Should we offer a free tier (freemium model) or just a free trial for our SaaS product, and what are the trade-offs between these two approaches?

Below is our answer based on the insights in our pricing strategy book, Price to Scale.

Directly answering your question: whether to offer a free tier (freemium model) or a free trial depends on your product’s maturity, target customers, and overall pricing strategy. Both approaches have distinct trade-offs.

Key Considerations:

• Free Tier (Freemium Model)

Advantages:
• Attracts a broader audience, including price-sensitive prospects.
• Helps build a large user base that can be converted or upsold over time.
• Acts as a continual marketing tool that can drive incremental revenue (as noted in our discussion on freemium packages).
Trade-offs:
• May require supporting a significant group of non-paying users, which could strain resources if the marginal costs aren’t managed.
• The conversion rate from free to paid users might be lower, so the revenue model depends on upselling higher tiers.

• Free Trial

Advantages:
• Limits the period of free usage, which can create a sense of urgency and encourage faster conversion into paying customers.
• Provides greater revenue predictability since the trial converts into a defined subscription once the trial period ends (as discussed in our analysis of predictable revenue in Chapter 3).
Trade-offs:
• Some potential users may be hesitant to start a trial if they don’t see an extended risk-free opportunity to explore the product.
• It may not capture the broader segment of users looking to use basic functionality indefinitely.

Additional Context from Price to Scale:

The book emphasizes that SaaS companies should balance average and marginal costs when deciding on their pricing models. This means considering whether the additional overhead of a large, non-paying user base (as with freemium) is justified by the potential to broaden your customer pool and eventually capture more revenue.
The market and product evolution call for flexibility. As mentioned, any pricing model is appropriate only for a given period. Regular evaluation is key to aligning your strategy with market changes and customer behavior.

Practical Takeaway:

Evaluate your customer base and product stage:
• For newer products where maximum adoption is crucial, a free tier might lower the barrier to entry.
• For products with clear, differentiated premium features that can drive conversion, a free trial might be more effective in steering users toward higher, more predictable revenue tiers.

In summary, choose the model that best aligns with your business objectives, taking into account the trade-offs between broad adoption and revenue predictability as thoroughly discussed in Price to Scale.