How To Develop a Customer Acquisition Strategy
This article covers the key aspects of designing and implementing an effective customer acquisition strategy. It zeros in on a few important decisions when it comes to the customer acquisition process:
- What is the most effective way to entice prospects to try your product?
- Is it better to offer a freemium or a free trial?
This article will not provide quick solutions or silver bullets. Furthermore, it does not advocate for one approach over another. However, the goal of this article is to guide industry leaders and practitioners through a detailed process of evaluating options when designing a customer acquisition strategy. Specifically, its aim is to help Software-as-a-Service (SaaS) businesses determine whether a freemium or free trial model is right for their organizations.
While I and the co-founders of Aptrinsic were writing our book — Mastering Product Experience in SaaS: How To Deliver Personalized Product Experiences with Product-Led Go-to-Market Strategy — we spent countless hours researching customer acquisition strategies and pricing models. As part of that, we interviewed SaaS industry leaders. What we found is that just about every SaaS company goes through a heated debate about whether or not to offer a free trial or freemium. We even went through that at Aptrinsic, when getting ready to launch our Product Experience Platform.
Table of Contents:
PART 1: What Is a Customer Acquisition Strategy?
PART 2: Why Is the Customer Acquisition Strategy Important?
PART 3: How To Design a Customer Acquisition Strategy
3.1 Four Psychological Aspects of a Customer Acquisition Strategy
3.2 What Are Freemiums and Free Trials?
3.3 Considerations for Designing an Effective CAS
3.4 Why Do Companies Fail With Freemiums?
3.5 The Hybrid Approach
Feel free to skip to the section of this article that interests you but before you do, let me tell you a real story. All of us can relate to this experience…
In November 2017, we, at Aptrinsic, hosted our first industry event: Mastering Product Adoption and Growth. It seemed to go well but we included a survey in our follow-up email to understand what could be improved in our next event. We needed to find an easy-to-use tool that would allow me to quickly create a simple survey.
SurveyMonkey was the first company to pop into my head. I visited their website and quickly created an account. A few minutes later, I was on my way to designing an eight-question survey. SurveyMonkey allows people to create simple surveys for free but you need to pay to use their more advanced functionality. It took me about 30 minutes to design a free survey and I decided to pay to unlock advanced features that would allow me to create a simplified survey with matrix / rating scale questions. Since, we were planning to conduct a few events and major market research in the next year, we used a credit card to pay $408 for an annual subscription.
I had zero interaction with sales, customer support/success, or marketing. I had a need, and I tried and bought the product once I was confident that it could solve my need on a consistent basis. This is a great example of a simple, frictionless product-led customer acquisition strategy in action.
Of course, SurveyMonkey benefits from being the leader in its category. Their name is synonymous with online surveys (read How Industry Leaders Create Strong Brands). It takes years to become a category leader but when it happens, the brand realizes outsized rewards. I didn’t type “online surveys” into Google search. Even though I had never used SurveyMonkey, I instantly went directly to their website — that’s brand recall in action. Aside from an incredibly strong brand, something else enables SurveyMonkey to score a customer with zero help from sales reps.
Customer expectations are rapidly changing. Consumer companies are often ahead of the curve when it comes to using new technologies to reimagine customer experiences. In our daily lives, we are exposed to numerous, stellar customer experiences that set the standard for us, even in our professional lives. In both the B2C and B2B worlds, companies are selling to individuals. You can call it Me2B, B2Me or B2I (read interview by Bill Price on Openview Labs). Whatever you call it, it has redefined how companies need to engage and sell.
Simply put, SaaS companies must transition and change their customer acquisition strategy to model those in the consumer industry. Business buyers no longer accept long, sales-heavy buying processes.
Just look at the most successful companies in the last generation of SaaS products: Slack, InVision, Asana, Dropbox, Zoom, to name a few. All of them follow a new customer acquisition strategy that puts prospects at the center. They optimize the buying process to fit buyers’ needs. Their customer acquisition strategy enables prospects to try their products before they buy.
The best companies in the new generation of SaaS are focusing on product growth strategies and tactics that bring product growth teams closer to the customer acquisition process. In other words, product leaders are increasingly more involved in the customer acquisition process (read Why Product Teams Must Join the Customer Acquisition Process).
