I’ll never forget one of the first lessons I learned in college. As an Economics major I learned, “there’s no such thing as a free lunch.” It was one of my introductory Econ classes that started at 8 in the morning. I used to struggle to climb out of bed and walk across the frozen tundra of campus. Shocker that an enthralling Economics lesson at 8 am wasn’t much of a draw. But this is one lesson that I remembered. The premise is that everything has a cost to it. The cost of certain items may not be dollars or currency as you imagine. There is some type of trade that takes place though when you get something for free. If nothing else, you are exchanging your time. You are trying someones service or product. Your time is valuable. You have traded your time which has a cost.
Lets assume you get a coupon for a free sandwich. When you redeem the coupon, a certain percentage of people will get a drink or other food. Lets assume you are not one of those people. You still took time out of your day to try their sandwich. Maybe you even liked the sandwich and would return another time to buy one. This is an exchange. There is a cost of your time and your opportunity cost. You could argue you had to eat anyhow but you tried their place. An exchange took place nonetheless. You got a free sandwich but you spent time familiarizing yourself with their menu, brand, and offering.
What is the Freemium Model
The idea of the Freemium model in SaaS is based on many of the same principals as a free sandwich. With a Freemium model SaaS service you offer a free version of your software. The free version just comes with the sandwich. You don’t get chips or a drink. If you want the full meal plan you have to upgrade. The Freemium model plan is designed to offer just enough to draw you in. This limited featured plan is then given away to anyone and everyone.
Its like a free sandwich, people will sign up without much consideration. People can use your solution without realizing they are trading something for it. There is no noticeable, direct cost. You hope, that in the long run, this person will see that your product or service is amazing. So amazing in fact that they are going to upgrade from the Freemium model to a paid plan. They will need to get more widgets or more bells and whistles from one of your paid plans.
Your free version comes with X but look at all the fancy shiny features you can get with a paid plan. You can get X + Y for a small fee of $19.99 a month. The Freemium model sounds like a great plan. There are thousands of mobile and web apps that make a lot of money with the Freemium model. It’s a numbers game. If you can filter enough people through your promotion, you are bound to get some to upgrade. If enough people upgrade, you can make some real money.
Why the Freemium Model Sucks
There are a couple of problems with this model. Now I’m not going to say that the freemium model doesn’t work. It does, to some degree, but it has its flaws. We have built some SaaS soltuions ourselves using the freemium model. We also have been successful with it. The point here is to show you the flaws that we have found. Not only are there flaws, but for certain offerings we think the Freemium model sucks.
People Who Like Free, Like Free
Using the Freemium model means that you need to get a lot of people signing up for your service. The conversion rates are lower than traditional sales leads and theirs a reason for this. When you get on a megaphone and tout how your free offering is amazing, people listen. You are going to attract a lot of people who like free stuff.
Free is a strange word. The word actually evokes excitement and opportunity in a lot of peoples minds. It’s a powerful word that you see in lots of advertising. The reason you see it, is because it works. The problem with the word free is that it attracts people who are looking for Free. Generally people attracted to free are looking for a deal or a steal. These are the type of people who often collect free things whether they need them or not.
Free implies that there is no hard cost. In most peoples minds signing up for your product doesn’t cost them anything. They enter their email and they are off. As the software owner who built this Freemium model, clearly there is a trade-off. You can collect their email address and have them to try your software. While you did make an exchange, the question remains. Is it a fair trade? If the people you are attracting don’t value your product is their any value to the trade? Are they even trying your product or did they just want something for free. They may not even need your product or service.
So when the dust settles, you have collected hundreds if not thousands of people looking for free stuff. A small percentage of these users end up actually trying your software. An even smaller percentage may have intent to upgrade to one of your paid plans. The lion share though are people looking for a free lunch.
The Free Ones, Are The Trouble Ones
So now you have your list of free users. You also can see the small percentage of users actually using the product. You are fielding lots of support. It feels like you are making progress with your Freemium model. Lots of people are using your software and you are hearing from them. So you take a look at who is sending all these requests and support tickets. What we found was amazing. The free users are the vocal users. They are the ones complaining. They are sending nasty emails about not being able to login to their free account. They are the ones demanding and immediate response because they have forgotten their password. With no hard cost or trade off, its easy to complain.
We actually ran some numbers. Our Freemium model members were 23% more likely to complain or file support tickets. We found ourselves spending more time on free users than on paying users. The free users somehow forgot they weren’t paying for the service. They wanted us immediately available for support issues or training. This seemed crazy. Our resources and our support should be supporting paying customers. These were the people who have bought into the product and bought into us. They deserve the attention.
