Product-Led Fundamentals

Guide to the Types of Free Plans for SaaS

Succeeding with a trial or freemium model

Joanna Huang

July 25, 2022
·
7
 min read

We’ve all seen products that say, ‘Try for free. No credit card required.’ Great products are lead-generation machines, where the free signup option widens and accelerates your top-of-funnel marketing.

Modern SaaS buyers don’t want to waste time listening to sales pitches. They want to do their own exploration and verify that what they see from marketing is what they get in the product. Free trials or freemium plans create experiences that lower the initial barrier to entry. Giving potential customers free access to your product also creates upselling and cross-selling opportunities that move people to your paid products. That’s the heart of product-led growth.

When becoming product-led, there are various ways to open up your product to free users. In this blog, we discuss:

  • Why offer a free plan?
  • The different customer acquisition models.
  • Types of free trial, freemium, and combination plans.
  • Increasing free-to-paid conversion

By the end, you’ll have an idea of which free plan and sales motion is right for you.

Why Offer a Free Plan?

There are quite a few benefits to offering a free signup option in your product-led growth marketing strategy. Prospects who already use your product are already motivated, making upgrade decisions easier. These users evangelize your product within their company, expanding the number of users per account. Finally, established user bases make businesses more likely to stick with your solution.

🚀 Increase Sales Momentum = $$$

When leads experience quick time-to-value, they will likely convert earlier in the funnel. They don’t have to imagine using a product by viewing slide decks or demo videos. Instead, users can log in and explore for themselves. Free plans end the struggle to communicate value – as long as your product is intuitive.

When there is enough widespread bottoms-up usage and product adoption, product usage data becomes a reliable buying intent signal. Salespeople no longer need to do hard selling. Instead, they can double down on the excitement of users who are already convinced.

🔁 Create Viral Loops = Lower CAC

Free products are also famously known for lead generation. Whether it’s network effects (inviting collaborators), social referrals (sharing embedded links), or simply word of mouth, product virality significantly decreases customer acquisition cost (CAC).

In recent years, traditional growth channels such as advertising have become oversaturated and more expensive. Meanwhile, software development has become more available with low-code tools and talented developers. A delightful free plan can go a long way in generating top-of-the-funnel growth.

📚 Promote User Education = High Retention

With early user acquisition, leads can self-educate before talking to sales. A strong emphasis on product content and education nurtures can lead to power users. High-fit power users (known as PQLs) are not only sales-ready and most likely to upgrade, but they also have higher retention over time.

With power users present, executive buyers are less concerned about buying a tool that won’t get used (or becoming a churned customer). After all, their employees already use the product.

Ready to kickstart a product-led lead volume with early conversion, high retention, and low cost? Let’s explore what free plan options exist.

Free Trials and Freemium Customer Acquisition Models

First, you must understand that “free” is not a business model. It is a way to acquire customers, filling the top of the funnel so your marketing and sales operations can start convincing free users to become paying customers.

Free Trial Models

The free trial model gives potential customers unlimited access to your product for a limited time. They are free to explore every feature but pretty quickly have to make a buying decision. If you make your product easy to explore within the trial period, customers rapidly see its value and do not hesitate to let the first payment go through.

Freemium Models

Freemium products give people limited access to your product for an unlimited time. Nothing prevents them from making the freemium product’s features part of their daily routine. Designed right, however, freemium models give your customers enough of a taste that they ask to pay for more.

Which is the Best Customer Acquisition Strategy?

Your SaaS product, customers, and resources will determine which customer acquisition strategy makes the most sense. If your product is straightforward with a simple discovery process, then people have time to try everything during a free trial. The more complex your product is, the more time customers need to understand its value, and the more likely a freemium model will be more appropriate. Everything depends on the details, so let’s take a deeper look at each model.

Types of Free Trials

In a time-bounded free trial model, people have seven, fourteen, or maybe thirty days to use as much of the product as possible. Once the trial period ends, free trial users must upgrade to continue using the product—otherwise, they lose their access.

For example, Sprout Social offers a 30-day trial for any paid tier. If you are interested in features from another paid tier, they’ll let you switch to a different plan for free during your trial.

Opt-in Versus Opt-out Free Trials

In most cases, the upgrade is structured as an opt-out. The only way people can complete the signup process is to give their credit card number. If free trial users do not actively cancel the trial before it expires, you automatically charge the first month’s payment.

