Freemium Pricing for SaaS: Optimizing Paid Conversion Upgrades

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Freemium Pricing for SaaS: Optimizing Paid Conversion Upgrades

 

The following is a guest post by Rishi Shah, Co-Founder of Digioh and 500 Startups Mentor. Join his newsletter and get his eBook "10 Paying Customers in 10 Days" for free.

I've been building a new product and I'm almost ready to launch it. However, I'm having a really hard time figuring out the right pricing structure so I'm going to analyze my favorite Freemium SaaS businesses.

Here is what I know I want:

  1. A free plan. Since we are just starting out I really want people to use the product for free (no credit card required). I'm okay with killing off the free plan if it isn't working economically (existing free users would be grandfathered in).
  2. It is a hosted product so it will be recurring revenue. There will be a monthly fee for the paid packages (with an option to pay yearly upfront for a discount).
  3. Based on many many studies the paid packages will end with a "9". So the packages will be priced with that in mind (i.e. $11.99, $24.99, etc.)
  4. I want to leverage our free plan to get more referrals. For example the free members can earn more features or storage by referring a friend or posting a status update with our link in it. Pretty much exactly what dropbox and appsumo does.

Questions:

  1. How generous should our Free plan be?
  2. What limits should we place on it?
  3. We need our free plan to be something amazing so people will sign up. However we don't want it to be so amazing that they don't ever need to upgrade.
Graph showing the free to paid upgrade sweet spotI decided to take a look at some Freemium SaaS company that I know of and analyzed what I think they did well at.

Screenshot of 37Signals Basecamp

I'm going to start with 37Signals (the godfather of small business SaaS). This was their pricing page before their relaunch. I like how they have the free plan but don't promote it at all. They don't mention it on their homepage and it is hidden at the bottom of their pricing page. A few years back they heavily promoted their free plan and said that 98% of all accounts were on the free plan. Check out their call to action on their homepage. They don't even mention the free plan. They do mention a 30-day free trial though. Basecamp Screenshot Call To Action

Some insights (and assumptions) from 37signals' pricing strategy:

  • They really focus on getting paid customers.
  • The # of Free-to-Paid Upgrades is probably really low. They probably get most of their paying customers right at sign up which is why they have a 30-day free trial on paid packages and have their call-to action towards paid sign up (not the free plan).
  • I think a great way to launch is having an amazing free plan and once you start getting bigger focus your homepage on the paid signups.

Wufoo Pricing

Wufoo is probably my favorite SaaS business. In a presentation about SaaS he says:" always always display your highest priced package to the left and your cheapest package to the right". I made this switch for Flying Cartand he was right about it. Here is what I like:
  • Highest priced on the left, the reasoning is customers read from left to right. The $14.95 price tag doesn't seem so bad when you just read the $199.95 price.
  • The Free plan is perfect. Just enough to start (not super limited) but I am happy to pay once I have a little bit of success. This is what I call investing in your customers.
  • I also like how they have multiple thresholds from the free to the paid plan. Notice how the "Bona Fide" $29.95/mo plan has 5 users and the free plan only has 1 user. If you have 5 users you must be a bigger company and can afford the cost. This also gives a chance for Wufoo to get paid customers right from day #1.
  • I really like how they don't offer a 30-day free trial. They have a free plan so there is no need to have a free trial as well, allowing them to pull in cash as soon as possible.

Above is a screenshot of the DropBox Pricing Page. They don't promote the pricing page on the homepage at all.

Here is what I like:
  • Heavily promote their very generous free plan on their homepage - they don't show any prices, just a video and a download button
  • They leverage their free users to get more customers - amazing referral program. You can earn more space by referring people.
  • Up-sell customers after many months of usage and dependence on their product. I bet they have really good lifetime value on their paid customers.
  • My assumption is that DropBox has an amazing free account to paid account upgrade ratio which is why they focus on getting you to use the product as soon as possible.
Intuit Pricing Screen Shot I'm including Intuit but I really don't like it at all. This is exactly what I don't want.
  • Very confusing. Each pricing tier looks like it could be a different product.
  • An Asterisk next to their prices? Are you kidding me. Whenever I see an asterisk I get really scared that the price is going to jump after the first month.
  • The "Try it Free" is an okay call to action. The word "Try" makes me think I'm getting roped into something.
  • The reason I think this works is because they have a really strong brand value. People trust Intuit and they have a solid product for business accounting.
MailChimp Pricing ScreenshotMailChimp is similar to dropbox. They have an amazing free plan.
  • Mailchimp puts a "MailChimp" ad in the footer of the newsletter promoting their services and allowing the end user to earn more credits with them.