Along those same lines, SurveyMonkey makes it easy for prospects to try and buy their product. Just think about the efficiency: I paid $408 for an annual subscription after just 30 minutes of using their product. Zero overhead was spent, and no salespeople were involved explaining how to use the product or trying to upsell me.
I wasn’t qualified by a Sales Development Representative and I didn’t submit a long lead form to “hear back” from their team. Of course, for the purpose of this discussion I’m omitting the fact that SurveyMonkey spent many years establishing a leading brand in its category (so I can recall it right away). And make no mistake, my buying intent was high too: I had an urgent problem that I had to get off my shoulders. Still, I could have tried a competitive product and not had the same easy, satisfying experience.
Let’s take a deeper dive into why SaaS companies have to re-evaluate and design their customer acquisition strategies and how the pricing model fits into it.
PART 1: What Is a Customer Acquisition Strategy?
In most cases, a customer acquisition strategy describes the media, channels, and tools to gain new customers. In the traditional sense, a customer acquisition strategy is a list of channels and techniques of where and how customers will be acquired.
This definition is incomplete. It’s generally a good idea to plan how you will get your message across what channels and by targeting what customers. However, SaaS companies have to also deliberately design an initial interaction between the prospect and their product.
A customer acquisition strategy is an essential part of your go-to-market (GTM) strategy (to read more on go-to-market strategy and go-to-market fit in the book — Survival to Thrival by Tae Hea Nahm and Bob Tinker). Before charting your customer acquisition plan, your team has to be clear on four essential elements of the GTM strategy. Just a reminder, a GTM strategy covers the following elements:
#1 Customer (WHO)
- Who is your ideal customer?
- What pains do your customers experience?
- Can you describe a day in the life of your target customer?
- How does your product fit into the customer’s daily activities and workflow?
#2 Market (WHERE)
- What markets do you want to pursue?
- How big is your addressable market? Is it growing, stable, or declining?
- Who are the biggest players in the market?
- Market segmentation and analysis
- Competitive positioning
#3 Product Offering and Pricing (WHAT)
- What product are you selling? What is your product’s unique value proposition?
- How do you describe your product’s value?
- How are you different from your competitors?
- What is your product pricing strategy (based on usage, features, capacity, seats, etc.)?
- How do you know which features to build next?
- Product offering
- Value proposition
- Pricing strategy
- Product vision/roadmap
#4 Channels (HOW)
- What are the most effective channels to reach your target customers?
- What are the most popular publications that your target customers read?
- What social media channels do your customers use the most?
- What channels enable the optimal customer acquisition cost (CAC)?
- How do your marketing channels correlate with product signup rates and won deals?
- Demand generation strategy
- Content and distribution strategy
- Paid media strategy
- Public Relations plan
We are not going to spend much time breaking down the GTM strategy. However, understanding who you are targeting, where, with what product and how will help you design an effective customer acquisition strategy. A customer acquisition strategy describes how all of these elements work together. It also describes what the first interaction between the prospect and product should look like.
Another important aspect of designing a customer acquisition strategy is focusing on how prospects buy as opposed to how your company sells its product. That means you need to understand your customer’s lifecycle. Let’s quickly recap the four general stages of the customer lifecycle (for a more detailed breakdown, read Chapter 4 in the book — Mastering Product Experience in SaaS):
- Acquisition stage, where the buyer goal is to quickly assess pain-product fit and obvious benefits, and take action to evaluate product.
- Adoption stage, where the buyer goal is to learn how to use the product, experience initial value or benefit, evaluate, and make a buying decision.
- Retention stage, where the customer goal is continuously receiving value and benefit from the product.
- Expansion stage, where the customer goal is to explore how to be more empowered and successful with the product and new features and capabilities.
So, why are we talking about the customer lifecycle? It’s easy to say that your customer acquisition strategy should be designed from the perspective of your customer rather than your company. But it’s incredibly hard to keep focusing on that. It’s especially hard in the SaaS industry, where you might be thinking that you sell to the organization and not to the individual. That why your sales organization is more likely to have created a sales process and not follow a buying process. The customer acquisition strategy zeros in on the first and second stages of the customer lifecycle, to ultimately drive a purchase.
