Redefining freemium: A customer acquisition channel
We mentioned in the intro that many businesses fail to understand what freemium is. The way they do that is by thinking of it as a monetization strategy. That's the wrong thought process. Freemium isn't a way of monetizing your customers, it's a way of acquiring them. More specifically, it's a way of putting them into your sales funnel with the hopes of acquiring them as paying users. When viewed as a customer acquisition model and not just another pricing model, freemium can really shine.
Freemium to encourage word-of-mouth marketing
One of the first success stories of the modern freemium era is Evernote. The note-taking app was fortunate enough to launch around the same time Apple's hugely popular iOS App Store did, which certainly helped them get a lot of eyeballs on their product. But it was the customers themselves that CEO Phil Libin credits with the early growth of Evernote. "The easiest way to get a million people to pay for a non-scarcity product may be to make 100 million people fall in love with it," Libin once said.
The freemium business model relies on enough customers making a purchase to cover for the fact that many users aren't paying any money. The users who don't pay for the premium verison, however, are likely to tell their friends if they enjoy your product. As Libin implied, you are getting a marketing rep out of them even when you aren't getting a new customer.
Freemium to lower customer acquisition cost (CAC)
When digital advertising first began, it opened up a whole new world for marketers. The ability to precisely target allowed them to reach just the right customer, and the ability to use very specific keywords reduced competition. We are many years removed from digital advertising being a new thing, however. Even with relatively niche keywords, it's getting harder and harder to remain competitive relying on ads as a primary marketing method. The result is increasingly high customer acquisition costs.
SEO is one way companies can reduce reliance on advertising, bringing in potential customers through organic means instead. But people love free services, which makes freemium a much more enticing way to get customers into your sales funnel that, like SEO, also costs next to nothing to implement. The less reliant on ads you can become, the lower your CAC will be.
Freemium to build customer habits
When you make a bare-bones version of your product free, you reduce the friction that it takes for customers to use it, down to almost nothing. By doing so, you are increasing the chance that your product will be their go-to when they need to get something done. If you create a solid product, then your customers will continue coming back to it. Once using your product has become a habit for them, the friction of switching to another brand increases. They'd have a whole new learning curve and feature set to adjust to. This creates a powerful lever for upselling those customers as their needs grow.
Freemium to strengthen your expansion revenue position
Anyone in marketing can tell you that an upsell is easier than a sale. If a customer is familiar with your product and what it can do for them, they are already primed to make a purchase. Because of this, expansion revenue is 4x cheaper than acquisition. Giving your product away for free and upselling on additional features means you can skip right past the difficulty of making an initial sale and take advantage of the relative ease that expansion revenue brings.
If there are multiple tiers in your upsell, this benefit is only strengthened. True growth for SaaS companies doesn't come from acquisition but from existing customers. If you bring in customers for free, you'll put a lot of them in the funnel. If you focus on retention and give them room to grow as their needs do, you will minimize churn and see your business grow right alongside them.