Poor Freemium Model Conversion Rates
So we realized we were spending a lot of support time. If it was just support time maybe we could deal with it. If we knew that a decent percentage would convert from the Freemium model to a paid plan we would address the support. Unfortunately the likelihood of converting these free users to paying users was abysmal. We actually had a 2% conversion rate from free to paid.
This conversion rate may seem like and acceptable number. Note this is not 2% of visitors to the site. This is 2% of the users who signed up through the Freemium model. Lets assume our Freemium model conversion rate was 3 or 4% of all website visitors. Of these people 2% of that number was upgrading. That’s 6 signups for 10,000 website visitors.
Unfortunately we offer rather specific software solutions. Furthermore, we don’t have huge Fortune 500 budgets. There isn’t even 10,000 potential clients for most of our products. The numbers just didn’t work. To get anyone to our site, we have already narrowed down the herd. We have spent time, effort, and money to get these users to our site. If they signup for our Freemium model, we need to know we have a chance of converting them to a paid plan.
We knew there weren’t major problems with our software. We knew we should be seeing considerably higher conversion rates. Users who were paying were happy with our product. Not only were they happy, they were some of our best referral sources. They were using the product almost daily and were engaged. While we knew we were attracting a lot of the wrong people to the site, we also were attracting them to waste our time.
Buying In Makes You a Believer
There is a strange thing that happens when someone actually decides to buy your product or service. They have done their research and read your site up and down. Maybe they have even asked other users or friends and they are ready to pull the trigger. Once they put their credit card in and actually pay you, they have made a conscience decision to use your product or service. Now, they want to feel like they have made the right decision. They are believers and they are on your team. They clearly value the service or product that you are offering.
This is 100% different than a free user. A free user feels nothing. If they haven’t paid for your service or product with their actual cash they don’t feel the tradeoff. They are far more likely to critique or find problems with your service or product. They are generally more vocal and have no vested interest in the succes or the product as a whole. These are not the type of users you want.
Value Can’t Be Free
Unfortunately price determines a lot of people perceptions about the quality of a product or the value. How can Christian Loubitan charge $675 for shoes that probably cost $10 to make. They can do this because they have built perceived value. If Loubitans were available all over town for $20 or free for that matter, they would never be able to get upwards of $1200. Not only would they never be able to get $1200, people would think they were junk.
You must put a value on your service or product. Giving it away for free is sending the wrong message. If its free then it must not be valuable or must be junk. If your app costs 99 cents then it must only be worth 99 cents. If you have built a viable product or solution that addresses a pain point, it’s valuable. Price shouldn’t be an obstacle to the sale. We wrote about [ doubling our SaaS pricing here ] where we tested that actual theory.
We Stopped our Freemium Model
A wise man once said, “why buy the cow if you can get the milk for free.” This beautiful quote actually is used for fathers teaching lessons to their daughters. In our case, we think it relates nicely to our SaaS as well. We were giving away the basic functionality for free. People weren’t perceiving any value in our product. They were using the software but it was free. Why would they upgrade if they can address most of their pain point for free.
We cut it off. We sent an email to all our free users. We stated that we were sorry to let them know we would be closing our free plan in 30 days. We explained that we were spending too much time and resources supporting it. We explained how we wanted to focus on our paying customers. We wanted to continue to make our paid product even better. We created a coupon code for these users for a discounted subscription.
We sent the email 2 or 3 times during the month and had an abysmal conversion rate of 1%. Most of the free users weren’t engaged and our open rates were terribly low. On that Monday morning we changed the website and closed the Freemium model. We waited to see what would happen.
Absolutely Nothing Happened
The amazing thing about our experiment was what didn’t happen. We thought we would receive a ton of backlash for getting rid of our freemium model. We thought people would be upset with us. We didn’t hear anything from anyone. In fairness, most of the free users were not actually users. These were people who had collected a free account but not actually using the software.
Of the ones who did use the software, we didn’t hear any complaining. It’s tough to complain that something you were getting for free shouldn’t be taken away but we hadn’t put it past them. Clearly our software had value to them but we presented a viable option with clear reasons why we had made our decision.
Consistent Conversion Rate
The real exciting part was that the conversion rate of our paid software didn’t change at all. We had the same number of people signing up for our paid service. There was no change in paid subscription numbers and our support dropped drastically.
We had alleviated customers that we didn’t want. We reduced support tickets, and kept our paid conversion rate constant. To us, this was a victory.
It’s Not For Everyone
Now I understand that you may have different product or service. Each offering is a little different. Its important to consider all your specific business factors. I was listening to a podcast today about someone arguing for the Freemium model. They sold Word Press plugins and wanted to be installed in as many sites as possible. They wanted exposure and I understand that.
In all honesty we use the Freemium Model still on some products that we think it makes sense. The point of my post is hopefully to show you both sides of the argument. Does the Freemium model make sense for your busienss? Have you tried getting rid of it? Are you attracting the right people?
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