A customer acquisition strategy is a plan for attracting and converting prospects into customers.
The four steps of a customer acquisition strategy:
- Drive awareness and demand (or in other words getting your brand into the consideration set)
- Design initial prospect-product interaction so the prospect can try your product
- Design a journey to deliver value to prospects
- Convert prospects to paid customers
SurveyMonkey designed a great customer acquisition process though a self-service option. I, as a prospect, went through the acquisition and adoption stages of the lifecycle on my own, with zero help from sales, marketing, or support. SurveyMonkey designed a customer acquisition process that allowed me to try the product, figure out how to use it in a matter of minutes, and complete the purchase with a few clicks.
For the purpose of this article we will focus on determining which customer acquisition model is more fitting for SaaS organizations to encourage prospects to try the product. The two most common ways are freemium and free trial.
PART 2: Why Is the Customer Acquisition Strategy Important?
It should be obvious why a great deal of attention should be spent designing a customer acquisition strategy. However, let’s highlight the most important reasons to be certain. An effective customer acquisition strategy will:
Boost product growth
Early-stage companies can potentially generate more interest and demand by providing a freemium option or a trial with minimum requirements and barrier for prospect to try the product. If competitors require prospects to fill out long lead forms and go through complicated free trial flows, offering an easy-to-use, self-service trial can differentiate your company and boost your product growth.
Reduce Customer Acquisition Costs (CAC)
CAC can be a silent killer of SaaS companies. When designing a customer acquisition strategy, it’s critical to keep in mind customer acquisition costs. It pays to think about simple, inexpensive ways to amplify your growth, such as by encouraging prospects to invite peers or share their experiences on social media. This is what growth marketing (or growth hacking) is all about: enabling your prospects and customers to share your product with their zones of influence. For example, every survey taker is a potential SurveyMonkey customer. SurveyMonkey makes it easy for prospects and customers to share with other potential survey takers.
Shorten the sales cycle
As my experience with SurveyMonkey shows, an efficient self-service option can shorten the sales cycle significantly. Think about how long would it take if I first had to speak with sales and/or see a demo. A self-service option is not for every company. That said, the goal with a SaaS customer acquisition strategy should be to reduce the time it takes a prospect to realize product value and see the product in action.
Force a focus on the initial interaction
The initial interaction between a prospect and the product is arguably the most important step in developing a long-term relationship with customers. That’s why designing for the first interaction should be part of your customer acquisition strategy. A great initial experience can be a powerful competitive differentiator and advantage.
PART 3: How To Design a Customer Acquisition Strategy
Aside from the fact that prospects expect and often demand to try enterprise software much as they do consumer products, incorporating freemium or free trials in your customer acquisition strategy can help your company sell more effectively.
In fact, there are a few psychological reasons why inviting prospects to try your software can provide huge benefits for your organization. Let’s explore four.
3.1 Four Psychological Aspects of a Customer Acquisition Strategy
1. The Endowment Effect
In simple terms, the endowment effect describes when people attribute more value to things merely because they own them. Numerous studies have been done in this area by Dan Ariely, Daniel Kahneman, and Richard Thaler and others. What is surprising is that even “near ownership” as much as outright possession of the object makes us value it more. For example, in a classic experiment, a scientist gave coffee mugs to half of the students but left the other half empty-handed. Students that received coffee mugs were unwilling to sell them for less than $5.25, while those that hadn’t received a coffee mug were unwilling to pay more than $2.75.
So how does this relate to a customer acquisition strategy? Providing access to a free trial or free version of your product can increase the value of your product in the eyes of your prospects.
2. Behaviors Drive Attitudes
Traditionally, marketers have believed that brand loyalty drives behavior. But some recent studies suggest that familiarity breeds liking, and that usage also breeds familiarity and brand knowledge (which in turn breeds liking) (How Brands Grow by Byron Sharp). In other words, prior knowledge of the brand makes a person slightly more favorable towards it.
Letting potential customers experience your product early in the buying process can increase familiarity and usage. Even better is when prospects can experience your product without having to talk to anyone. This enables the prospect to have a greater engagement with your product, and in the long term, makes it more likely for the prospect to convert into a paying customer.
