Free User vs Paying User: A B2B SaaS Best Practice Guide Ed Chessman March 20, 2023
Most folks know the best way to get someone to try something is to give it away for free.
Free eliminates most barriers and leaves us able to focus on the item being offered. But what happens when it's not a one-time opportunity, but provided free forever?
I mean, how would the crazy person behind something like that ever make any money?
Welcome to the world of freemium software, an interesting world of 2 halves: free users on one side and paying customers making up the other.
The model is simple: get lots of users started on a free version and then magically convert a percentage of them to paid plans. Studies suggest you ideally need 2-5% crossing over to being paid users, with 1% being the industry average.
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Wikipedia says the freemium model has been around since the 1980s, although the term itself wasn't coined until 2006. Today many of us who use Slack, LinkedIn, Spotify, Dropbox, and perhaps even Discord for the NFT lovers out there are freemium users.
Let's look at some of the main concepts, ideas, and best practices of B2B SaaS companies using freemium strategies.
The free users—in a nutshell
Providing a free product is the entry point for many companies utilising a product-led growth strategy. It generates 33% more users via free accounts for every website visitor over just offering free trials or sales demos. (Source)
To be attractive, a free product must be easy to use and deliver value fast. It requires good documentation and great examples to ensure smooth onboarding for new users. Good self-service mechanics are important to ramp new users on a product quickly and safely.
For a freemium model to be successful, a product must not only deliver value fast, it must do so frequently or ideally on a continuous basis. To do that, it has to be sticky, drawing users back again and again, meaning the user experience has to be flawless, too.
Planning for how to convert free users to paying users must be done early. It's also important to define and provide a clear upgrade path to guide users down your marketing funnel.
How to convert free users into paying users
i) Premium features
Many B2B SaaS vendors charge for a set of premium features for things like security, compliance, and monitoring because, while perhaps not necessary for a free version, these become critical requirements for corporate deployments.
Another strategy is charging for features that improve the user experience, for example, ones that accelerate workflows with integration to other tools. Users are often happy to pay if it means doing something faster or easier.
It's important to provide information on how free users can upgrade to become paying users, too. For example, Glass.io makes it easy to engage website visitors while they are showing buying intent, increasing conversions from day one.
ii) Extra capacity
There are plenty of companies that provide free products with limited amounts of storage, iCloud (5GB free) and DropBox (2GB free) to name but a few. If the product is sticky enough, a new user will soon use up their free quota and be happy to pay for more.
Usage-based pricing is the cornerstone of the major cloud vendors, and all the major vendors provide free starting tiers for most of their products and services.
iii) Remove advertising
YouTube and Spotify were early masters of the "why not pay to remove advertising" tactic, with many of us more than happy to spend money to stop being annoyed or interrupted by ads.
Do we need to convert free users?
Absolutely not. Selling advertising space or packaging and selling user data are popular monetisation strategies, too.
All data has a value, and charging folks to access it programatically is yet another popular strategy as we see with Twitter's announcement they are now charging $42,000 to access their (previously free) API.
Free user vs paying user: the pros & cons
There are plenty of good reasons to deploy a free user strategy:
"Free" is incredibly appealing and there are virtually no barriers. Ever say no to a free ice cream?
Lower CAC (there is an excellent article about this here)
Free is a great barrier to competition—I mean, it's pretty hard to compete with free
Better retention when they become a paying user/premium subscriber—typically 10% to 15% higher (Source)
Free users provide valuable early insight on product usage
As non-paying users adopt your product, you are provided signals on your ideal target audience, helping you to focus your early marketing efforts
There are also several risks associated with free users that require caution and careful navigation:
"Free" burns cash fast, especially if you start supporting large numbers of free users
Free often suffers a higher churn rate due to a throwaway mentality
Conversion rates are unpredictable, especially in the early stages, making it hard to forecast revenue with any accuracy
Paying users are important, too
The goal of every B2B SaaS company is to make money—and converting freemium users to paying users is core to most freemium business models. Paying also creates a loyalty effect and lowers churn, because while a product may not be perfect, it's often cheaper than moving to an alternative.
And all your customers provide plenty of opportunities for upsells and cross-sells, too. Oh yeah!
What questions are important?
Before you set off to create a freemium plan or product, it's important to consider several fundamental questions:
Why are you offering a free version? Be very specific by defining clear objectives and success metrics.
How will you make the product sticky? Only people who frequently use and love your product will convert to paid users, so it must deliver value every time it's used, not once every blue moon.
What is the incentive to convert? Why will users pay? What is the user benefit?
What is the right pricing model? Can certain features command a higher price? Define exactly what paying customers will buy. For a tiered business model, what is the average revenue required for each level?
How long is free sustainable? Cash doesn't last forever, so understand exactly when you must start generating revenue.
Is there a plan B if you can't convert enough paying customers? Explore every conceivable way your product and the data you collect could be monetised.
Does the product have a strong network effect? It should, because "70% of value in tech is driven by network effects." (Source)
We all have our favourite freemium products but there are many factors that need to be considered to build a successful one. And it's becoming harder to standout as more and more B2B SaaS companies build and release freemium products. But the formula for success seems clear, and it starts by giving users a great product for free that delivers value every single time it's used.
Ed Chessman is founder of cowXsales, a startup sales consultancy. He has created and closed over $22M in new business revenue leading sales for global software companies and early stage startups. Early stage tech startups are Ed’s true love where he enjoys working with founders to build great products. Ed lives on the south coast of England where he enjoys spending time with his family, running in the South Downs, and trying to master the art of sea swimming.
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