

A freemium model offers users a basic free version of a product.

If users love the product, they can upgrade to a paid plan with a premium feature set.

Freemium is free forever (unlike a free trial) and allows customers to sign up on their own.

And if you didn’t already know: freemium rocks! 🎸

Why?

Here are five major reasons to consider a freemium revenue model:

1. Brand Awareness and Virality

Offering a freemium version of your product will help you attract a large user base.

Why?

Because everyone loves free stuff. 🤑

The word “free” is a fantastic marketing tool.

A freemium pricing structure could encourage a potential customer to choose your product over a competitor’s.

After all, why pay to try something when you can try it for free!

But it’s not only about brand awareness.

If you have a high-quality product, your freemium users also become advocates of your brand.

This is where the network effect comes into play, AKA: virality.

The more people use your product, the more people want to use it.

And every free user of your software could be a potential paid user.

Freemium lets you show off your premium feature set to people who may require more than the basic service.

Think of the Zoom “boom” in 2020 and how it became the go-to app for video conferencing.

In January 2020, Zoom had 81,000 paying customers. By the third quarter of 2022, it had 512,000, largely thanks to virality.

2. Reduced Customer Acquisition Cost

Customer acquisition cost is the average money you spend to convert someone into a paying customer.

If you have a high sales and marketing spend but low customer acquisition rates, you’re spending way too much on getting way too few customers!

So, how can freemium help?

Well, we can’t say this enough: 📢

It’s easier to attract people to a free product than a paid one.

Freemium apps allow users to try the features without handing over their hard-earned cash or credit card info. And unlike a free trial, users can take their time getting used to the software.

But we’re not done.

Converting an existing free user into a paying customer is also easier than converting a customer who has no relationship with your SaaS company and product.

Why?

Because they’ve already experienced your product’s value and suitability!

This means more conversions and a lower customer acquisition cost 💸.

3. Opportunities for Monetization

If everything’s free, you’re not going to make any money, right?

Not true!

Here’s the truth:

Just because you're offering something for free doesn’t mean you can’t monetize it.

In fact, there are many ways to leverage your free user base for revenue generation.

For example, you can:

Invite advertisers to target ads to your audience. Netflix is a recent example of a company using this revenue model. In response to losing over a million subscribers in 2022, Netflix plans to introduce a more affordable paid subscription plan with advertisements.

Ad revenue then becomes a secondary income stream to compensate for the lower prices. Instead of offering this on your lowest paid plan, like Netflix, use it for your free version!

Cultivate a community of users who can support each other. This helps reduce the time and money spent on one-on-one customer service. For example, GitHub, a software development service, has a community forum where users can help solve each other’s queries.

Most importantly, use the freemium stage to determine who your most active users are. With tools like Toplyne, you can target these specific users for upselling. This leads to extremely high conversion rates as you only focus on promising leads. You have no idea how much money you’ll save as a result!

4. Low-Cost Beta Testing

Your SaaS company can provide freemium users access to new products or features still in development.

How does this help?

It lets you receive valuable user feedback to improve your product and make it the best in the game.

While you’re attracting an initial user base, you can use customer feedback to improve your premium offering. Once people are ready to upgrade, your paid version will be kick-ass and value-packed!

In addition, users feel like they helped perfect the product, which contributes to brand loyalty.

5. Allow Your Users to Scale Naturally

With a freemium business model, you can give your users the chance to scale as their needs change.

A new user may sign up for your freemium service to see how it solves a problem they have. But their needs will likely evolve over time. For example, a scaling B2B customer will eventually need more seats, advanced features, and more storage capacity than the free offering can support. This is a sign of growth!

In other words, a business owner may be in a better position to pay for a premium offering once they’ve outgrown the free plan.

But will these users stick with your product?

Short answer: yes!

Customers are more likely to stick with your product and upgrade to the premium version because they’ve experienced your product’s value proposition. Plus, all their data is already there!

Take MailChimp for example: The free plan supports one user and 2,500 emails a month. When a business outgrows these limitations, they’ll likely upgrade since their entire email database and workflows are already set up in MailChimp.

Although these freemium advantages sound amazing, there are some common pitfalls you need to look out for 👀.

Let’s explore these next.

Three Common Freemium Roadblocks

Sure, there are tons of successful freemium companies, but that doesn’t mean they didn’t overcome challenges to get there!

There are typically three main challenges with the freemium business model:

1. High Cost of Supporting Non-Paying Users

Supporting freemium users can involve some overhead. After all, your freemium company still has to handle customer support, product maintenance, and continued development.

If you don't, ratings can drop, brand image can suffer, and you could fall behind competitors.