3. Loss Aversion
We fear loss more than we value gain. A loss of $100 costs you more in happiness compared to the happiness of receiving a $100. That’s why we often see marketing materials and messaging highlighting how customers can avoid negative outcomes instead of what can be gained from using the product. Like it or not fear, just like sex, sells.
That’s why so many companies gravitate to offering a free trial over a freemium — they know thethe end of the free trial is a powerful incentive for prospects to buy the product. In other words, loss aversion is the primary argument in favor of a free trial.
4. Effort vs Impact
What kind of effort will your prospects have to spend to try your product and then to buy? And what kind of impact (or benefit) should your user expect in return? Whatever approach your company uses to design an initial product-prospect interaction, it’s critical to understand how different types of prospect efforts map to different benefits to your company.
The framework below shows how likely a prospect is to try / buy the product based on the level of effort it takes versus the perceived impact on them.
High Effort + Low Impact = “No way will I try your product!”
Low Effort + Low Impact = “Maybe I will try”
High Effort + High Impact = “Maybe I will try”
Low Effort + High Impact = “YES, please!” (“Shut up and take my money” category)
Interestingly enough, the fastest growing companies of the last generation of SaaS (e.g., Slack, Asana, Zoom) all fall under the Low Effort / High Impact category. But not all enterprise SaaS products fit the low effort category. Some are very complex and require significant effort on the part of customers to set up and integrate into their organization to realize product value.
Where do you think your product fits in terms of the effort it takes to try and buy it versus the perceived impact on prospects and their organizations? While it’s important you figure that out, the question is more complicated and we will try to provide a few guide posts on how to decide whether a free trial or freemium is right for your organization.
3.2 What Are Freemiums and Free Trials?
If your SaaS company is not offering a free trial or freemium, it is missing out on many sales opportunities. A study by Forrester has shown that B2B buyers prefer to self-educate rather than talk to a sales representative to learn about a product by a factor of three to one.
With more prospects preferring a self-service option, SaaS companies can improve the buying experience and drive more revenues by providing options to try a product early in the buying process. Free trials and freemiums are the most direct way of showing the value of a product and guiding prospects to their first “Aha!” moment — when they experience and realize that value. When done right, this strategy not only improves the customer experience, it also shortens the sales cycle and reduces customer acquisition cost.
SurveyMonkey designed a customer acquisition model that made it easy for me to try the product and pay just 30 minutes later. Their customer acquisition cost was almost zero (I’m not counting the huge effort and resources to build brand recall in the last decade) and the sales cycle lasted 30 minutes.
That’s why some very successful companies in the subscription era — including Trello, Zoom.us, and Asana — lead their customer acquisition process by providing a free trial or freemium.
So, how does a SaaS company determine whether a free trial or freemium option is best?
First, note that free trials and freemiums are not solely reserved for low-margin products. Companies offering a premium product can use the freemium model, as these industry leaders do: Slack, Dropbox, Atlassian, inVision, and Zenefits, to name a few.
Now let’s define each model to ensure everyone is on the same page. Some define freemium and free trials as pricing models. But as we argued in “Mastering Product Experience in SaaS: How to Deliver Personalized Customer Experiences with a Product-led Go-to-market Strategy,” both are more customer acquisition strategies than pricing models.
Freemium is a customer acquisition model that provides access to part of a software product to prospects free of charge, without a time limit.
Free trial is a customer acquisition model that provides a partial or complete product to prospects free of charge for a limited time. Typically, a free trial runs for 14 or 30 days.
Freemium and free trial are popular customer acquisition strategies with companies that use a product-led go-to-market strategy, meaning those that leverage their product as a leading go-to-market channel. Freemium and free trial strategies are critical because they enable prospects to interact with the product for the first time. And that first interaction will set expectations and, ultimately, lead to a signup-to-customer conversion in the freemium model or a trial-to-customer conversion.
