A Tasty Freemium Strategy

A Tasty Freemium Strategy

As a product leader, one of the most challenging decisions you face is determining what features and services should be offered for free and which ones should be reserved for paid plans. This crucial choice heavily relies on your target market and its behavior. In this blog post, we will explore the ideal customer mix for a typical bottoms-up approach, with a focus on SMBs and the mid-market.

The Ideal Customer Mix
For an effective freemium strategy targeting the SMB and mid-market segments, your customer mix should ideally consist of the following proportions:

  1. 50% of customers on the Free plan:To build economies of scale and encourage word-of-mouth marketing, design your features in a way that offers substantial value to most users without requiring them to pay. By allowing them to experience your product's core value proposition and encouraging regular usage, you create a loyal user base that can help drive growth.
  2. 45% of customers on self-serve paid plans:Your self-serve paid tiers should be structured with multiple price points, typically ranging from 1-3 tiers. Adhering to the 80/20 rule, focus on having more customers in the cheaper tiers and fewer in the higher-priced tiers. The features in these tiers should be easy to set up without human intervention and provide significantly more value compared to the free tier, motivating users to upgrade.
  3. 5% of customers on the enterprise plan:While this segment may represent a small percentage of your overall customer base, it plays a critical role in generating revenue in later stages of your company. To encourage growth in this section, it's essential to ensure that the features offered extend beyond account management and premium support. These enterprise-tier features may be more involved in set up but provide organization-wide value, making them indispensable for larger customers. For e.g. SSO through Okta, Azure are a terrible free tier features but are great for the an enterprise tier since they need buy-in across the whole organization.

Strategies for Maximizing Freemium Upgrades
Once you've defined your customer mix, it's time to focus on productizing your freemium strategy to maximize upgrades to paid plans. Here are a few strategies to consider:

  1. Opt-in Free Trial after activation:By providing users with access to additional features through a free trial after they've activated their account, you can pique their interest and incentivize them to explore the benefits of the paid tiers. This approach works best when your free plan is robust enough to keep users engaged, increasing the likelihood of them recognizing the need for more advanced features during their journey.
  2. Default everyone to a Free Trial on Signup:Alternatively, you can opt for a strategy where all users are automatically enrolled in a free trial upon signup. This approach allows users to experience the maximum value of your product from day one. During the initial days of their trial, users are more inclined to explore and set up premium features. This strategy aims to help users realize the core value of your product and encourages them to upgrade to the paid version before their trial expires.
  3. Bring users back to the free tier after a trial:If users go through a free trial and decide not to upgrade, it's important to bring them back to the free tier without making them feel abandoned. This presents an opportunity to educate them about the differences across different tiers and highlight the value they could be missing out on.
    A hidden insight here is to experiment with a potential second free trial for a segment of users who are more likely to upgrade the second time. In fact, for high growth companies, a renewed Free Trial every year makes a ton of sense because you are constantly adding new capabilities to your paid tiers. Free trials are a great way to market premium capabilities.

Finding the right balance between free and paid offerings is a strategic challenge for product leaders. By understanding your target market and its behavior, you can create an optimal freemium model that maximizes upgrades to paid plans. The recommended customer mix for the SMB and mid-market segments is 50% on the free tier, 45% on self-serve paid plans, and 5% on the enterprise plan. Implementing strategies such as opt-in free trials, defaulting to a free trial on signup, and providing second trial windows can help drive conversions and revenue growth.

Remember, the key to a successful freemium strategy lies in delivering value to users in the free tier while offering compelling upgrades in the paid plans. Continuously monitor and analyze user behavior, gather feedback, and iterate on your offerings to ensure that you strike the right balance and drive sustainable growth for your product.

By carefully navigating the free and paid buckets, you can build a thriving user base, cultivate brand advocates, and ultimately achieve long-term success for your product or service.

AJ Jindal