Deciding whether a free trial, freemium, or hybrid model will work best for your business is challenging — especially as choosing the wrong one could potentially dent your business’ performance.
In this course, you’ll learn:
Wes Bush:
Now we're going to go through freemium, which is a whole other can of worms because in freemium there's a ton more risk. I didn't include it here, but I always mention it from Rob Walling, it's my favorite quote on this but "Freemium is like a samurai sword. If you don't know what you're doing, you can easily cut your arm off." And I love that quote, not because it's so descriptive and we're thinking of cutting our arms off here, but there's actually quite a bit of risk whenever we're thinking of launching a freemium model. Such as, will revenue growth tank? And this is one of the big things you got to think about. Well, will it? I hate to break it to you, but usually that first quarter you launch a freemium model.
Wes Bush:
Yes, you will see it, not necessarily tank, tank like, "Oh my goodness. We went from a 100K new MRR every month to zero." No, it won't tank like that, but there will most likely be a dip. And that is because while you're giving people more time to make the decision and to upgrade. And so usually that quarter will have some sort of revenue tank, but afterwards it could even go up. And so that's something to consider. The other thing is, will our server costs skyrocket? If we're giving people away so much for free, how will this impact our costs? And it's such a good question, because when we're thinking of this, we always have to be considered of how much are we willing to spend to acquire a new user? And this question, when we think about it in terms of even just start customer acquisition costs, this is when we have to really change from more of the traditional sales-led in like marketing tactics stuff.
Wes Bush:
We spent $3,000 on advertising, we're going to get one customer. All right, so out of that $3,000 in customer acquisition costs, why don't we put 50 or even 100 of that to every free trial user. They sign up, we give them access to use that much of cost and ability within our product to see the value of it. Now, maybe it's not that high. Maybe it's only a couple of dollars, but every user you take on in your freemium account has a cost. Maybe it's eaten up through server costs. Maybe it's eaten up through support costs. There's many ways you can add costs to your business through freemium, but you do have to be aware that there is going to be an additional cost here. But ideally they're going to still upgrade and not all of them, but there is going to be a good amount of people here who stay, who never upgrade.
Wes Bush:
In fact, that's actually one of the criteria of a good freemium model. You will have people long-term who are not paying for your product. That is actually one of the signs of success. It is good enough just free. A lot of people when they do frame them, they skimp out. They don't give enough. And then they realize it's not good enough and they just think the model doesn't work, but no, they're too skimpy. They didn't give away enough for people to have a good reason to come back and continue using it. The other big consideration as well, will our support costs substantially increase? Now, after talking to tons of businesses, yes, support costs and tickets do increase. But is it mind-blowingly 10X increase in support tickets? No, it's not actually that. In a lot of cases, maybe it's a third more support tickets.
Wes Bush:
It depends on obviously how successful your freemium launch is. But at the end of the day, whenever you do get these support tickets, it is really just your opportunity to show people how to improve the experience, how you can improve your experience. Why are people reaching out? There's a good quote from the CEO of Atlassian, he really just treats support tickets like bugs. Why did they have to reach out? Really dig into that. What was the issue that made them want to reach out here? How can we solve that, so we can proactively address this problem in the future? And so that's really what you want to be using for support in a proactive way versus more just being reactive. And, "Oh my goodness, we got so many tickets." If anything, it's going to put a spotlight on the problems you need to fix within your product itself.
Wes Bush:
The other thing that I hear a lot, and this goes for free trials too, is how many customers will downgrade to the free plan? And this happens a lot less with free trials, because obviously there is time constraints. But when it comes to freemium, this is a serious consideration, because let's say you have right now a light plan. You got light, premium, and let's say gold, something like that. And your light plan looks pretty darn similar to your free plan. Maybe there's a couple differences between it, but you're thinking to yourself, "Oh my goodness. Out of our user base and customer base, 10% or 20% of people, they would have every reason just to downgrade." Now, this is a big decision to make because you might just shoot 20%, 30% of your revenue down the drain and they're all downgrades to your free plan.
