Is the Freemium Business Model Right for Your SaaS?

Everyone is talking about the freemium business model as a quick and effective way to market SaaS and ensure better, faster adoption by otherwise skeptical prospects. Of course, on paper, this seems to be about right, but how often does this model actually work effectively?

First, before we explore if the freemium business model is right for you, let’s actually define it. Bear with me, because you may or may not have the complete picture, and I want to make sure if that be the case, you do have this complete picture before we continue.

Freemium is basically the idea of offering an access model to your SaaS that is in some way inferior to a paid version, but is good enough to stand on its own for users who don’t feel they need certain features etc. The trick with it is making the fee version outstanding, but making the added benefits of the paid model good enough to entice the average user, while justifying the expense.

This model is basically a descendant of the free sample concept, but on steroids. Whenever you see a “free account” with no limits to time frame, coexisting with a premium model of the same service, you’re looking at the freemium model, be it SaaS or another form of service.

Examples of this model in practice are DeviantART, an art gallery service used by various artistic people. It offers a free account which limits some social features and forces ads on gallery pages, with premium bringing in additional social features and removing the ads on the pages. Another example is the entertainment video stream service, Hulu. Hulu’s “plus” service offers a larger library of titles such as complete series, earlier access to episodes and movie releases, etc. It does not, however, remove the commercial interruptions, which actually means that in Hulu’s case, their freemium model is very, very broken.

So, is this model right for you? Well, let’s look at the risks, which Hulu just partly demonstrated. If your paid model doesn’t seem like a major upgrade, and in their case it does not, then people will not be incentivized to upgrade and pay money.

If your free version has advertising, it has to be removed from the paid model, plain and simple. But, the added features have to be a huge boost to what the free model does, and this is a difficult balance to achieve. Your free model has to let people effectively achieve the primary goal of your solution with no serious limits imposed. At the same time, the features of the paid model have to do it so much better without making the free model look like garbage.

So, unless you can really split the demographic in half without sacrificing on either end, feeemium is probably a risky endeavor for you to take on. If you want to use this model, your best bet is going to be to make the pivotal factors be storage allotment where applicable, and ad removal.

The advantage of ads being the difference, as well, is that since removing them is a good incentive and an easy metric to use, the ads on the free version can at least cover overhead for the free version if used right.

Overhead is one of the bigger problems with the freemium business model as we’ve pointed out in the past, so using advertising as a difference point is probably the only real way to easily make this work.

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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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