Startups and other companies with little brand recognition or offering a SaaS product people are unfamiliar with may choose an opt-in trial to erase any barrier to customer acquisition. In this case, people do not provide their credit card details until the end of the trial.

Another option is to combine the two, offering a brief opt-in period and then letting people continue a more extended free trial by handing over their credit card information.

Free Trial Pros and Cons

Pro: Time-based free trials can create a sense of urgency that boosts initial engagement with your product and conversions. Free trial users have limited time to use the product, which makes them more proactive about exploring it. If they experience enough value as the deadline approaches, they will take the easy path by letting the subscription kick in.

Con: On the flip side, time pressure can create a poor experience. Products take time to unlock value and become a habit. When customers have shifting priorities, they don’t always have enough time to poke around in the product.

Free trials are good ways to monetize quickly, but rushing people to make a decision is more business-centric than user-centric. Forcing free trial users to convert or else lose access can leave people with a negative impression of the product and your business. As we’ll see, freemium has slower conversions, but it’s a healthy long-game approach for retaining users.

Types of Freemium Plans

Whereas free trials limit access based on time, freemium models have many ways to give customers long-term but limited experiences. The constraint you choose—whether by usage, features, or support—depends on your product. In some cases, combining constraints may create a more compelling free product with product-based incentives to self-serve into a paid version.

📈 Usage-Based Freemium Models

Usage-based freemium plans are similar to free trials. Customers get free access to your SaaS product’s core functionality. They can use it as much as they want up to a specific limit.

For example, Zoom allows anyone to host a meeting (use the core feature), but each meeting can only run for 40 minutes (the usage limit). To host longer meetings, people must convert to a paid plan.

Pro: Many features are free, so the barrier to entry is low. In turn, the value realized can be high. Users can take their time and grow to the usage threshold. They pay according to the value they receive.

Con: Usage is hard to predict. Even as a paid user, it may rise and fall. People who bump against the usage limit but not enough to justify the paid plan may grow frustrated. On the business side, your revenue forecasting must become more sophisticated than traditional licenses with annual commitments.

Usage-based freemium models are strongly aligned with user value. Inspiring a new use case naturally encourages higher usage. For this reason, many companies (freemium or not) are transitioning from traditional license contracts to usage-based pricing.

🛠 Feature-Based Freemium Models

Sometimes users require add-on tools to deepen usage. In this scenario, feature-based freemium models are good alternatives. Feature-based freemium plans give core functionality for free. The plan monetizes through additional features and add-ons.

For example, Canva doesn’t have a usage limit on core designs. Instead, they offer paid users premium photos, Background Remover, Brand Kits, and other features. These tools all provide a specific benefit for advanced users.

Pro: Feature-based freemium models tend to have Free Forever tiers. Without any limits on core features, free users have low churn. They can stay loyal free users until they’re ready to introduce the product to their organization.

Con: Out of all the free plans, this one requires the most patience to show ROI. There’s a risk of customers using a free plan in perpetuity, which cannibalizes revenue from paid tiers. (We’ll explore ways to combat this in more depth later in the blog.)

Add-ons are a great way to offer more than your core features. Knowing when and how to introduce paid features is crucial to the success of this plan. It should be easy to find and unlock value from features and tools.

🧑 Support-Based Freemium Models

Support-based freemium plans are upgrade incentives that lie outside the product. The plan starts free and then lets users upgrade for additional support. Support-based freemium models complement usage-based and feature-based models as value differentiators between the free and paid tiers.

For example, MailChimp increases the support level for paying users. Alongside the other freemium tactics mentioned above, they offer 24/7 email & chat support when users upgrade.

Pro: This plan is a good way to move products upmarket to larger customers that require white glove support. When enterprise companies start using a free product, they’ll naturally have complexities requiring upgrades for more support.

Con: Unlike the other free models, support-based rarely works as a standalone tactic. It is more expensive to maintain while having less free-to-paid differentiation than the other models.

This strategy prioritizes the time of support, sales engineering, and customer success teams for the high-value customers who need them.

✅ A Combination of Customer Acquisition Models

To avoid cannibalizing revenue from paid tiers, most companies creatively combine free trials and the various freemium models into a combination free plan. Examples include:

  • Free trials with usage limits.
  • Free trials with feature limits.
  • Free trials that downgrade to a freemium forever tier.

