Freemium v.s. free trial for a marketplace?

We're building an online workforce marketplace, and we're considering introducing a free version. What would you recommend us to use - Freemium (i.e. having a free plan) v.s. Free trial ?


It depends on a number of factors but I'd boil it down to two key things to start:
1) What is your real cost to provide a free plan or trial?
2) Who exactly is your customer and what are they used to paying and who and how do they pay today?

When you say "online workforce marketplace" it sounds as though you're placing virtual workers. If that's the case, or if you're paying for the supply side of the marketplace, the question is how much can you subsidize demand?

Depending on where you're at in the process, I'd also question how much you can learn about the viability of your marketplace by offering a free version, assuming again, that free is actually a real cost to you.

I was part of a SaaS project that started charging people for early access based mostly on just a good landing page (we clearly stated they were pre-paying) and were amazed at the response.

I've also run a SaaS product that offered free trials and realized that the support costs and hand-holding and selling required to convert from free trial to paid wasn't worth it, this despite the product's significant average ARR.

You might be better off providing a "more information" sign-up form (to capture more leads) and let them ask for a free trial while only showing your paid options. I've been amazed at the lead capture potential from a simple "have questions? Click here and we'll contact you"

This is all the generalized advice I can offer based on the limited information I have, but happy to dive-in further if you'd like on a call.

Answered 11 years ago

It is difficult to give a specific answer with little context, but I'll suggest two things to think about.

The first thing to note is the question of conditioning.

Is your target market conditioned to spend money? If so, a free plan to bring them in with an offer may make sense - since they've demonstrated a willingness in the market to spend money for value. Once you offer the promise of delivering the value, they'll upgrade. But lots of other folks in many markets aren't prepared (or conditioned) to spend anything. In that dynamic, all you're doing is incurring cost. One study I'm familiar with (for online membership sites) showed that an increase from free to $1/year saw a reduction in sign-ups by upto 30%. That's a whole lot of people not conditioned to spending a single dollar.

The second is the notion of the cost of marketing.

I don't know what the cost or kind of marketing campaigns you're imagining. But the logic goes like this - if you offer free plans, you'll still see very low conversions to the premium plans. That means that you goal will be to bring as many people into your funnel. I'm hoping your market is huge. But assuming that it is, the real cost is your marketing campaigns. Even if offering your service for free doesn't cost you (maybe you're already paying for servers and that's sunk cost), it will cost you in marketing.

So be clear you know your cost of marketing, and your conversion rate, so that you can determine the real cost of this approach.

All that said, I'm not a fan of free plans or trials. Instead, my bias is towards charging people (it really highlights their intent to pay you when they give you their cc number). You can always have a 15 or 30 day money-back guarantee, which will act like a risk-free trial.

Answered 11 years ago

This really depends on your target audience and your overall sales / growth strategy.

Without knowing the specifics of your business I can't give specific advice (feel free to contact me for a call), but I can give some general guidance.

If you're selling to established businesses, don't go freemium. Businesses spend money to make money, and if they have a problem that needs to be solved, they're used to spending money to solve it. A freemium model in this case is probably just going to attract pathological customers, and not the good, well-paying, easy-to-work-with clients that you want.

On the other hand, if you are targeting smaller businesses that you hope will "grow into" a paid plan, a freemium strategy might work.

It could also work if you are targeting corporate workers who have no budget authority, but who might be able to convince their boss to pay for the product if they can demonstrate results using your free version.

Go out and talk to the customers you're building this with and get a sense for what they're willing to pay for, or what their purchasing authority is and what it would take to get budget for your product.

If you're not building this with customers already onboard and helping you guide its development, you are much less likely to be successful. Go out and find some customers, validate your business model by pre-selling the product, and take their feedback into account as you build and market it.

