Freemium Saas Business Model Pros and Cons

freemium-saas

Everyone has been taking about the freemium SaaS business model, and how it is going to change the marketing and delivery of SaaS almost to the level SaaS is changing software itself. So many companies have blindly jumped onto the freemium model expecting instant results, without considering if it even works for their software or company philosophy, let alone their target demographic.

The fact of the matter is, freemium isn’t a perfect SaaS business model, and like anything else, it has its pros and cons, and depending on your business and software model, the cons may in fact outweigh the pros or vice versa.

So, if you’re considering going freemium with your product, let’s stop for a minute first and look at these pros and cons, lest you make a grave mistake that will be costly for a long time in the future. You may find that this is the perfect model for your business, but you may just as quickly discover it’s a calamitous decision to make.

First, the pros …

The freemium business model does have its benefits. Of course primarily, it’s useful for reaching a skeptical customer base by allowing them to try the product, possibly in a gimped form, indefinitely. They can evaluate if it’s something they need and have a use for, and can give them a chance to become enamored with it and therefore enticed to pay more for a heftier, shinier version of the system.

This also ensures large coverage by software blogs and users who create tutorials and material discussing the product, who otherwise wouldn’t be able to afford it to do so. In the past, pirates have defended piracy of software by stating that those who pirate will not pay anyhow, and it ensures high user exposure, and therefore PR for the software. While we’re not here to debate ethics or morals, they had a point from a technical standpoint.

With freemium, the negatives of piracy – profit loss – are abated by the SaaS nature of the product, while playing on this same boundless PR and exposure. So, if PR is important because it’s a novel and unique software for a novel and unique problem that’s new to the industry, this is hands down a definitely positive model to go with.

Customers also feel that when they buy the upgrade, they are paying of their own volition for an otherwise free product. They will value it more from a psychological level, and feel more in control. This psychological tactic bears a lot of weight in marketing and business models – more than most are willing to admit.

If these things match your demographic and model, then the freemium SaaS business model may be right for your product. But before you make that decision, consider the downsides of this model as well.

Fraud is prevalent with freemium models, especially ones based around limited time trials. When a trial expires, users are known to create new email addresses and accounts to get unlimited use out of the software, and there’s only one realistic way to prevent this, and it isn’t pleasant.

The only way to abate fraud in this case is to require credit card validation per trial, and this will deter many users who either don’t want to give this information our, or who don’t own credit cards. It comes as a surprise to a lot of businesses that many people are becoming wise to the traps associated with credit cards, and are starting to avoid them where possible. This locks out a lot of potential customers out of the gate.

Another problem is overhead. Each user, be they paid or free, produces incremental overhead, which costs money to support. Combine this with overhead that also increases incrementally with complexity, and there becomes a significant cost margin to paid users. When the conversion rate from free to pay is less than 10%, it often becomes an issue where the price raises for paid customers to support so many free users per paid user, plus enough to create a profit margin. This can become a headache and has been the bane of many companies who failed at freemium.

The trick is to make the paid product affordable and valuable enough to spark a 10% or greater conversion rate, so look at your service and be sure you can do this before you even try it.

These are the positives and negatives of a freemium SaaS business model , and they should be weighed in unbiased balance when judging whether or not the model is right for your business.

Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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