This last example is worth elaborating on. Recently, growth teams have found success in ‘trials turned freemium.’ In this motion, users start with a normal trial of the paid tier. But if users don’t convert, they aren’t fully cut off from the product (unlike traditional trials) and are instead retained in a free tier. They can continue as a free user, albeit with more limited features than before the trial.

Why is this so effective? First, people naturally have a strong loss aversion. Staying as a free user after the trial ends would be a downgrade event. This approach retains the free trial’s sense of urgency without losing the customer entirely. Second, combining a free trial with a freemium plan creates the opportunity for remorse in your customers’ minds. They’re still users but have less than they did during the trial. Because yesterday’s luxuries become today’s necessities, they’ll be more likely to convert to a paid user to restore the features they started with.

Lastly, you don’t have to combine the four constraints we discussed into a single plan. You can run multiple free plans alongside one another—as long as they’re in separate tiers. For example, you can run usage-based freemium for the lowest tier and trial for the highest tier. Keep iterating to find that perfect combination.

Increasing Free-to-Paid Conversion

Free product experiences get people in the door. They act as the hook before the sale. With a solid free plan, you’ll have a large user base and compelling product-led reasons for your users to upsell themselves to your paid plans. You’ll have different action items to increase paid revenue based on the free model (or combination of models) you pick. 

Here are a few ways to turn free users into paying customers:

There are also universal upselling strategies for free plans. These include:

  • Identify the free users most likely to upgrade. Learn how to define product-qualified leads (PQLs).
  • Prioritize these users in your upselling motion. Reach them using in-app prompts, marketing emails, and sales conversations.
  • Regularly promote high-value and paid features.
  • Test offering free temporary upgrades.

With the right tools and playbooks in place, sales teams can strongly influence your free-to-paid conversion rates. Timely and personalized outreach by salespeople can engage users with high intent and interest in your product and convert them into paying customers faster. In a Redpoint study, sales teams increased the average free-to-paid conversion rate by 3x.

Free trial and freemium customer acquisition models fill the top of the funnel while nurturing users and generating the product signals sales teams need for value-based conversations. That’s why your product-led engine and sales team are multipliers of each other.

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Turn your self-serve funnel into a revenue engine.
Get a demo
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Product-Led Fundamentals

Guide to the Types of Free Plans for SaaS

Joanna Huang
|
Product Marketer
|
Calixa

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July 25, 2022
ReadTime

We’ve all seen products that say, ‘Try for free. No credit card required.’ Great products are lead-generation machines, where the free signup option widens and accelerates your top-of-funnel marketing.

Modern SaaS buyers don’t want to waste time listening to sales pitches. They want to do their own exploration and verify that what they see from marketing is what they get in the product. Free trials or freemium plans create experiences that lower the initial barrier to entry. Giving potential customers free access to your product also creates upselling and cross-selling opportunities that move people to your paid products. That’s the heart of product-led growth.

When becoming product-led, there are various ways to open up your product to free users. In this blog, we discuss:

  • Why offer a free plan?
  • The different customer acquisition models.
  • Types of free trial, freemium, and combination plans.
  • Increasing free-to-paid conversion

By the end, you’ll have an idea of which free plan and sales motion is right for you.

Why Offer a Free Plan?

There are quite a few benefits to offering a free signup option in your product-led growth marketing strategy. Prospects who already use your product are already motivated, making upgrade decisions easier. These users evangelize your product within their company, expanding the number of users per account. Finally, established user bases make businesses more likely to stick with your solution.

🚀 Increase Sales Momentum = $$$

When leads experience quick time-to-value, they will likely convert earlier in the funnel. They don’t have to imagine using a product by viewing slide decks or demo videos. Instead, users can log in and explore for themselves. Free plans end the struggle to communicate value – as long as your product is intuitive.

When there is enough widespread bottoms-up usage and product adoption, product usage data becomes a reliable buying intent signal. Salespeople no longer need to do hard selling. Instead, they can double down on the excitement of users who are already convinced.

🔁 Create Viral Loops = Lower CAC

Free products are also famously known for lead generation. Whether it’s network effects (inviting collaborators), social referrals (sharing embedded links), or simply word of mouth, product virality significantly decreases customer acquisition cost (CAC).

In recent years, traditional growth channels such as advertising have become oversaturated and more expensive. Meanwhile, software development has become more available with low-code tools and talented developers. A delightful free plan can go a long way in generating top-of-the-funnel growth.

