Get your demo with Paddle 🙌
Written by Leah Messenger SaaS Specialist
« Go back
13 Sep 2021  |  Pricing

What is freemium and why is it a winning model for SaaS businesses?

6 minute read

With benefits including easier conversion and more revenue, the freemium model is a favorite in the world of SaaS. Here’s what you need to know to determine if it will work for you.

A freemium model is a quick way to boost your revenue. We’re talking about an average of 8-10% conversion rate for SaaS, compared to a 1-2% average for eCommerce.

But what makes it a winning model for SaaS businesses? 

In this article, we talk you through what makes freemium so popular, as well as the tactics and key metrics that will help guide you towards a successful freemium model for your business.

What is freemium? 

Freemium is a strategy used in customer acquisition, where businesses offer a free version of a product or service with an aim to encourage those customers to upgrade further down the line. 

The freemium model has largely come to replace the free trial or demo model, especially in product-led businesses . A freemium tier gives users access to a feature or a limited version of the product indefinitely, but to go beyond the restrictions the customer will need to upgrade and pay. 

One example is Their freemium product has a range of features that users soon hit the limits for, encouraging them to upgrade to the paid-for version. This saw a huge increase in their checkout conversion rate. 🙌

What is freemium and why is it a winning model for SaaS?

What’s the difference between freemium and free trials? 

There’s a reason why freemium has come to replace free trials and demos, and that’s because there is no time limit. 

Some products can take a bit of time to show their true value. A five-day free trial won’t always allow enough time for your product to shine, for your potential customers to use the product to its full (freemium) potential, or for them to gather accurate data as to whether it’s the product for them. 

The fact that freemium has no time limit for your users means that they can come back to your product time and time again with zero pressure or countdown and use your product - in its restricted form - in their own time. This comes across as less of a sales tactic and more of a generous offering. A great look for you, and a great way for them to keep returning to your product.

Look at Spotify as an example. Signing up for the free account seemed like the obvious choice for customers initially - music for free, how could we not? 

The more we love and use the service, the more we experience the limitations of the freemium version: Ad breaks. The same ads over, and over. No music without internet signal (not ideal for urban commuting). Ads. Next stop: we’re handing over $9.99 a month indefinitely, no questions asked.

The benefits of a freemium model for SaaS businesses

It’s fair to say the freemium model has taken the SaaS industry by storm, and there are a number of reasons why. 

Here are six: 

1) Effective customer acquisition

As mentioned, freemium is an effective way to acquire new customers. Everyone loves a good discount (just look at the popularity of volume discounting ), but completely free to use for an unlimited amount of time? That’s almost irresistible. 

It’s a bonus point over any of your competitors that aren’t offering a free solution, and will help you attract a larger user base to nurture into paying customers. 

Then comes your next mission: building your perceived value to boost that freemium-to-paid conversion rate. 💰

2) Aiding product-led business growth

There is no better way to prove the value of your offering than to give some of it away for free, letting prospective customers experience it firsthand and on their own terms. That’s exactly what product-led growth is about - letting your product do the talking. 

With no need for explanations over the phone or demo run-throughs, this can free up your commercial resources to focus on converting the big opportunities or nurturing customers to upgrade.

By creating a pipeline of active users that can be converted into paying customers, PLG businesses are able to grow faster and more efficiently. What’s more, these companies perform better than their peers post-IPO as a result of this fast expansion

3) Easier customer conversions

Whichever way you choose to segment your price plan to include freemium, you want to clearly signpost the features (and the benefits) that your customers and their business are missing out on if they aren’t paying for the full version. 

This helps create a great incentive for your customers to upgrade, and an easy conversion for you once you’ve identified the hot leads that just keep coming back for more. 🔥

A freemium model also gives you access to a continuous stream of user data and feedback to understand what’s working and where you need to improve the product, your positioning, or pricing strategy to keep and convert users. 

4) Higher retention rates

A ‘try before you buy’ situation allows your customers to get a handle on your product, and make a fully informed decision to upgrade or pay for something. 

This style of product-led growth will have a positive impact on your churn rate, and therefore both your customer and revenue retention rate. Nice.

Think about it as a step-by-step process:

  1. Signing up: Your customers start out using your product as strangers or beginners.

  2. Scoping it out: They continue to return to make the most of their freemium account, becoming regulars.

  3. Seeing value: By fulfilling your promises and proving your product value, these customers will champion it and be more willing to pay.

  4. Shouting about it: With the freemium model coming across as a great deal, your freemium and newly converted customers will be more likely to promote it too.

5) Enhanced customer experience

A sales demo that showcases the best of your product and how much your customers love it is one thing, but the benefit of enabling people to experience the product without a cost or commitment is a great benefit for your customers. 

Offering this kind of customer experience without human support does require solid onboarding and UX throughout the site, but it takes the pressure out of the sale. Not only does it allow the prospective customer to take the time to make a more informed decision of whether it’s the right product for them, but it takes some pressure off your team too.

6) More cost-effective 

While you may not be getting revenue from each individual freemium customer, you could still be saving money. By letting your product do the talking, you can save on customer acquisition costs (CAC). 

Customers using the freemium version wouldn’t expect to have the same level of service, support, or commitment from your team as those on - say - a premium version of your product. It’s on them to discover your product themselves, and that cuts down on costs and time taken away from your developers or support team. That’s not to say there isn’t value in helping them fully understand how to use the product, but you can do so fairly cheaply and at scale through email flows and other onboarding comms tactics.

Are you sold on the benefits and ready to start planning your freemium solution? Once it’s up and running, make sure to check out the metrics to track to see if it’s working for you.

Upgrade to Growth-Ready Revenue Delivery Infrastructure

Replace your chaotic tool-chain with a Revenue Delivery Platform. Talk to the Paddle team today.

Request a demo Learn more