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Risk factors of freemium model in SaaS software

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Freemium model

Freemium model is used as an effective go-to market strategy among Software-as-a-Service (SaaS) vendors. This is a marketing tactic where the vendor has both free and premium version of their product. The ultimate goal of the vendor is to convert the non-paying customers to paying customers.

Many startups founders especially with a technology background consider this as best model to enter the market. Of course the psychology of free among the users helps company to build substantial traction. The product or service will have more signups and get mentioned in blogosphere and social media. Everything looks great for few days from launch. However, at times the things may go wrong!

Freemium has significant risk associated with it. If not managed wisely; it may lead to increase in overhead, negative product positioning and finally lead to overall failure. This blog helps to understand risk factors of “Freemium Model” in SaaS Software.

Most of the founders consider freemium as a revenue model in back of their mind. Freemium is never a revenue stream – It is just a marketing tactic. Company’s revenue has to come from somewhere.

Sometimes free hurts brand or market position, if a wrong message is spread among the users. Few enterprises may not consider the product as part of their evaluation process.

“Try before you buy” model is has a different effect on buying decision of the user when compared to freemium model. In freemium users may end up using whole or fewer features of the product for ever.

Free users must never be considered as customers – to an extent they can be considered as product promoters, but nothing beyond that. Customers who have paid before may pay for the product if they find value in service. According to psychology, customer who has never paid before will be non-paying customer forever. In fact, when company closes its freemium model free customers will find alternative service that comes at no charge.

Freemium model has to be planned wisely such that company keeps the overhead of free users as minimum as possible. The good ratio of paying and non-paying customer must be maintained such a way that operating cost for supporting non-paying customer can be balanced by revenue from paying customers.

Founders must be aware of these risks before entering the market with freemium model. Please share your experience of SaaS company in the comments.