Carbonmade Pricing Screen Shot

Carbonmade has one of the most fun pricing pages. Here is what I like:

  • The top package is super cheap. $12/mo - wow. That's it and I get it all
  • How they display Free vs. Paid. The Paid package seems so much more fun and cool. I feel like a total loser clicking on the "Meh" package. I would rather just pay the $12 and feel better about myself. Other companies do this by highlighting their middle package with a "Best Option" headline.
Screenshot of the Experts Exchange Experts exchangeis a developer focused question and answer service. So if you need a coding question answered you can sign up and a real live person will email you right back. This is sometimes better than Stack Overflow or Quora because at times no one answers your questions. The Experts Exchange isn't your traditional Freemium business. When you sign up you are signing up to a paid plan (with a 30 day free trial). However when you become a customer you are given the opportunity to answer questions, the more questions you answer the cheaper your member ship becomes. This is a really interesting freemium approach. Their "Free" customers are helping Experts Exchange get paid customers. What I like:
  • The plans get cheaper if you pay for multiple months
  • They allow you to earn Free. It isn't given.

So what am I going to do?

I'm going to take the best from each one:
  1. Launch a free plan that is amazing. We aren't the first service that will be doing what we do so we need to go the Mailchimp route.
  2. Allow people to earn more features and storage if they share our service (similar to dropbox)
  3. Make our paid plans feel amazing by adding a fun icon next to them (similar to carbonmade but won't be as awesome)
  4. Make our highest paid package displayed to the left and offer multiple barriers so we can take payment on day one for bigger companies (similar to wufoo)
  5. Learn from our data after 7 months and either de-emphsize our free plan (like 37Signals) or over emphasize it (like dropbox).

Here is what my current pricing page looks like: Digioh Pricing Page

What do you think of my freemium pricing analysis? Any tips or tactics you've learned from your own freemium pricing experience?  

Posted by Dharmesh Shah on Tue, May 22, 2012

COMMENTS

Seems like a good business model of future if you keep your self in touch with you customers

posted on Tuesday, May 22, 2012 at 10:22 AM by Muhammad Abbas Khan


Thanks for your great post with very interesting material.  
 
Quick personal feedback: 
 
You did a great work already and I give you only negative points which is I think the most useful.  
 
- Red checks for the pro plus plan look really weird to me because red means "no" so it's confusing and unusual 
- I feel that the price difference between your 2 plans is too small in regard of the difference in services. You offer not only more data but phone support with is an expensive feature and really great for users 
- It seems that you use dark print for your "preferred" plan and grey for the free and pro ones. Another option I like is to have dark printing for all paying plans and to identify the preferred ones in a more global way like making it a little bit bigger or framing it differently.  
 
A last point. The optimal number of plans is a difficult question. You may also consider having 3 paid plans. A first one a little bit cheaper corresponding to your pro plan, a second with more data but no phone support and a third one with even more data and phone support to make it more premium. Just a thought. I know that usually simpler is better. 
 
Good luck and thanks again for sharing your findings

posted on Tuesday, May 22, 2012 at 10:23 AM by Pascal Coupet


Worth noting Basecamp have since killed their Free Plan on the new Basecamp.  
 
They also rounded their pricing ($20, $50, $100, $150) and extended their free trial to 45 days. 
 
All of this points to a more mature brand who don't necessarily need volume with the Free Plan, and ongoing optimizations to a more simple offering. (where many of these other sites fail).  
 