Wes Bush:
So this keeps a lot of people up at night, whenever we're thinking of making this transition of freemium. And it's completely valid, but what often happens is when you're looking at that percentage of people who would have every reason to just downgrade. What you need to account for is, well actually, most people won't go down that route and downgrade to the free plan, but what you also gain is quite a lot more than just losing out on that 10%. You might gain 100% in business growth the next year. So try and keep things in perspective whenever you're thinking of, "Oh my goodness, is this going to be such a big loss?" But also try and counter it with, how much are we actually going to gain in this decision? A full year of freedom, what could that do for our business?
Wes Bush:
How many more users would we have? How much more revenue could we have in our market and space? The other thing is how long will it take people to convert? If it's free forever, will it take people three years, five years, 10 years, how long? And the end of the day this sounds pretty interesting. So I'll go back to the example with Tetra and the company Wiki. And so they had the same question. And so in this instance, they had this very same question, how long will it take for people to convert? But what they found is that people are converting around month, one month, two month, three, those are like the power months for that first three months. And so actually it wasn't like substantially longer than what they initially had even with their free trial model.
Wes Bush:
And so, that's not always the case, but typically you're going to have still a lot of people convert in those first few months, because those are the serious people, the serious ones who, if they have that good omni experience, get up to speed in your product very quickly. They will have every reason to convert. And part of this, we will cover in module five around monetization, because if you pick the right value metrics, it will just be a natural extension. People want to continue using your product and the free version and accessing more of that capacity within your product. It's just a natural extension to become that paying customer. The other thing is what is the right trigger to move people from free to paid? If you don't know this and you're just contemplating, how do I create this freemium model? That's okay. It's a good question to have.
Wes Bush:
Don't have to have the answer now. This will be covered in the monetization piece of the program, but I do want you to start asking yourself, what would be the right trigger? if we think of the email marketing space, there's subscribers. So most of their free plans, they're freemium, they give you access to like 2000 subscribers. We think of MailChimp, now a lot of other companies are doing the same amount. And so, okay, we get a taste test that 2000 subscribers, we can send a bunch of emails to, and that'd be great. But as soon as we hit that limit, that's the trigger that says you need to move from free to paid, because you have hit that limit. And so think about that. What does that look like for your product and how can you potentially align your pricing with that trigger?
Wes Bush:
So that you're as a business incentivize to help as many people as possible in the email marketing case, get as many subscribers as possible. So they're successful and ultimately you'll be successful. The other piece here is how much will it cost to sustain a large segment of free users annually? This one can be massive for some people. And a lot of times we try and overestimate this around the cost of sustaining a lot of these things. Because at the end of the day, when you're building a SaaS business, it is inherently efficient in a lot of ways. You're building software to do a lot of things. It's not a product high service, for instance, where you have a high degree of fixed costs and cogs involved. No, your software can scale. So just bear that in mind. Yes, you're a support cost and all these things will potentially increase, but will it increase 10X along with 10X growth? No, it won't. It'll be a much smaller variable of that.
Wes Bush:
And so the other piece, when it comes to freemium is how large is your total addressable market? I know there's folks like Jason Lumpkin, who pronounced, you need to have, I'm not doing his accent right, but like 50 million total addressable market even make freemium work. And my counter to that is always, it really depends on what kind of business you want to build. If you want to be that big venture-backed company that hits that billion dollar valuation. Yes, you will most likely have to have that 50 million total addressable market either way. But if let's say you just want to have a business that runs very efficiently with a small team, with brilliant folks on it, and you're happy maybe even just 10 mil or one mil. I don't know what your ambitions are in this as well, but it could be much smaller of a total addressable market for you to even be happy.
Wes Bush:
So bear that in mind, everything with a grain of salt kind of deal. And so how large does it have to be to even make it work? There is no clear cut number on this one, but even if it was, let's say 1 million people. Would it make sense [inaudible 00:11:14]. If it was 500,000, if it was 100,000 people in your market, would it make sense? I will leave that question to you because let's say you captured 1% of that, if we could look at a 1% conversion rate on a freemium model or 2%, would that make sense for you as a business to make that work? If you could only, if you're capped at, let's say 50K MRR, like would that be good enough? Comes down to you, what kind of business you want to build? I'll leave that to you to decide how large of a total adjustable market does it actually matter for you?
Wes Bush:
But don't just take anything from anyone who sounds like they know what they're talking about and say 50 million is the number I need to have because a lot of it comes down to the context you want to have.
