{"id":17051,"date":"2020-10-09T12:16:03","date_gmt":"2020-10-09T10:16:03","guid":{"rendered":"https:\/\/chartmogul.com\/blog\/?p=17051"},"modified":"2022-10-20T12:06:09","modified_gmt":"2022-10-20T10:06:09","slug":"freemium-business-model","status":"publish","type":"post","link":"https:\/\/chartmogul.com\/blog\/freemium-business-model\/","title":{"rendered":"Freemium: Playing the Long Game"},"content":{"rendered":"\n

The last decade has seen the explosion of Freemium as a growth strategy in B2B SaaS, and companies like Canva, Notion, and Slack have contributed to the rise of this new normal. While 2012 saw notable SaaS experts questioning the Freemium model<\/a>, fast forward to 2020s and buyers now expect<\/em> to have access to a free, ungated version of a product, or at the very least, access to a free trial.\u00a0<\/p>\n\n\n\n

While Freemium has seen its fair share of vacillations over the years, today, SaaS companies have become A LOT better at mitigating the risks associated with the strategy. For instance, by offering premium product features, and leveraging scalable pricing<\/a> tiers that are directly proportional to user growth, companies can limit their free offerings to cost-strapped SMBs and startups, while monetizing on selling premium pricing to customers with more complex needs.<\/p>\n\n\n\n

Why is Freemium becoming so popular?<\/h2>\n\n\n\n

Let’s address some of the basics:<\/p>\n\n\n\n

Larger Total Addressable Market (TAM)<\/strong><\/h3>\n\n\n\n

By removing entry-level cost barriers to product adoption, companies using a Freemium strategy are able to increase their total addressable market to include price-sensitive audiences, startups, and SMBs. A free plan also drives bottom-up discovery from end-users<\/a> in larger organizations, so businesses can target more buyers within a single company.

A study<\/a> from ChartMogul finds that B2B SaaS companies on a path from $100M to $1B in ARR are more likely to offer a Freemium plan, suggesting that it\u2019s a favored strategy for businesses that need to aggressively grow TAM to reach new revenue milestones.<\/p>\n\n\n\n

Companies using the Freemium model, by ARR band:<\/em><\/h4>\n\n\n\n
\"Freemium
*sample size of ~700 companies analyzed<\/figcaption><\/figure>\n\n\n\n

Word of Mouth Acquisition <\/strong><\/h3>\n\n\n\n

Possibly one of the most coveted reasons for offering a Freemium plan is the word of mouth acquisition and virality it can drive. Offering a free version of your product is one of the few critical factors in creating a viral growth loop<\/a> at scale \u2014 the more people experience your product, the more likely they are to talk about and evangelize it.<\/p>\n\n\n\n

To quote Jason Lemkin in his updated post on the evolution of Freemium<\/a>: <\/p>\n\n\n\n

Even if freemium is only 20% of your revenue, if it represents 2,000 customers that are happy, spreading the word, tweeting, telling their friends \u2026 this is powerful.  All the best software companies are built on word-of-mouth. The more happy customers you have, the faster that positive word-of-mouth spreads.<\/p><\/blockquote>\n\n\n\n

Self-serve Revenue & User Experience<\/strong><\/h3>\n\n\n\n

Freemium creates an opportunity for self-serve revenue that doesn\u2019t require large, expensive sales teams to drive it. This self-serve model then pushes companies to provide better user experiences: from seamless product onboarding and exhaustive documentation to better communication across customer touchpoints. <\/p>\n\n\n\n

Consider the online video hosting software, Vidyard. In a funding pitch deck they recently published<\/a>, they reported that over 60% of closed-won ARR began with free users<\/strong>. <\/p>\n\n\n\n

Measuring the revenue impact for Freemium can get complex if you consider the time it takes for users to hit a usage or feature limit on a free plan, before converting to a paid version \u2014 depending on your product\u2019s pricing structure, its stickiness, and the needs of the customer, this can take anywhere between 30 days to up to 2 years, as in the case of the note-taking app, Evernote.<\/p>\n\n\n\n

\u201c<\/em>Evernote found out early on<\/em><\/a> that inactive users didn\u2019t stick around very long. Fortunately, those who did came to rely on the product and were more willing to pay for it.<\/em><\/p>

In fact, after a year of using their product, users were 8x more likely to convert into premium subscribers than they were after using it for only a month. These individuals had experienced the benefits of using Evernote and depended on it as a solution to their everyday organizational pains.\u201d<\/em><\/p><\/blockquote>\n\n\n\n

While Evernote wasn\u2019t successful in monetizing its Freemium strategy, the fact remains that the more engaged free users are, the more likely they are to become paying customers. <\/p>\n\n\n\n

Given everything we know about building better self-serve product experiences today, this path to user engagement and revenue can (and should) be shorter. Still, it\u2019s important to address that for many, a self-serve Freemium plan is a long-term monetization strategy that generates revenue and compounds over time. This is even more so for pure B2B SaaS where Freemium\u2019s ROI can take longer to manifest. <\/p>\n\n\n\n

Playing the long game<\/h2>\n\n\n\n

For businesses that offer Freemium, understanding its \u201ctrue ROI\u201d starts with measuring the right metrics.

For example, perhaps one of the most commonly discussed metrics is the free-to-paid conversion rate, which is the % of new sales won from customers who went from a free plan to a paid plan<\/em>. While companies like Slack report a whopping 30% conversion rate<\/a>, the average tends to be somewhere between 2-5%.<\/p>\n\n\n\n

While this metric is a strong health indicator of your Freemium strategy (and is viewed as a north star KPI by many), looking at it in isolation can be deficient. Primarily because it fails to attribute future gains as customers land, expand, and grow<\/a> with you. <\/p>\n\n\n\n

Let\u2019s put this in context for a minute. Freemium buyers can be largely organized into two categories:<\/p>\n\n\n\n