All products & audiences are different, so you're right in listening, learning and optimizing over time.  
 

posted on Tuesday, May 22, 2012 at 11:36 AM by Glenn Rogers


Thanks for sharing this wonderful insight on a topic that is rarely discussed. I read somewhere about the psychology of pricing businesses use all the time. For example when large retailers want to sell a certain brand of TV, they price and display it in between a lower and a higher priced model. The consumers generally have a hard time deciding on the best value and they often perceive the middle tier as the best value for money. You should also look at ConstantContact pricing model. Good luck and stay flexible.

posted on Tuesday, May 22, 2012 at 2:17 PM by AJ Durrani


Great to see your thought process as you looked at various Freemium offers and determined what you liked, what you didn't like. 
 
I too looked at the Intuit pricing page and found it incredibly confusing. 
 
One issue though is that the metrics for these Freemium apps are not known -- what is their conversion rate and how is it measured? What are their costs to support the free users? How big is their target market and their user base? The reason these issues are important is that Freemium may make perfect sense in a market that has 100s of millions of potential users, if the marginal cost to support a free user is near zero, but no sense in a market that has hundreds of thousands of users where the free users cost real money to support that cannot be fully covered by the paid user conversions. 
 
Sadly, these statistics are not generally available as far as I know. 
 
The rumor mill says that many Freemium app vendors are stuck in the 1/2% to 2% range and struggling to be profitable. Of course not all vendors have the goal to be profitable but rather are focused on gaining market share and traction. 
 
BTW for those of you in the Silicon Valley/SFBay area we are running a Freemium Meetup on the 2nd Thursday of the month. All are welcome to come. 
www.meetup.com/freemium 
@freemiumsfbay 
 
Cynthia

posted on Tuesday, May 22, 2012 at 4:14 PM by Cynthia Typaldos


Thank you for sharing your findings Rishi!  
 
I do aggree with Pascal, the red colour is a 'no no' for me as well. I understand what you wanted to do there, but maybe try a different, more neutral colour. Orange? - Just a thought. 
 
The free plan looks viable and a good option to start with for completely new customers who just want to see what you guys are all about. So all in all, seems you are on the right track:) Best of luck!!!

posted on Wednesday, May 23, 2012 at 4:01 AM by Vytis Duknauskas


Hi - Good insight and examples.  
 
My suggestion is never miss an opportunity to appeal to the triune (reptilian) brain.  
 
The limbic system is responsible for emotion, motivation, behavior, etc.  
 
The most common technique for the appeal is to show attractive people doing real stuff. The Intuit page gets it, but then falls down with a rather murky offering.  
 
People are far more likely to convert is they have an emotional tie to the experience.  
 
Achieve this with some great photo stock. Madison Avenue uses the reliable pair of babies and bikinis, of course. Makes sense to show exactly what you want people to do (like Intuit).  
 
Bottom line? Reflexive response from the triune brain will improve paid conversion across-the-board. -j

posted on Wednesday, May 23, 2012 at 5:51 AM by John Maloney


Great analysis and well written article. One trend I noticed throughout your analysis is the amazing free offers (dropbox and mailchimp) structure their plans to encourage the customer to try it, use it and eventually hit a threshold (storage space, subscriber list) that causes them to upgrade. This is very different from the companies that are segmenting customers based on a profile (# of users, features, additional support requirements, etc.) 
 
Deciding which one is best for your company comes from knowing who your customer is and understanding how/why they use your product. From there you should be able to slice up the plans and maximize the # of paid users. 
 
One last thing to consider, is there something novel you can give away for free that is unmatched by all of your competitors? Think back to when Gmail launched and was offering 1Gb of free storage space with every account. Always a great way to break through the clutter and get people talking about your product. 
 
Best of luck and I hope to read a follow up post down the road about how things turn out.

posted on Wednesday, May 23, 2012 at 4:42 PM by Derek Story


Rishi, 
 
Great analysis and great examples. On the question of prices increasing or decreasing as you read left to right, Lincoln Murphy explains why they should decrease 
http://sixteenventures.com/pricing-page-design-high-to-low

posted on Sunday, May 27, 2012 at 4:44 AM by Giles Farrow


You did not mention Google Drive in it. Any reasons?

posted on Wednesday, May 30, 2012 at 3:02 AM by Fahad


Hi, 
Great analysis! Here are my answers to your questions: 
 
How generous should our Free plan be? 
-> As generous a Free plan should be. Give them an incentive to look at your product and know a bit about it. Give them a chance to try it. Does not mean give them access to full product.  
 