Very often we see companies structuring freemiums using a few parameters to limit the usage (a few examples):
- Feature limited
- Capacity limited
- Seat limited
- Customer class limited
- Effort limited
- Support limited
- Time or bandwidth limited
- Storage and space limited
Examples of companies that limit their freemiums using multiple variables:
- Dropbox (enterprise): Capacity + feature limited (link)
- Slack: Feature limited (link)
- Asana: Seat limited (15 people) + feature limited (link)
- inVision: Usage limited (1 prototype) (link)
- Hubspot (link): CRM — Free unlimited, Sales — Feature limited
- Zoom.us: Feature + Seat + Bandwidth (link)
- Amplitude: Bandwidth (engagement) + feature limited (link)
- Heap Analytics: Bandwidth (engagement) + feature limited (link)
- Mixpanel: Bandwidth (engagement) + feature limited (link)
Compare the Tradeoffs: The Pros and Cons of Freemium and Free Trial
Next, let’s consider the tradeoffs between freemium and free trial models. Some companies don’t support a freemium strategy because it can cost too much to serve free customers, yet many companies find the freemium model effective.
Remember: a freemium product does not limit the amount of time a prospect can access the software, but often limits users in some way, such as through stripped-back features or allowed amount of usage. Slack employs a freemium model, and so do Zoom.us, Dropbox, and Asana. Companies such as Atlassian, Github, and Twilio focused on the developer market also start with a freemium.
The pros and cons of freemium and free trial are highlighted in the table below:
When deciding whether a free trial or freemium strategy is right for your company and product, we recommend estimating the size of the addressable market. Jason M. Lemkin outlines the math behind making freemium work in his article, “Why You Need 50 Million Active Users for Freemium to Actually Work”. The main point that Jason is trying to make is that total addressable market is a result of product price and complexity. Highly priced and more complex products have a lesser total addressable market; for example, software for a nuclear reactor. Lower priced and less complex products have a larger total addressable market.
Low Price + Low Complexity = Freemium (and self-service option) is the most suitable option.
High Price + Low Complexity = Freemium is a good option because the cost of servicing free customers is still low.
High Price + High Complexity = Free Trial could be a better option since a product with higher complexity requires a more complicated setup and/or more time-consuming onboarding.
Low Price + High Complexity = AVOID. This is an extremely tough spot to be in, as your team has to either redesign the product to deliver more value so it can be priced higher, or find a way to deliver value with a less complex solution.
Note: we are assuming here that a higher price is correlated with a higher cost of servicing customers. Update 1/19/2018: great article by Joel York on Three SaaS Sales Models.*
According to Tomasz Tunguz, “Freemium funnels typically convert only 2 to 4% of users who try the product. At $10 per seat per month, a startup needs about 10M accounts converting at 4% to reach $50M in revenue. At $100 per seat per month, a startup needs 100,000 accounts.”
Suffice it to say, the addressable market needs to be large enough to make it worth your while, and enable you to be profitable while only converting a relatively small percent of free users.
3.3 Considerations for Designing an Effective CAS
Companies can structure a freemium offering many ways, including feature-limited, capacity-limited, seat-limited, customer-class-limited, support-limited, and time or bandwidth limited. Lincoln Murphy’s article provides a good overview of seven types of freemiums to consider.
Freemium makes sense when your organization has:
- A large addressable market
- Low costs to serve free users
- Low barriers/commitment for users to start with your product
If your company meets these criteria, freemium may be the way to go.
Note: Make sure you articulate how different the user experience is between free and paid versions — prospects need to know what they’re missing. Perhaps a freemium makes sense for your business. But, consider a free trial strategy before making a choice.
Free Trial Considerations
The goal of the free trial is to deliver as much value as possible to users during a short period. For the purpose of this discussion, we will concentrate on an ungated free trial strategy, which means a user can sign up and start a trial without talking to a sales rep. With gated free trials, users request access to the product and get approved by a sales or sales development representative. An ungated free trial is essentially a self-service version of the traditional Proof of Concept (PoC).
Important questions to answer before deciding whether a free trial strategy is right for your organization:
- How long does it take for prospects to realize initial value on average? How long should the trial last?
- What features should and can our team limit or remove from the free trial process?
- How do we nurture a free-trial user? What in-product behavior correlates with an optimal trial-to-customer conversion rate?
An effective trial signup includes a simple, guided journey that is painless and immediate. Think of a free trial as a chance for users to test drive your product like they would a new car, on their own, seeing how it handles when driven to their favorite or most-visited places. Picture them taking it on a winding back road and pushing it on the freeway. There’s no salesman with these prospects, but the guide makes sure the journey takes them where they need to go to experience the right “Aha!” moment.