📚 Promote User Education = High Retention

With early user acquisition, leads can self-educate before talking to sales. A strong emphasis on product content and education nurtures can lead to power users. High-fit power users (known as PQLs) are not only sales-ready and most likely to upgrade, but they also have higher retention over time.

With power users present, executive buyers are less concerned about buying a tool that won’t get used (or becoming a churned customer). After all, their employees already use the product.

Ready to kickstart a product-led lead volume with early conversion, high retention, and low cost? Let’s explore what free plan options exist.

Free Trials and Freemium Customer Acquisition Models

First, you must understand that “free” is not a business model. It is a way to acquire customers, filling the top of the funnel so your marketing and sales operations can start convincing free users to become paying customers.

Free Trial Models

The free trial model gives potential customers unlimited access to your product for a limited time. They are free to explore every feature but pretty quickly have to make a buying decision. If you make your product easy to explore within the trial period, customers rapidly see its value and do not hesitate to let the first payment go through.

Freemium Models

Freemium products give people limited access to your product for an unlimited time. Nothing prevents them from making the freemium product’s features part of their daily routine. Designed right, however, freemium models give your customers enough of a taste that they ask to pay for more.

Which is the Best Customer Acquisition Strategy?

Your SaaS product, customers, and resources will determine which customer acquisition strategy makes the most sense. If your product is straightforward with a simple discovery process, then people have time to try everything during a free trial. The more complex your product is, the more time customers need to understand its value, and the more likely a freemium model will be more appropriate. Everything depends on the details, so let’s take a deeper look at each model.

Types of Free Trials

In a time-bounded free trial model, people have seven, fourteen, or maybe thirty days to use as much of the product as possible. Once the trial period ends, free trial users must upgrade to continue using the product—otherwise, they lose their access.

For example, Sprout Social offers a 30-day trial for any paid tier. If you are interested in features from another paid tier, they’ll let you switch to a different plan for free during your trial.

Opt-in Versus Opt-out Free Trials

In most cases, the upgrade is structured as an opt-out. The only way people can complete the signup process is to give their credit card number. If free trial users do not actively cancel the trial before it expires, you automatically charge the first month’s payment.

Startups and other companies with little brand recognition or offering a SaaS product people are unfamiliar with may choose an opt-in trial to erase any barrier to customer acquisition. In this case, people do not provide their credit card details until the end of the trial.

Another option is to combine the two, offering a brief opt-in period and then letting people continue a more extended free trial by handing over their credit card information.

Free Trial Pros and Cons

Pro: Time-based free trials can create a sense of urgency that boosts initial engagement with your product and conversions. Free trial users have limited time to use the product, which makes them more proactive about exploring it. If they experience enough value as the deadline approaches, they will take the easy path by letting the subscription kick in.

Con: On the flip side, time pressure can create a poor experience. Products take time to unlock value and become a habit. When customers have shifting priorities, they don’t always have enough time to poke around in the product.

Free trials are good ways to monetize quickly, but rushing people to make a decision is more business-centric than user-centric. Forcing free trial users to convert or else lose access can leave people with a negative impression of the product and your business. As we’ll see, freemium has slower conversions, but it’s a healthy long-game approach for retaining users.

Types of Freemium Plans

Whereas free trials limit access based on time, freemium models have many ways to give customers long-term but limited experiences. The constraint you choose—whether by usage, features, or support—depends on your product. In some cases, combining constraints may create a more compelling free product with product-based incentives to self-serve into a paid version.

📈 Usage-Based Freemium Models

Usage-based freemium plans are similar to free trials. Customers get free access to your SaaS product’s core functionality. They can use it as much as they want up to a specific limit.

For example, Zoom allows anyone to host a meeting (use the core feature), but each meeting can only run for 40 minutes (the usage limit). To host longer meetings, people must convert to a paid plan.

Pro: Many features are free, so the barrier to entry is low. In turn, the value realized can be high. Users can take their time and grow to the usage threshold. They pay according to the value they receive.

Con: Usage is hard to predict. Even as a paid user, it may rise and fall. People who bump against the usage limit but not enough to justify the paid plan may grow frustrated. On the business side, your revenue forecasting must become more sophisticated than traditional licenses with annual commitments.