Answered 11 years ago

Let us look at both the models carefully.
Freemium models
A freemium strategy offers perpetual access to a restricted version of a product. Restrictions come in many forms:
1. Feature limitations. This is the most common form of a freemium product—a no-frills version of its premium counterpart (e.g. Evernote).
2. Usage limitations. The freemium version limits storage or server access (e.g. Dropbox), or caps the number of users (Canva).
3. Advertisement additions. Not every restriction removes functionality. Freemium versions can also include advertisements as a limitation on the experience (e.g. Spotify).
4. Cross-sells. Some freemium products are fully functional (e.g. iTunes), but access to them is an entry point to an ecosystem that incentivizes future purchases (e.g. iCloud).
Other products are fully free (e.g. Instagram) with other means of monetization, like advertising. While not freemium products—there is no paid version to which you can upgrade—they represent one end of the free vs. paid spectrum.
If freemium still seems like a barrier to acquisition, you’ve got plenty of money in the bank, and you’re crossing your fingers for a buyout by Google or Facebook, a fully free product may make the most sense.
Free-trial models
A free trial gives users full access to a product for a limited period.
In an interview with HubSpot’s Kieran Flanagan, Ty Magnin of Appcues suggests that a free trial is the “demo of 2018.” That is because most SaaS products are accessible immediately via a browser or app and automate onboarding: they’re self-paced, time-limited demos.
There are two ways to structure free trials:
1. Opt-in. Users sign up for free without including any payment information. They can explore the product until their trial expires, at which point they’re prompted to sign up—pay or get out.
2. Opt-out. Credit card information is taken at the start. At times, a nominal fee such as $1 is charged, often to placate payment processors or to cross the penny gap early on. If the user does not cancel by the end of the trial, they are billed automatically.
An opt-in free trial typically generates more trials because it reduces friction at signup; however, an opt-out free trial generates a higher percentage of sales (often of the “Gotcha!” variety), as some users forget to cancel in time. Those near-term sales, while enticing, may erode a brand and hurt retention. A credit-card wall has consequences, not all of them desirable: It will keep out bad and good prospects, and it will tank your sign-up conversion rate. For some, opt-out free trials are essential—you may have more leads than you can manage or face rampant trial abuse. Nonetheless, sharpening targeting for user acquisition or offering a trial only to some users (e.g. those already on an email list) may reduce the need for an opt-out version (and sign-up friction for legitimate prospects).

How to choose between freemium and free trial:
Getting to that decision point comes down to answering questions about:
1. Your business.
2. Your market.
3. Your product.