Questions to consider when designing a freemium or free trial
The cost of servicing users is the biggest factor in deciding whether or not to provide a free trial or free version of your product. If the cost of servicing free trial or freemium customers isn’t offset by paying customers, nothing else matters.
- What goals do we want prospects to achieve during free trials?
- What value do we want to deliver to prospects?
- What valued features do we want prospects to try?
- What are the requirements for a freemium user to become product qualified leads (PQLs)?
- Do we provide a self-service option to buy at the end of the trial?
- What type of free trial or freemium will we offer?
- Will we limit our free trial in any way?
- How will we limit our freemium?
To select what features should be part of your freemium or free trial, we recommend you to go through the Importance vs Satisfaction framework highlighted by Dan Olsen in his The Lean Product Playbook, and shown below.
This framework lets product teams decide not only what features to include in the roadmap but also how to categorize them into Must-haves, Performance benefits, and Delighters. To build a successful product, companies have to implement all Must-haves, and focus on one Performance benefit where the product outperforms competitors’ offerings, and one Delighter, a feature that is completely unique offering. However, your freemium or free trial offering can include a Must-have features but limit features that provide performance benefits and delight customers.
- What features do we want to offer and/or limit during the free trial?
- What are the valued features that we want to offer?
While the duration of a free trial can vary, 30-day and 14-day trials are among two of the most popular options. You can make a good argument for shorter and longer free trials. The ultimate length of your free trial is usually dependent on your product’s complexity. Here is interesting research by the team at MadKudu, which found the duration of a free trial had little impact on the ultimate outcome.
- How long should the free trial last?
- When and why would we extend the free trial duration?
Think of the cost to service free users as your customer acquisition costs. Say a freemium option increases your product signups and conversion rates. In that case, it might be better to spend a little more of your marketing resources to nurture existing users instead of acquiring new signups through more expensive channels like ads.
- How much will it cost to sustain a large segment of free customers? Is a freemium model scalable for our business?
- Can we provide enough value for users to realize product benefits but still limit value to entice them to pay for a subscription?
- What is needed and how much will it cost our company to offer a free trial?
- How do our Customer Acquisition Costs (CAC) and free trial costs align with our PQL goals?
It’s important to understand the buying process of your target companies and personas. In many cases free trials and freemium speak more directly to end users of your product than to the decision maker or budget owner. In other words, free trials and freemium are more appealing to end users since they will be the ones to use your product on a daily (hopefully) basis.
- Are we attracting the right kind of customer? (i.e., a customer in our target market with a real need, an urgency to purchase and a desire to expand the subscription?)
- Do we expect that only end users will sign up for a free trial, or will managers and/or others also sign up?
- Does it make sense to differentiate between influencers, decision makers, and end users during a free trial?
- If so, how do our signup process, journey to experience initial value, and nurturing efforts change?
Signup Process and Requirements
It pays to map out the initial customer journey and what actions will deliver the first value to users. For example, Asana can drive newly signed up users to create a first project and invite teammates. Achieving this in the initial signup process ensures users understand the product value.
- How difficult is it to get started with the product? Does it require technical integration and broader organizational approval?
- What is our signup process for a free trial?
- What information do we request from prospects?
- How many steps are in our free trial setup?
- What is required from prospects to access a free trial (for example, corporate email, credit card, social login, third-party integration information)?
Customer Journey to Initial Value
- What are the steps in the buyer/customer journey to experience initial value or the desired outcome?
- What is considered initial value?
It might be tricky to understand why frequency of use might be an important factor in deciding between freemium vs free trial. If your product solves one of the top three challenges for your target audience, then it’s easier for the prospect to become a daily user. But what if your software enables people to send newsletters and most companies send only weekly or monthly newsletters (for example, Revue, a simple solution to build beautiful newsletters)? In that case, a standard 14-day or 30-day trial only allows users to test your product a few times during the free-trial period.
Maybe that’s why Revue provides a free product if your subscriber list is no more than 250 contacts. Now compare a product like that with low usage frequencies with a product like marketing automation that can be used on a daily basis. A 30-day trial allows users to learn your product and use it on a daily basis if needed.
