.png)
Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
In the dynamic landscape of SaaS business models, freemium has emerged as a powerful go-to-market strategy. Yet many executives continue relying on Customer Acquisition Cost (CAC) as their north star metric for pricing decisions—a practice that may be fundamentally misaligned with freemium's unique economics. This traditional metric, while valuable in conventional sales-led models, fails to capture the nuanced reality of freemium businesses. Let's explore why CAC alone is insufficient and what metrics leadership teams should prioritize instead.
The Limitations of CAC in Freemium Models
Customer Acquisition Cost has long been heralded as a critical metric in SaaS, calculated by dividing total sales and marketing costs by the number of new customers acquired. However, this approach presents several critical shortcomings when applied to freemium businesses:
1. CAC Ignores the Value of Non-Paying Users
In freemium models, free users contribute substantial value despite never converting to paid plans. They generate network effects, provide product feedback, and often serve as ambassadors for your product. According to data from Amplitude, active free users drive 30-40% of paid conversions through word-of-mouth referrals in successful freemium products—yet CAC calculations completely overlook this value creation.
2. Conversion Happens at Multiple Touchpoints
Unlike traditional sales-led motions where conversion is a discrete event, freemium users may convert to paid plans at various points in their customer journey. Research by OpenView Partners reveals that the average freemium-to-paid conversion timeline spans 3-6 months, with multiple engagement points influencing the decision. CAC fails to account for this extended nurturing period and the incremental investments that drive conversions over time.
3. Blended CAC Obscures True Economics
When organizations calculate a blended CAC across both free and paid users, they often misrepresent the true cost dynamics. As Tomasz Tunguz, venture capitalist at Redpoint, notes: "Blended CAC creates a dangerous illusion of efficiency that can lead to improper resource allocation and pricing decisions."
Better Metrics for Freemium Pricing Decisions
So what should freemium businesses measure instead? Here are the metrics that more accurately reflect the economic realities of this model:
1. Activation Rate and Time-to-Value
The percentage of users who reach key value milestones—and how quickly they get there—provides critical insights for pricing. Companies like Slack and Dropbox optimize for activation above all else, knowing that users who experience core value are 3-5x more likely to convert to paid plans, according to research from ProductLed.
David Skok, founder of For Entrepreneurs, explains: "In freemium, the primary goal isn't to acquire users but to activate them. Your pricing should reflect the value unlocked at activation, not the cost to acquire the user."
2. Expansion Revenue Efficiency
For freemium products, the ability to expand revenue within the existing user base is often more important than initial conversion. The cost to generate expansion revenue (through upgrades, seat additions, or feature adoption) is typically 25-40% lower than acquiring new customers, according to Chargebee's SaaS benchmark report.
3. Monetization Velocity
How quickly can you monetize different user segments? This metric examines the time between activation and first payment across cohorts. According to OpenView's Product Benchmarks Report, top-performing freemium products convert users 2x faster than average performers, significantly impacting cash flow and unit economics.
4. Value-Based Engagement Metrics
Rather than measuring all engagement equally, successful freemium businesses track engagement with specific features that correlate with willingness to pay. Elena Verna, former Growth leader at SurveyMonkey and Miro, recommends: "Identify the features where usage patterns show a high correlation with conversion to paid plans, then optimize your pricing tiers around access to those value points."
Implementing a New Approach to Freemium Pricing
To move beyond CAC and implement a more effective pricing strategy for your freemium product:
1. Map Your Value Metrics
Identify the specific actions and usage patterns that correlate most strongly with both conversion and retention. These should form the foundation of your pricing tiers and packaging decisions.
2. Segment Your User Base Properly
Different user segments follow different conversion paths. Enterprise teams might convert based on security features, while small businesses prioritize collaboration tools. Your pricing strategy should account for these distinct paths to monetization.
3. Implement Cohort-Based Economic Analysis
Rather than calculating a single CAC figure, analyze the economics of different user cohorts based on acquisition channel, activation timeline, and conversion patterns. This nuanced view will reveal more accurate insights for pricing optimization.
Conclusion
While Customer Acquisition Cost remains a valuable metric for many SaaS businesses, it simply doesn't tell the full story for freemium models. By shifting focus to activation, monetization velocity, and value-based engagement, executives can develop pricing strategies that better reflect the unique economics of freemium businesses.
The most successful freemium companies—Zoom, Slack, Dropbox, and others—have recognized that their pricing power comes not from recouping acquisition costs but from aligning monetization with value discovery. As your organization evolves its freemium strategy, consider whether your pricing metrics need to evolve as well.
Remember, the goal isn't to monetize every user immediately, but to create the right conditions for sustainable growth where monetization becomes a natural extension of the value users already experience.