Usage-based freemium models are strongly aligned with user value. Inspiring a new use case naturally encourages higher usage. For this reason, many companies (freemium or not) are transitioning from traditional license contracts to usage-based pricing.

🛠 Feature-Based Freemium Models

Sometimes users require add-on tools to deepen usage. In this scenario, feature-based freemium models are good alternatives. Feature-based freemium plans give core functionality for free. The plan monetizes through additional features and add-ons.

For example, Canva doesn’t have a usage limit on core designs. Instead, they offer paid users premium photos, Background Remover, Brand Kits, and other features. These tools all provide a specific benefit for advanced users.

Pro: Feature-based freemium models tend to have Free Forever tiers. Without any limits on core features, free users have low churn. They can stay loyal free users until they’re ready to introduce the product to their organization.

Con: Out of all the free plans, this one requires the most patience to show ROI. There’s a risk of customers using a free plan in perpetuity, which cannibalizes revenue from paid tiers. (We’ll explore ways to combat this in more depth later in the blog.)

Add-ons are a great way to offer more than your core features. Knowing when and how to introduce paid features is crucial to the success of this plan. It should be easy to find and unlock value from features and tools.

🧑 Support-Based Freemium Models

Support-based freemium plans are upgrade incentives that lie outside the product. The plan starts free and then lets users upgrade for additional support. Support-based freemium models complement usage-based and feature-based models as value differentiators between the free and paid tiers.

For example, MailChimp increases the support level for paying users. Alongside the other freemium tactics mentioned above, they offer 24/7 email & chat support when users upgrade.

Pro: This plan is a good way to move products upmarket to larger customers that require white glove support. When enterprise companies start using a free product, they’ll naturally have complexities requiring upgrades for more support.

Con: Unlike the other free models, support-based rarely works as a standalone tactic. It is more expensive to maintain while having less free-to-paid differentiation than the other models.

This strategy prioritizes the time of support, sales engineering, and customer success teams for the high-value customers who need them.

✅ A Combination of Customer Acquisition Models

To avoid cannibalizing revenue from paid tiers, most companies creatively combine free trials and the various freemium models into a combination free plan. Examples include:

  • Free trials with usage limits.
  • Free trials with feature limits.
  • Free trials that downgrade to a freemium forever tier.

This last example is worth elaborating on. Recently, growth teams have found success in ‘trials turned freemium.’ In this motion, users start with a normal trial of the paid tier. But if users don’t convert, they aren’t fully cut off from the product (unlike traditional trials) and are instead retained in a free tier. They can continue as a free user, albeit with more limited features than before the trial.

Why is this so effective? First, people naturally have a strong loss aversion. Staying as a free user after the trial ends would be a downgrade event. This approach retains the free trial’s sense of urgency without losing the customer entirely. Second, combining a free trial with a freemium plan creates the opportunity for remorse in your customers’ minds. They’re still users but have less than they did during the trial. Because yesterday’s luxuries become today’s necessities, they’ll be more likely to convert to a paid user to restore the features they started with.

Lastly, you don’t have to combine the four constraints we discussed into a single plan. You can run multiple free plans alongside one another—as long as they’re in separate tiers. For example, you can run usage-based freemium for the lowest tier and trial for the highest tier. Keep iterating to find that perfect combination.

Increasing Free-to-Paid Conversion

Free product experiences get people in the door. They act as the hook before the sale. With a solid free plan, you’ll have a large user base and compelling product-led reasons for your users to upsell themselves to your paid plans. You’ll have different action items to increase paid revenue based on the free model (or combination of models) you pick. 

Here are a few ways to turn free users into paying customers:

There are also universal upselling strategies for free plans. These include:

  • Identify the free users most likely to upgrade. Learn how to define product-qualified leads (PQLs).
  • Prioritize these users in your upselling motion. Reach them using in-app prompts, marketing emails, and sales conversations.
  • Regularly promote high-value and paid features.
  • Test offering free temporary upgrades.

With the right tools and playbooks in place, sales teams can strongly influence your free-to-paid conversion rates. Timely and personalized outreach by salespeople can engage users with high intent and interest in your product and convert them into paying customers faster. In a Redpoint study, sales teams increased the average free-to-paid conversion rate by 3x.

Free trial and freemium customer acquisition models fill the top of the funnel while nurturing users and generating the product signals sales teams need for value-based conversations. That’s why your product-led engine and sales team are multipliers of each other.