1. Questions to ask about your business:
Who are you selling to?
Is it the same person who uses your product on a day-to-day basis? If not, a product-led strategy may not be right at all. (A sales-led strategy may work better.) On the other hand, a freemium strategy may work well with a bottom-up approach that requires time to scale. Consider Slack: At a large organization, the eventual purchasing decision may come from the C-Suite (where it’s used sparingly, if at all), but the request for that purchase could develop over time as more and more departments within the company rely on it for communication. The inertia that regular use builds—historical knowledge, platform familiarity, etc.—makes switching difficult. Reaching that level of inertia takes longer than the duration of a free trial. Advocacy depends on widespread adoption, but users are not homogenous: Freemium accounting software may be simple to a college administrator but complex to an independent contractor. Ensure that “easy to use” applies to every target demographic.
What are your goals?
Companies like Spotify and Canva created massive user bases by giving away a high-value product. As Kieran Flanagan explains, however, each did so with different goals in mind:
1. Market domination. For a product like Spotify, a freemium version drove rapid adoption that established the company as the dominant business in a crowded market.
2. Market disruption. Canva is not trying to win a head-to-head competition with Adobe. However, its freemium version is good enough to create loyal users who would rather spend thousands on something other than Photoshop.
The danger, of course, is that both market goals optimize for more free users. Spotify and Canva did not become freemium success stories until they monetized their user bases. And, like bottom-up efforts, both were a slow burn that required tens of millions in funding to sustain the glut of free users that precedes revenue. To generate that financial support, a SaaS product needs mass appeal. It is why your market may be the best guide to choosing a freemium or free-trial strategy.
2. Questions to ask about your market:
How big is your market?
If you ask Jason Lemkin of SaaStr, he’ll tell you that you need 50 million active users to make freemium work. (By “work,” he means building a $100 million business.) That is why most freemium success stories feature products that appeal to most people.
Not everyone is hoping for an IPO, however, which means that freemium is possible in smaller markets if the conversion rate is higher and the revenue per paid user also rises. (Lemkin’s back-of-the-napkin math assumes $10 per month per paid user.) As Vineet Kumar argues in the Harvard Business Review, it may be easier to identify the right model by targeting a conversion rate. Kumar suggests that a 2–5% conversion rate is a reasonable balance; the more niche the market, the higher you should peg your target conversion rate. So, if your conversion rate is 35%, you may want to consider a freemium option to expand your market. However, if your conversion rate is less than 1%, you may want to restrict access. The size of your market is not the only consideration.
How mature is your market?
What product are you displacing? Murphy believes the answer is key to identifying the right customer-acquisition strategy. For B2B SaaS products, the added challenge is that the choice for consumers is often all or nothing: Companies have one CRM, one email marketing platform, one CMS, etc. That is different from B2C SaaS products (Murphy uses the example of smartphone games), in which consumers may simultaneously use several.
Regarding displacement, there are three potential answers:
1. You are displacing a popular commercial product. You are entering a product category with wide adoption for which people expect to pay money two key benefits. But it may also be the hardest market to break into; you are a disruptor. A freemium approach, like Canva’s, may motivate users to try an alternative solution.
2. You are displacing an archaic system. Does your SaaS product achieve something that a patchwork of spreadsheets currently does? Your product may offer a ton of value, but you are also asking people to pay for something they currently get for free. (Or, at least, the cost of the existing solution is buried in extra hours of labour.) Is a free trial enough time for users to establish a new habit? Or will it take the promise of a forever-free product to convince them to migrate a process to your product? If you think a freemium version is necessary to inspire a shift, beware that you are replacing one free product with another. At some point, you will need to convince users to pay.
3. You are displacing nothing at all. Are you offering a never-before-imagined SaaS product? Freemium could expedite adoption and dominance. After all, you have no competition yet. However, you also establish the expectation that your new service is free. A free trial may let you figure out quickly and, perhaps, painfully that there is no market at all.
What is the network effect in your market?
Freemium requires an active, engaged market with a strong referral network to monetize (albeit indirectly) legions of non-paying users. Freemium products expect that most users will never become paying customers; however, those freeloaders pay for their use by spreading awareness. For generating word-of-mouth referrals, freemium beats free trial: Freemium is a product, not a sample, and, as a result, is worth sharing. Still, that sharing will not occur organically. As Murphy emphasizes, freemium products must catalyse the network effect (e.g. Dropbox lets you give free storage to your friends.) Identifying those trigger points—to entice new users and convert them into paying customers—requires deep product knowledge.
3. Questions to ask about your product:
How expensive is your product?
An expensive product, according to Bush, does not work with an opt-out free trial. (Bush argues against opt-out free trials in general.) For one, opt-out “free” trials often create a low initial anchor, like the nominal $1 fee, which makes the full price seem that much higher (to say nothing of the negative impact that even a one-penny price has on conversion rates—free is a powerful word). Second, they yield unintentional purchases and, with a high price point, ones that may max out a credit card and infuriate users. A freemium approach for an expensive product faces a similar risk: The penny gap grows wider, and freemium can devalue a high-end brand. An opt-in free trial solves the issues for expensive products. For inexpensive products, the decision point between freemium and free trial likely resides elsewhere.
Is your product easy to use?
No freemium offering comes without costs, even if those costs are a few GBs of server space. To ensure that onboarding and customer service costs remain low, however, freemium requires simple onboarding and total (or near total) self-service. (Bush offers another possibility: charging for user onboarding or folding those costs into the product’s price.) As noted earlier, a diverse user base may make product onboarding surprisingly complex. And, of course, if users do not understand how to use a product, they are unlikely to become passionate advocates. The same is true for free trials: The more involved the onboarding process, the greater the need for user qualification (unless you have resources to devote to added customer support).
How much do you know about your product?
Free trials use urgency to motivate a purchase. When trying to convert more free-trial users, you can test trial length—say, 14 days versus 30—but the variables are limited. Freemium can serve, in effect, to scale user research. You can rapidly test the addition or subtraction of features (to statistical significance) to determine which are stickiest. At the same time, you may not have the patience (or funding) to endure an influx of new users. Piloting the software with a handful of companies may provide similar information at a fraction of the cost.
Besides if you do have any questions give me a call:

Answered 4 years ago

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