What do successful companies like Evernote, Dropbox, Prezi and even Skype have in common? They are all using the freemium pricing model to attract new users and grow rapidly.
Software vendors might think that since this strategy worked so well for them, it will work for their SaaS application too. But is it right?
Unfortunately, the freemium pricing model is not right for any application: read further to understand if this model could boost or kill your growth.
Sketch of the freemium pricing model
In the freemium pricing model, you usually offer a free-to-use version of your product and motivate your free customers to switch to paid plans to get more features, more capacity or more users.
According to Chris Anderson, author of the book “Free”, the freemium model works on the 5% rule. This means that the 5% of paying customers support the 95% of free users and the cost of servicing the 95% is close to zero.
Basically, the freemium pricing model requires virality. As the CEO of Evernote said “The easiest way to get 1 million people paying is to get 1 billion people using it.”
If you offer a good product for free people will activate an account and you could start getting hundreds of users is no time. However, this means that as a software vendor, you will be spending (a lot) for resources that users will consume for free. This is where you could start having problems: you keep on investing on resources to manage more users and you are not generating revenues.
In other words, you SaaS application will become profitable if the cost of acquiring new users and serving your free and paid users is lower than the revenues generated from your paying customers.
If you are still not sure about this model, try to answer to the following questions by Dan Martell: if the following 3 of 4 are true, then you can use the freemium model.
- make sure that the potential number of users is in the tens of millions of users: if only 5% of your free users will end up paying for your service, this model will not work for niche markets
- free distribution is a competitive advantage based on the competitive set of the market: you need to understand if the freemium plan could be the differentiator in your target market.
- your product has a very simple and straightforward value proposition: if the product needs too much explanation or a success team or an account manager, then it is not simple enough.
- the marginal cost to serve additional users is negligible: you need to get users to use your product and share with other people how much they love it
Pros and cons of the freemium pricing model
Usually, one of the main barriers for SaaS services is to persuade your potential customers to sign-up and try the product. With the freemium model, users can just try the service out with no risks.
As there are no barriers to use, it becomes easy for users to sign up and try the service. If your users see a real value in your product, they start sharing it with their friends and colleagues. Referrals will help your product to become viral.
If in your target market the freemium model is not used by the big players, you could make it your competitive advantage.
Free users consume your resources and do not generate any revenue. You need to make sure that you can afford it until the revenues from your paying customers will be higher than the cost of the infrastructure for paying and non-paying users.
Free users do not value your service as much as paid users. This means that they could switch to another service just because it is new or has one of two features that you only have in your paid plan.
Your free plan needs to be attractive enough for new users, but if it solves too many painful problems, they will not be encouraged to upgrade to a paid plan.
How you can implement a feature based pricing model in Cloudesire
The Cloudesire marketplace platform allows software vendors to easily implement different pricing models, including the freemium based pricing model.
This is how you can implement the freemium pricing model on the Cloudesire marketplace:
Step 1: create a product plan in which the product price is zero
Step 2: create more plans with different pricing points
Step 3: save & publish on the marketplace
For more information about the “Plans pricing” section take a look at this video.
Do you want to learn more about the pricing models available in the Cloudesire marketplace?