That’s why you need to find the right recipe for monetizing your freemium user base and driving conversions.

Otherwise, you won’t see much ROI (Return on Investment).

2. Low Conversion Rate

If you’re struggling to get users to upgrade from the freemium service to paid plan, you likely haven’t found the right balance between your freemium and paid features ⚖️.

What do we mean?

If your freemium offering is “too good,” a new user won’t need to upgrade.

And if your free product isn’t good enough, they won’t want to upgrade!

The trick is to offer an excellent freemium product that attracts and retains users, while holding back on enough paid features to entice them to purchase a paid subscription.

You can also look at your pricing strategy. Perhaps you need to introduce a more affordable paid option to your freemium pricing strategy. This makes the purchasing decision more manageable for a new user.

3. High Churn Rate

SaaS companies tend to see two kinds of churn associated with the freemium business model:

A potential customer might try the free plan, then disengage from the product entirely. This is usually when your freemium version isn’t feature-rich enough.

A premium user reverts to the free plan. This likely indicates that they didn’t find enough value in your paid plan vs the free plan. Luckily, because the user is still engaged in the freemium product, you can ask them for feedback on why they downgraded.

So how do you avoid these issues?

Let’s look at how to do freemium right.

Three Best Practices for Implementing Freemium

Here are three no-fail tips for developing a kick-ass freemium strategy:

1. Find the Best Way to Limit Your Freemium Offering

If you want to see your freemium conversion rate skyrocket 🚀, you’ll have to show your freemium users what they’re missing out on.

Successful freemium companies tend to differentiate their basic service from their premium service in one of four ways:

Limiting features: Users need to upgrade to the premium version to access certain features. For example, Canva is a graphic design tool with an excellent freemium plan. However, they offer many additional features in the paid version like premium stock photos and social media scheduling. The company (a champion Toplyne customer, btw 🏆) is now worth over $40 billion.

Limiting usage: Users need to upgrade to access extra storage space, seats, credits, etc. Dropbox executed this strategy perfectly by offering free users only 2GB of storage. Use Dropbox long enough and you’re going to need way more storage!

The result? Nearly 17 million people bought a Dropbox subscription in 2021.

Limiting support: Premium plan users get access to comprehensive VIP customer service options. For example, you could offer 24/7 customer support via phone or live chat as a premium feature, and limit free users to email support.

Advertising: Some freemium apps, like Spotify and YouTube, remove advertising from the platform for users of the premium service.

2. Set SMART Conversion Goals

Unless you have specific targets for your free plan, you’ll never be able to leverage it for revenue growth.

To do this, opt for SMART goals.

These are goals that are Specific, Measurable, Attainable, Realistic, and Time Sensitive.

Here are a few examples:

Attract a user base of >100,000 by Q3.
Achieve a 3% freemium conversion rate within six months.
Convert 100 users to a premium plan each week.
Lower acquisition costs by 30% by the end of this year.

Regularly assess progress on your goals, and use these insights to adjust your customer acquisition and marketing plans.

How?

With a tool like Toplyne that has a goal-setting feature for customer acquisition. Just say what you want to achieve, and Toplyne can show you how to get there!

3. Leverage Insights for Conversions

Data is your flashlight to illuminate the way forward 🔦.

It can provide insight into your Product-Qualified Leads (PQLs) - people who already love your product and are likely to buy. But to get conversions, you need to segment your data to identify what kind of leads you’ve got.

Then, you have to figure out what message to send and how to send it.

This can be a daunting task when you’re looking at a sea of numbers.

Here’s where Toplyne can help!

Toplyne is a tool that helps you monetize your freemium users and boost premium conversions.

With Toplyne, you can:

Experiment with different conversion strategies.
Collect valuable user data to help you identify opportunities (e.g., new customers, upselling potential, churn risk).
Get insight into your target buyer personas.

How?

Check this out:

Toplyne connects your data sources (like Amplitude and Mixpanel) with your CRMs (like Salesforce and Hubspot).

It builds a 360° view of your current and potential users, combining each user’s data (demographics, behavior, payment history, communication history) in a convenient dashboard.

It segments users according to their level of engagement with your product (e.g., curious, likely to convert, highly engaged, disengaged).

It segments users according to their level of engagement with your product (e.g., curious, likely to convert, highly engaged, disengaged).

It then recommends the best ways to reach these customers and helps you automate different marketing, conversion, and retention strategies.

It then recommends the best ways to reach these customers and helps you automate different marketing, conversion, and retention strategies.

Toplyne aims to send your conversion rates through the roof and save you time and money! That’s because you’ll focus your resources on potential users that are likely to buy instead of spending them on users who’ll never convert.