The freemium business model has been having a moment for the past few years – with popular services like Dropbox, Evernote, and Spotify among the ranks of successful companies that lure new customers with a free introductory-level plan and make money by upselling customers to a paid premium offering.
Freemium can be a great approach for attracting new users and driving trial for a disruptive technology – especially when the marginal cost of supporting new users is low.
But successfully deploying a Freemium model requires a nuanced strategy: a clear and differentiated value proposition for the premium vs. the free offering, ongoing innovation in value-added services, and a systematic approach to nurturing and cultivating users from the free offering to the paid service.
It’s easier said than done. Here are some lessons from the leaders around how to boost free-to-paid conversion – equally applicable for B2C or B2B software.
- Benchmark your customer journey. Experts tend to think of the free-to-paid conversion as an engagement funnel. Honeybook, for example – the leading CRM for creative entrepreneurs – views the journey from casual usage to paid commitment as essentially an extension of their acquisition marketing strategy. To that end, usage analytics can help shed a light on your effectiveness at nurturing users from one stage to the next. For example, your marketing and customer success teams should have a clear picture of your signup to first-usage rate, from first usage to regular adoption, and from regular adoption to paid conversion. Digital engagement analytics software like Mixpanel, KissMetrics, and Heap Analytics can help create intuitive reporting that groups users into acquisition cohorts and charts out key trends in stage-to-stage conversion over time.
- Identify pain points and “activity cliffs.” While specific end-to-end benchmarks vary between B2B and B2C sectors, and between opt-out or opt-in relationships, experts recommend targeting an overall free-to-paid conversion rate of greater than 25% – with best-in-class companies boasting over 60%. Okay, so if you’re below that: where should you focus your energy? The great thing about measuring the free-to-paid journey in terms of incremental conversion steps between stages enables teams to hone in “problem areas” – stages that represent significant dropoff. For example, perhaps a workflow management tool notices that of all customers who sign up for their free offering, only 50% ever make it to initial software trial. Or a consumer fitness app observes that two-thirds of users never come back to try additional workouts after their first fitness experience. Pinpointing the biggest bottlenecks in the conversion funnel enables freemium business teams to formulate hypotheses about what will move the needle the most.
- Leverage engagement data and AI to understand the why. Here’s the good news: the chances are good that your team is already sitting on all the data needed to understand what’s holding you back from a robust free-to-paid conversion rate. For example, a tax preparation software company likely has some combination of email exchanges with customer success agents, calls to the support team, in-application chats with company representatives, and more. The challenge is making sense of this data in the context of the conversion challenges identified above. For example, what’s holding customers of the tax preparation software back from initial product trial after signup? This data is typically “unstructured” – meaning that it comes in the forms of written and spoken words rather than quantitative responses – making it a perfect candidate for artificial intelligence, or AI. AI refers to a set of technologies that replicate human faculties for language and thought, including the ability to recognize patterns in complex verbal and written interactions. For example, the tax preparation software company might identify a large cluster of first-time users who express sentiments of frustration around level of effort, and confusion around specific document types. As a result, the software might create an upfront checklist of documents required (and additional support resources or FAQs on where to locate them), rather than waiting until subsequent stages in the filing workflow to surface those requirements.
There are lots of reasons that freemium business models fail. Most common among them are insufficient value in the base offering and a lack of differentiation in the premium services. (Turnaround stories of companies that turned around struggling freemium ventures include LinkedIn and the New York Times, both of which have continually tuned the balance between their free and paid offerings.)
But continuously monitoring the customer journey – and leveraging AI to identify and remediate customer pain points in the conversion funnel – should be at the top of the list for any freemium software leader looking to make the model a success.