Konstantin Valiotti
More posts from Konstantin Valiotti
Building a freemium product or service is only the first step.
Once you’ve done the work to build and launch a freemium product, you will have to collect initial market reactions and see how the funnel behaves at each touch point. You will then have to decide whether to optimize the freemium experience, keep it the way it is currently or remove the funnel altogether.
Each funnel has a set of metrics:
- Acquisition.
- Activation.
- Retention and engagement.
- Monetization.
- Expansion.
There are many ways to improve each step so you must consciously reevaluate your strategy to avoid over-investing. There may be situations where unit economics are not yet working, but the increase in conversion required to break even is very small. You may learn that new users find it difficult to activate and move to a paid tier. Or you may find that your users are excited about the free tier and see no reason to upgrade.
What to optimize?
As described above, you need to analyze how your freemium funnel performs to understand where the biggest problems are.
In general, the main areas of optimization are:
- Limitations that you set on freemium (both on the base use case and advanced features).
- Conversion paths.
- User activation.
- Supporting product changes on freemium.
The first two are primarily to do with monetization, the third is related to retaining free tier users, and the last is a cost you have to bear to support changes to the freemium product.
Limitations
The more data you generate about freemium use, the more ideas you will have about whether you have chosen the restrictions correctly.
There are two types:
- Direct limitations to the basic use case.
- Inclusion (or exclusion) of other features.
The first point is fairly straightforward — it relates to the use case and the extent to which you allow free tier users to engage with the base use case. Experimenting with limitations is a must because you need to find a balance between serving the use case in its simplest form and pushing users to upgrade.
Suppose your model allows unlimited use of the base use case. In this case, you can include limitations such as the ability to invite other users to the account, the experience of collaboration and so on. This is the second type of limitation that you can work on. It is possible to over-engineer freemium by providing access to additional features that make the basic use case “complete” — e.g., analytics, notifications, etc. This is another area where you can experiment.
Conversion paths
Since your free tier users use your product for the basic use case, creating conversion paths that allow them to understand the benefits of your paid plan will be a problem. Should they go through a trial period before paying for your paid solution? Should you ask for their payment information if they want a free trial?
While we cannot address all the issues that come up in the freemium-to-paid conversion path, one thing should be clear: You can optimize this step in many ways.
Activation
Before you hope to convert or retain the user base, you must get them to complete their basic use case for the first time. Establishing a freemium offer takes a lot of time due to all of the engineering and operations involved, so activation may be the last thing on your mind.
Until a new user experiences the core value of your product for the first time (and that’s how activation is defined), they will not be retained or converted. This should be one of the first areas to analyze right after the launch.
Supporting product changes on freemium
When new features are introduced or the existing user experience is changed, you need to understand how this will affect the freemium tier. The new features may not be available in the freemium version, be displayed with a prompt to start a trial or can be offered in a limited form. Regardless of the decision, additional technical effort will be required to ensure that the freemium experience doesn’t break.
If this is not managed proactively, other teams contributing to the core experience will have to work around the freemium level and spend time deciding what to do with their features on freemium.
When should you stop optimizations?
When you work on something long enough, you lose track of whether it’s still important to devote resources to it. This is the reality of many products that still get updates despite there being no business reason for doing so.
Freemium is no different. If your tweaks do not bring significant changes to the funnel, you should either rethink your strategy or remove it from your priorities if it is not your primary funnel.
The freemium challenge
Enabling freemium, especially for established products, can bring organizational and operational challenges even if it adds value to the business.
If you are still in the early stages, do not even have a funnel yet and are thinking about how to structure it, these challenges will not apply. However, they will still play an important role, because freemium has second-order effects apart from audience growth.
The main consequences of freemium introduction are felt at the strategic, analytical and operational levels.
Strategic issues
If you have already introduced a free trial or a sales-driven model, freemium will be an addition to your portfolio of models. In this case, you have probably covered your acquisition of ideal customer profiles (ICPs) with one of the two approaches.
This means that freemium will address the lower end of your target group: users who are looking for free alternatives, users who need something simple and smaller businesses.
Over time, freemium users will make up a significant part of the audience you serve. You will inevitably have someone who is not your ICP requesting features, having support issues and going through a sales funnel.
As the audience grows, there will be more emotional investment in freemium, and the company will be setting goals for its growth that may conflict with your performance targets. Overcoming these challenges is neither simple nor straightforward. Teams not directly involved with freemium (and supporting its success) still need to dedicate time and resources to support the freemium strategy.
You should make a clear decision about how resources will be allocated to freemium and what level of support it will receive from the rest of the organization.
Analytical issues
If the above challenges apply to your case, you will have a segment of your active paid users that is different from the users you have acquired through other channels. For example, your average revenue per account (ARPA) could be lower (even significantly), churn could be higher or expansion could be lower.
How you understand the performance of your product can become complicated. Is it an average for all the acquired target groups? Is it on a per-funnel basis? In the latter case, what should you present to your investors as ARPA, churn and net dollar retention?
There is no clear answer to these questions, and you will have to answer them yourself. If you set targets for the company based on one of these metrics, the freemium funnel will have a negative impact on the average level while producing sales growth and cash.
Operational issues
If you already have a free trial and a sales-led motion, freemium just becomes an additional funnel. This funnel will bring new users who typically become part of the sales funnel after reaching a certain lead score or becoming a product-qualified lead.
However, we have found that new users from freemium funnels are often (though not always) different from the audience you already have. Should you be working with them in your sales funnel? If so, should they be scored the same way as other accounts?
Another consideration is the cost of servicing these users with sales staff, especially if the unit economics in paid channels are worse than in your other motions. Introducing sales to freemium will pressure the economics even more unless you achieve a significant increase in total contract value through the sales funnel.
Freemium 2.0: Reverse trial
There is another way to structure your freemium funnel that Elena Verna of Amplitude has popularized: the “reverse trial.” In this, instead of letting freemium users get to their free plan, you immediately upgrade them to a trial version of the entire paid solution. At the end of the trial period, users decide whether to continue using (and paying for) the full solution or downgrade to the free version.
A reverse trial solves one of the critical problems of freemium. Freemium users usually have to start a trial to understand the full solution. There is a lot of friction in this scenario, as some companies require a credit card to start a trial. Some users may not know what features the company even offers in a paid plan, not have the time or may consider the additional benefits marginal at best.
The reverse trial solves these problems by providing the full solution upfront and educating users about its benefits through natural exploration. If these users engage with the paid features, they will see what features they lose at the end of the period. That creates additional pressure to buy.
In theory, a reverse trial should result in at least the same rate of conversion as your freemium solution. After all, the reverse trial significantly shortens the time-to-value for freemium users in terms of paid features.
Even though the reasons for using the reverse trial model are valid, there are some considerations you need to keep in mind.
On the activation and experience side, new users will land in the full solution, which might be too complicated for them, especially if they signed up for a simple solution with the one use case they needed. There is a risk they might get lost in the onboarding experience.
On the monetization side, there are two further problems to consider.
If you require a credit card when converting from a free plan to a trial, you cannot do so with the reverse trial. This is rarely a problem, because it should not make a difference unless your business relies on people forgetting about their subscriptions.
Should you offer a downgrade option to your general trial cohort? This is a tough question, because before freemium (and reverse trial), if you had a free trial motion, all users needed to decide whether to buy or leave. If you allow them to downgrade, you might see a decline in paid accounts.
Regardless of these concerns, reverse trial is the future for freemium models. It’s pretty rare for a business model to offer benefits without equal costs, but with reverse trial, that seems to be the case.
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