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In this blog, we talk about freemium business models and how businesses use (and can use) this acquisition strategy to generate sales leads.
When it comes to choosing a pricing model for a product or service in the B2B space, determining the ideal is a struggle for many companies.
Firstly, what’s on offer needs to be coherent and match the expectations of the ideal customer. This means offering something that solves a clear need.
Secondly, companies also need to be careful to not undersell the value of their product or service, so competitive pricing is incredibly important.
But regardless of the price of the product or service, one of the most difficult hurdles to overcome is getting people to purchase and start using the product.
As a result, many companies have (and successfully) adopted the so-called “freemium” business model (you might have guessed it, the word “freemium” is a combination of “free” and “premium”). Popular sites like Spotify, LinkedIn or even online newspapers have all adopted this pricing strategy, whereby users can sign up for a free account and later on upgrade to a paid (or “premium”) plan to unlock more features and functionalities.
But this pricing model has not only been adopted by B2C companies, many B2B businesses also use free plans to generate new leads. Let’s take a look at how this works.
You might be thinking: “How on earth do companies make any money by giving away their products and services for free?” Well, this great quote by Phil Libin, CEO of Evernote, highlights the point of freemium products and services:
“The easiest way to get 1 million people paying is to get 1 billion people using".
The goal of the freemium model is to lower customer acquisition costs (CAC). By providing a free version of your product, you eliminate any barriers to entry. If people want to buy it, all they need to do now is provide their payment details (you’ll already have their name and email address).
You can also use the data from your free users' behaviour to work out what features of your product are working well and which aren't. You can go even further and break down your user base by market segments (or buyer personas) to see who gets the most out of it.
Another advantage of the freemium model is its ability to build trust. When it comes to investing in large software-as-a-service (SaaS) or technology platforms, your prospects will want to see how and if the product works for them before making a decision.
Going freemium might sound like a no-brainer, but before you decide this acquisition model is the right one for your business, you should also assess the other side of the coin.
Generally speaking, when a brand provides a free version and a paid version of its product, users expect to get a lot more from the paid version. So rule number one for any freemium product is to give customers a taste but clearly state the additional value they can get by upgrading to the paid version.
But here’s the kicker: freemium products – particularly in the B2B space – require some initial upfront investment. Because of the nature of the model, most freemium providers end up with a lot of “trial” customers (on Spotify for example, more than half of their users are on a free plan), so the challenge is converting trial users into paying customers.
So to make this acquisition model work for you, you need to focus on your “freemium-to-premium-customer” conversion rate.
Just as you would nurture website visitors with a traditional content marketing strategy – moving them through the buyer journey – you need to nurture trial users through the sales cycle. This can be done through in-app notifications highlighting the features of the paid plan.
Here are a few examples of companies which offer a freemium plan (it’s worth noting that some target both B2B and B2C or get individuals to sign up before they can upgrade to a paid plan for their whole business).
So, taking all the above into account, here’s how you generate leads using a freemium business model:
First, conduct a careful review of your product and pricing strategy. It's important to clearly define what you can offer for free. More advanced features and/or bespoke options should come as part of the paid/premium version of your product/service. For example, you could limit features and storage limits or offer less support.
Though a freemium business model can help you generate leads (and at a lower cost) it does require some initial investment:
Next, you will need to map out your conversion strategy and define how you are going to convert your free users into paying customers.
It's important to note that early adopters of your product/service are less price-sensitive than others. They will have acquired your product/service on the basis of market opportunity/value - for them, the value proposition is incredibly compelling. So it's likely that at the launch of your product (and with a bit of good marketing and PR) you will have several B2B freemium leads.
Over time, however, conversion rates will gradually decrease as your user base expands and your product starts to reach the early and late majority. These groups are more price-sensitive and may not see the value in your product. There will also be those who arrive very late (laggards) and will be difficult to convert without 'major' product updates or incentives.
So it's up to you to devise strategies for these market segments and communicate the value of your offer to them. This is where the promotion of your product via your website, social media channels, email marketing and PR can help.
Also, those using your free product and loving it will eventually become evangelists for it. They'll either become subscribers or draw in new B2B freemium leads. You can increase the number of referrals you receive by providing incentives and communicating with your user base.
As well as using the methods above, you might have to do some testing to see which conversion methods work best for your audience. Consider calls-to-action or in-app notifications. What you need to do is ensure that at every opportunity you're reminding long-term users, there's a paid option available with more sophisticated options. It's pointless having loads of free users and not doing anything with them as this will put a strain on your hosting solution and customer service.
Freemium business models won’t be right for every company, but if yours provides online software services that can be obtained through purchase or subscription, meets a need, are the best in its particular space and can deliver ongoing value, you might want to think about adding a free plan to your pricing model.
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