What limits should we place on it? 
-> Time limit of 30 days, if it's applicable. Most users are busy and they may not get a chance to even look at the product if you put a time limit of under 30 days.  
 
We need our free plan to be something amazing so people will sign up. However we don't want it to be so amazing that they don't ever need to upgrade. 
-> Exactly! Give them a sneak peak and incentive to try it out. And you can do that for asking them to try it out free for XYZ time. So if you have 10 features in your product, offer 3-4 features for free so that they know what your product is about and how it works and how it can benefit them. 
 
Hope this helps.

posted on Saturday, June 02, 2012 at 2:25 AM by David


This is fantastic Rishi. I'm going through the same exercise with my start-up. 
 
A couple of thoughts: 
- Have you considered a 30-day trial period? One that includes real-time analytics? My thinking here is that this forces engagement as/when the account hits that 30-day mark, which you can treat in a couple of ways. Either you can let it go (if the data says that's the right thing to do) or you can reach out to offer an extension or even a little support/guidance. 
- Is it necessary to offer a free trial at the Pro and ProPlus levels?  
- Is there an opportunity for "enterprise" customers, the services/features of which would go above/beyond the three tiers you've defined at this point? 
 
Nicely done and thanks for sharing.  
 
James

posted on Saturday, June 02, 2012 at 9:28 AM by James Sandoval


Freemium? I'm just hearing this word for the first time. But i pick your idea and analysis. You truly seem to understand your prospect. Nice one

posted on Saturday, June 02, 2012 at 3:20 PM by jide


Hello, thanks for this great article.  
I'm not sure placing the highest price on the left is a good thing, because I think you'll lose some people that read too fast and that think you product is too expensive.... 
The standard is free to expensive from left to right, I think it's better.  
The dropbox aproach is very interesting to gain new customer in a viral way .  
 
Sébastien

posted on Sunday, June 03, 2012 at 10:13 AM by Lucas


Nice compilation. I'm in the process of making pricing page for my startup. My SaaS targets enterprise customers as well. How to deal with enterprise customers in SaaS model? Do they use our credit-card recurring billing system or they prefer someother mode of payment?

posted on Monday, June 04, 2012 at 4:54 PM by Satish


Hi, 
 
 
 
I like your detailed review of online pricing. 
 
 
 
I personally always have a problem deciding between free and paid version. One of our free software utility is downloaded by more than 10,000 users but never able to convert it in paid version. 
 
Recently we are in the process of launching an Online ERP for trading business. In start we are planning to give its trial version also but when we analyzed this option we feel following issues 
 
 
 
1. It’s a complete ERP hosted on Windows server and using Microsoft SQL Server hosted at Rackspace. So we need to pay money to keep the server online 
 
2. We are keeping separate database of each client, so we need to provide separate database even for free users 
 
3. In our case we had one more issue of data security so we are offering complete solution that they can host on their server. 
 
 
 
I feel a company which is not funded by outside and supporting its product from its resources it’s an expense. So we took other way 
 
 
 
1. We are providing fully working demo version 
 
2. We are trying to provide as much documentation as possible including video. 
 
 
 
Let me know what your views are and how we can make our offer better. 
 
 
 
Thanks & regards, 
 
Tariq 
 

posted on Monday, June 11, 2012 at 10:10 AM by Tariq


Hi, great article. And actually we did the same: Looking how others are doing. But to make the highest prices left, we'll consider now. It would be really nice if I get some feedback on http://tingl.com/en/plans_and_pricing  
BR, Erich 
tingl live chat and click to call contact button | Plans

posted on Wednesday, June 13, 2012 at 3:30 AM by Erich


By definition  
"what is free has no value"... 

posted on Wednesday, June 20, 2012 at 10:54 AM by Gilles


you said you were going to put the highest pricing on the left going down towards the right but the picture at the end has the opposite, why?

posted on Saturday, June 23, 2012 at 11:43 PM by Dad


Fascinating article, especially the tip from Wufoo about placing the highest price on the left.  
 
I was wondering if that would still be as effective with less pricing options - let's say with three rather than five? 
 
A hunch tells me not, but it's just a hunch.

posted on Friday, July 13, 2012 at 8:49 AM by Caimin, Genius Startup


Comments have been closed for this article.