Freemium in SaaS: Three Key Strategies

The concept of freemium has been actively discussed and introduced in B2C products. It is no exaggeration to say that most of the SNS, social games, and media, in particular, have adopted the freemium model.

Is there potential for implementing freemium models in SaaS, where B2B is the primary focus? In fact, freemium is already being considered in the context of product-led growth, and is starting to be introduced more and more often in products for SMBs.

In light of this situation, this article will review what freemium means in the context of SaaS, comparing it with the similar concept of free trial, and confirming what it means in terms of product strategy.

What is freemium?

Let's begin by examining the concept of freemium, which involves offering a basic version of a product that fulfills fundamental user needs for free, without any time limitations. The main objective is to maximize user acquisition by making the price free and to foster the evolution of the product.

When the needs of freemium users become more sophisticated, additional functions or paid plans that allow users to use the product beyond the limits of the number of times they can use the function or the number of IDs are proposed to encourage upselling and monetization.

On the other hand, a similar concept is the free trial. This is the same as freemium in that the product can be used for free, but there are often no restrictions on the basic functions or number of times the product can be used. Instead, there is often a time limit of one week to one month, during which the user can check the usefulness of the product and, if necessary, register for a paid plan after the trial period ends.

The main objective is to encourage users to try the product extensively to experience its value and quality, thereby increasing their interest in and trust in the product or service, which may lead to a purchase. Unlike freemium, this policy is focused on user acquisition because of the time limit.

Freemium Changes in Slack

Slack has been offering a freemium plan that allows users to access the service for free, with limitations on the number of posts and available storage space. Since there is no time limit and the usage of features is limited by quantity, it is literally a freemium plan. However, starting last September, we removed this restriction and instead changed it to a restriction that only allows users to keep a history of posts for a certain period of time.

The usage limit for the free plan is simple. Instead of the previous limits of 10,000 messages and 5GB of storage space, you will now have unlimited message history and file storage for the past 90 days. No more guessing when the limit will be reached. You will also have access to more features, including clips and message and file storage settings.
Quote: Excerpted from Slack help center "Pro Plan Pricing Changes and Free Plan Updates"

The purpose of Slack is to communicate internally and externally, but it also has bookmark-like features that allow you to post not only ad hoc, but also cohesive pieces, make them fixed posts, and flag them for later reading. In other words, Slack is developed to be used as a stock place for communication as well.

With the latter in mind, the restriction of keeping a history of posts only for the past 90 days is more like a time limit than a functional restriction, and is more akin to a free trial restriction.

In addition, while there is no restriction on the use of flow communication, if a certain level of communication cannot be continued and 90 days have passed since the last post, there will be no posts. In such a situation, the hurdle to posting is raised dramatically. In other words, if a certain amount of communication cannot be guaranteed, there is no functional limit to flow communication, but it will be virtually impossible to use it.

In summary, the changes to the limits of the freemium plan, while retaining the establishment of functional restrictions, actually change the limits to be as close to those of a free trial as possible, and the plan seems to be designed with a strong emphasis on user acquisition. This is an example of meticulous design of restrictions, taking into consideration where the main purpose of the plan lies, how the functions and duration of the plan are perceived, and how the user usage trends will change as a result of these restrictions.

Three Product Strategies for Freemium

Having examined Slack's approach to designing freemium restrictions, let's explore three fundamental strategies that can be implemented through freemium models. Here we will introduce them one by one.

1. Creating Network Effects

The first strategy involves leveraging freemium to create network effects. Zoom, which spread rapidly due to the spread of the coronavirus, has developed a freemium plan that does not limit functions for one-on-one video calls. This allowed former users to use Zoom to make video calls with non-users, and by taking advantage of the communication tool's characteristics, reached out to non-users in one fell swoop.

At that time, remote working was a necessity, and the need for online communication such as video calls was extremely high for companies and other organizations, and it seems that an atomic network was quickly established in various places. The approach to non-users allowed the potential adoption segment to be exposed to Zoom's quality and services, and a network created a network, which quickly spread.

Communication is the best example of this, but the network effect of freemium, which anyone can start using easily, and the value that can be created increases as the number of users increases, and there is a very high affinity between the two.

2. Focus on increasing engagement through user pool acquisition

Although limited to the realization of a minimum number of user stories, the free freemium plan with no time limit and free of charge lowers the hurdle to getting started to the extreme. In terms of user acquisition, this is the ultimate product-led growth.

Of course, there is room for further development of user acquisition through freemium, for example, through marketing coordination and tutorial refinement. However, by deploying freemium, you are offering your most important asset, your product, for user acquisition, and the product side can focus on user engagement.

In addition, users who have become accustomed to the UI/UX through freemium will consider other products when they have more advanced needs, and the results of having already used the product for a certain period of time will be a very impactful input for consideration.

As a concrete example, Mailchimp gained prominence by introducing freemium immediately after the collapse of Lehman Brothers. At the time, Mailchimp was providing an e-mail distribution platform for SMB marketing, but the high rate of SMB closures was creating a sense of stagnation in user acquisition.

So we adopted a freemium model and put the Mailchimp logo on the emails sent by users and directed them to the LP, which quickly improved the efficiency of user acquisition. From there, they focused on getting people to pay and seem to have grown their business.

3. Acquire product usage data from the beginning and formulate a highly accurate roadmap

In the case of SaaS, it is very difficult to get a certain number of users to use a product immediately after its release. Especially in the case of enterprise SaaS, it often takes several rounds of negotiations, and in some cases, 1-2 years to get users to decide to adopt the product. In other words, even after releasing a product, it is difficult to get a large number of users to use it immediately, and it is not possible to scrutinize the product vision and roadmap using actual usage data.

However, by developing a freemium plan, although there are some functional limitations, a certain number of users will utilize the product. If we can create this situation, some users will be willing to be interviewed, and of course we will be able to obtain usage data and raise the resolution of how users are using the product and what the next issues are. In turn, this will lead to a more accurate product vision and roadmap.

Conclusion

Freemium has been introduced mainly in B2C, but it is also a very important strategy for SaaS. Unlike free trials, which ask users to use the product for a limited period of time and force them to decide whether or not to pay for it, there are three major benefits: user acquisition through network effects, focus on engagement measures, and a highly accurate roadmap by raising user resolution from the early stages of release. We hope this analysis encourages viewing freemium as a strategic product decision rather than merely a marketing tactic.