- How often do we want prospects to log in and use our product during the trial period?
- Can our product become a part of their daily routine?
Nurturing free users is probably the main reason why many argue that a freemium model doesn’t work. It is not effective to just offer a free product and hope that users will upgrade to paid at some point. More on this later.
- How will we communicate with prospects during the trial (emails, in-product messages, etc.)?
- What content would be helpful for prospects to review before and during their free trial?
- How will we nurture and prioritize freemium users that are ready to purchase?
In order to design an effective customer acquisition process using a freemium or free trial process, SaaS companies must go through the list of questions above. The goal is to ensure that the decision was well thought out and that an implementation plan is in place. Now, let’s discuss why some companies fail with a freemium model.
- What metrics do you want to measure during a free trial?
- What in-product user behavior do you want to track?
- How will you measure and report signup-to-PQL and signup-to-customer conversion rates?
- What customer segments and roles correlate with shorter time to PQLs and closed deals?
3.4 Why Do Companies Fail With Freemiums?
Let’s review a few of the most common reasons why SaaS companies fail with a freemium model.
#1 Provide no or little incentive for free customers to convert
Giving away too much of the product is one way to fail with freemium. Assuming that the cost to service free customers is low, companies must strike a careful balance. They need to provide access to just enough of the product to continuously derive value but not quite enough to eliminate the incentive for users to buy the product. The goal of the freemium is to entice customers to increase product usage and essentially to convert to a paid subscription.
#2 Don’t deliver enough value
If you provide features that are of low importance to the user, or limit you free version to the level where no value can be extracted from the product, you will most likely fail. Even if you provide your product free of charge, users still have to derive some value from it. For example, if SurveyMonkey allowed just one question per free survey, it’s unlikely anyone would find enough value to use the tool. What’s more, fewer survey responders would be exposed to the SurveyMonkey product and brand.
#3 Don’t create a sense of urgency
One of the main criticisms of the freemium model is that it doesn’t create a sense of urgency. A free trial expires, which creates urgency for users to invest the time to user and learn about the product value. However, companies can craft freemiums that highlight the urgency factor.
Analyze your freemium users and categorize them into three buckets:
Not ideal customer to get the full value for your product
Too small with no budget
Ideal customer with a budget but low usage
No matter how good your product is, it will never be the case that everyone finds enough value to buy it. Thus, not everyone is the ideal customer. Plus, not everyone has the budget. These free customers can still love your product and share positive reviews. They can be influencers and promote your product and related content across social media but conversion to paid customer might never happen. Therefore, focus on building urgency with the third category of free users who fit your ideal customer profile, have budget, but most likely do not yet use your product enough to pay for it.
You can create the urgency by communicating about new premium features that deliver more value or by highlighting the value missed by not having access to a premium subscription.
#4 Don’t nurture and engage continuously with prospects, resulting in a lower free-to-paid conversion rate
Too many companies overlook the importance of nurturing free customers while highlighting the differences between their free and paid versions. Instead, they rely on the idea that free customers will understand the product value and will convert themselves over time or as their needs grow. Companies have to continuously educate users on how they can get more benefits from the paid version of the product. It’s worth it to educate about new releases and product upgrades.
#5 Don’t track and analyze insights on how and why customers convert
This is related to the previous point. Companies need to outline a clear path to take free users to paid customers. It’s a mistake to think that free users don’t need to be analyzed or tracked. First, tracking free users can help you understand target customers better and create data-driven research content. For example, say your product tracks mobile app performance and collects uptime and the most common issues related to downtime. Your company could use this data to create an industry report showcasing uptime for each mobile app category. This type of customer usage-driven content is extremely effective in marketing and PR.
#6 Don’t provide appropriate onboarding experience
Even with the free version of your product, users will need to learn how to use your product. Remember, “empty state” or “zero data” is what prospects see during their initial signup process when no data is available in the product.Providing free access to your product that looks empty isn’t going to help you convert free users to paid customers. This is all part of onboarding, which is critical for successful product adoption and can also guide prospects through the steps to generate more data so they realize even more product value.
#7 Don’t evaluate the cost of supporting free customers
We talked about the cost of a freemium offering. It can quickly add up when considering all your costs, everything from cloud storage to support. Communicate to your users what’s included and excluded in the free version of the product. Ensure that your costs are manageable in the long term.
