Why Is Freemium Model Best For Your SaaS Start-up?

I had pointed out in my earlier article that if you are contemplating on starting a SaaS business, then you have to appreciate the fundamentals of low cost customer acquisition through accelerating organic growth and by “getting found on the web”. This article is an extension of the same fundamental. The fundamental of ‘freemuim’ is to understand that the free subscription means free selling of your start-up through improved utility and deep customer engagement which helps in spreading word-of-mouth and accelerating inbound marketing strategies for organic growth.

Freemium model essentially means that you give away the basic services of your product as free either for a limited period or for a limited number of users, and charge a subscription fee for more sophisticated part of your services. The catch here is that the utility of your service or product should be high enough to keep your target customers engaged deeply, so that the cost of losing the service is perceived higher than paying for the premium version of that service. In short, your service must serve a strong unmet need so that it becomes an indispensable thing with the customers upon them experiencing it.

If you are a SaaS provider, then the economics of cloud will prompt you to bring down your subscription charges to a reasonable level such that conversion from a free subscriber to a paid one does not become difficult for the customers.  The conversion ratio of paid customers to free subscribers will be higher for your SaaS start-up.

The freemium model is best understood with an example. Dropbox, which is a storage service in the cloud, allows you to store your data in the cloud for free up to 2 GB of storage space. Now 2 GB can be used up very quickly. But its convenience is so high and the need so strong, (secured back-up of your data and convenience of accessing your PC from anywhere) that the more you use the service the more you need it. Of course there have been other players offering the same services as Dropbox, but being early and using the freemium model, they have succeeded in further deep-rooting the need for their services. If at all you want to switch to another such service provider, you will end up spending a lot of time in uploading gigabytes of your data. Instead it makes more sense to subscribe for Dropbox’s premium services and upgrade your storage limit.

Depending on the type of your SaaS business, you can choose the freemium model which suits your business model best. Usually there are four types of freemium models, as written by Chris Anderson in his post for Wired Blog Network:

1. Time limited: For example, 30-day free trial and then pay.
2. Features limited: Get basic version free (always) and pay for more sophisticated features.
3. Seat limited: Get free for certain number of users and pay for more number of users.
4. Customer type limited: Free for certain type of customers (e.g., start-ups) and paid for others (e.g., larger enterprises with employees greater than 1000).

So, if you are a start-up and are sure that you are servicing a strong unmet need, then it is easy to go for the Features limited model, as the utility of your service will drive the word-of-mouth and the free version will keep getting your top-of-the-funnel filled. You can do a similar brainstorming for weighing the pros and cons of other freemium models to arrive at the one best suitable for your business.

What is your take?