Exploring the Freemium Model: Pros and Cons for SaaS Startups

The pricing model for your SaaS model can affect your customer base if you do not move strategically. As it depends on the value and positioning of your SaaS product.

Appropriate SaaS pricing models can boost the value of your company's reputation while also increasing sales. So you should definitely focus on the pricing model. One such SaaS pricing model, such as the freemium pricing model, is in trend these days. Companies like Evernote, Dropbox, Pandora, Spotify, Linkedin, and Skype are some of the well-known companies following freemium mode.

What is the Freemium model?

The freemium model comprises "free" and "premium". It is a kind of pricing strategy that is offered as a free service with the option to purchase a premium version.

Many Saas product development models use a freemium model with a clear objective to attract more users and convert them to premium members.

Pros and Cons of the Freemium Model: Is it really a profitable SaaS model?

Let's understand the pros and cons of the SaaS freemium model.

Pros of the Freemium SaaS Pricing Model

Customer acquisition

When the market is full of premium SaaS products and you are offering the same service at zero cost. This way, you can create a tempting environment for users as they start trusting your SaaS product. This way, you can get the opportunity to convert them into premium customers.

The freemium model allows you to upsell premium features or additional functionality to users who find value in the free version. This can generate revenue and provide a scalable business model.

High exposure

Everyone likes free services. Isn't it? Here is the tweak in this Saas model. SaaS startup companies provide free services so that they are exposed to a larger number of users. After trying the free service, many users upgrade to the premium service.

For example, Ubersuggest offers three free keyword searches daily. Many users refer this to another user and this way they indirectly promote Ubersuggest and get exposed to more users.

Profitability concerns

Missing profitability whilst discussing freemium SaaS pricing models is incomplete. As you offer a free version, still you require substantial resources, such as server infrastructure and ongoing maintenance costs.

Helpful in collecting data

By offering freemium services, startup companies collect huge amounts of data, such as users' email addresses and contact numbers. This will help startups develop a further strategy to utilize that information to sell premium services.

Feedback and product improvement

When a start-up follows the freemium model, it possesses a large user base. Those using the free version present an excellent opportunity to collect valuable user feedback. When implemented well, that feedback is a good way to improve the product, identify pain points, and add features that resonate with users.

Transform the sales environment

When you offer freemium product services such as Saas pricing models, this will reduce the pressure on your sales team.

Just think: when you offer anything free to your users, you are building your product's reputation. You just need a little push to convert leads into customers. You can say that it's actually a great sales strategy.

Network effects and virality

If your freemium product offers value and is widely used, it can generate network effects and may go viral. Users will start recommending and sharing it with others, bringing free advertisements leading to increased adoption.

Cons of Freemium SaaS Pricing Model

There is always a risk in offering any product or service free of charge. Let's see what they are.

Nothing is free

When any company offers freemium services to their users, you spend a huge amount of money to maintain their servers. This is the biggest disadvantage of offering freemium services. Users are totally unaware of this, as they are busy enjoying your freemium services.

Value perception

The biggest risk of offering freemium services is the undervaluation of the SaaS product development. Many users have small requirements, so they are fully satisfied with the free service and never switch to the premium service. This way, they reduce the value of your SaaS product.

Sometimes leads to a high churn rate

Not every customer switches to premium products. Many users switch to competitors' products; this will further lead to a higher churn rate.

Competitor challenges

Freemium models have become more common in the SaaS industry. That means the competition as well as user expectations are always high that too for a product without charges.

If you'll not differentiate your product from others, the users will keep switching to new and better competitors.

Conclusion

Any Saas product development success depends on various factors such as customer acquisition, market research, target audiences, and pricing plans.

By analyzing the above factors carefully, one can create a robust plan through which companies can convert their free users to premium customers.

Before implementing the freemium model, you should analyze all the possible outcomes and make an informed decision.