Don’t look at Freemium model as a thing of the past, freemium in SaaS is might be here to stay.
3.5 The Hybrid Approach
It’s not always about either or. I’m convinced that a hybrid approach between freemium and free trial can be an effective way to get the best of both options. Freemium can drive more demand but what if your company can’t provide all features because of the high cost to service free customers? Offering a full-featured free trial to select users can be an effective way to get the best of both worlds. Specifically, you can drive higher signups associated with the freemium model and a create sense of urgency due to a clear expiration date.
Let’s say a prospect signs up for a fully working, free trial of your product for a specified duration. At the end of the trial, part of the product is gated while allowing the prospect to use a freemium version for as long as they like. This makes it possible for prospects to use the free product and convert at a later date. It also creates urgency for the prospect to: 1) try the full product capability, and 2) buy the product before the full trial capabilities are stripped down to the freemium version.
Lincoln Murphy provides an interesting perspective on the subject of using both freemium and free trial customer acquisition models. He advocates using two distinct calls-to-action and two paths to try the product with a hybrid model. However, I believe that it’s more effective to put up only one gate to your product so you can focus on one path and one call to action.
How do SaaS companies effectively acquire customers? This is one of the most essential and critical questions for companies to answer. Yet, you rarely see the go-to-market or customer acquisition strategy in startup pitching decks. Pitching decks usually go over problems the company is trying to solve, the solution, market size, competition, the business model and pricing. We rarely see any explanations as to how companies plan to get to the first 10, 50, and 100 customers. But it’s arguably one of the most important topics for a startup to figure out.
The initial customer acquisition strategy might not work and may even be completely wrong. But it allows investors to analyze how the team plans to reach initial traction, and empowers them with insights into how systematic and process-oriented the startup team is about acquiring customers.
This article only touched upon the basic elements of a customer acquisition strategy, zeroing in on the decision about whether to offer a freemium, free trial, or a hybrid option. As you saw, there is no clear answer about which is the right approach because it varies case by case. The context of your market forces, competition, product, and even corporate culture all play into the decision. That said, the hybrid model might provide just enough compromise to capture most pros and avoid many cons of the freemium and free trial strategies.
The goal or this article is to help every SaaS company and every product team systematically evaluate options and their specific cases in order to design an effective and efficient customer acquisition strategy. The books and resources at the end of this article will help you learn more about this topic.
Acknowledgements / References
Some ideas were taken from this list of resources and some original ideas shared in the article were influenced by it.
- Blurred Lines: Today’s B2B Customer Expect B2C Experience by Bill Price
- Startup Killer: the Cost of Customer Acquisition by David Skok
- Rethinking the Endowment Effect: How Ownership Affects Our Valuations
- How Self-Service Research Will Change B2B Marketing by Steven Casey
- Understanding Freemium
- SaaS Startup Strategy | Three SaaS Sales Models by Joel York.
- Why You Need 50 Million Active Users for Freemium to Actually Work by Jason Lemkin
- The Freemium Game Plan by Tom Tunguz
- There are 7 Types of Freemium and Why That Matters… by Lincoln Murphy
- 30-day trial? 14-day? Freemium? Here’s why it probably doesn’t matter by Sam Levan
- 2018–2025: The Golden Age of SaaS Freemium via Saastr.
- How to Offer Both Freemium and Free Trials by Lincoln Murphy
Not referenced but worth reading:
- How to Market to Customers When The Free Trial is Over by Kissmetrics
- Growth Hacking: Creating a Wow Moment by David Skok
- Survival to Thrival by Tae Hea Nahm and Bob Tinker
- Mastering Product Experience in SaaS by Nick Bonfiglio, Mickey Alon, Myk Pono
- How Brands Grow by Byron Sharp
- The Art of Thinking Clearly by Rolf Dobelli
- Behind the Cloud by Marc Benioff
- The Lean Product Playbook by Dan Olsen
- The Strategy and Tactics of Pricing by Thomas T. Nagle, John Hogan, Joseph Zale
- Play Bigger by Al Ramadan, Dave Peterson, Christopher Lochhead, Kevin Maney
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