Pros and Cons of SaaS Freemium Business Model

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Translated by Núria Adell.

The statistics on the popularity of WordPress haven’t ceased to increase in recent years. In the same way, the best companies are using WordPress more and more to manage the content of their website, and so the market for the development of WordPress plugins and themes is still rapidly rising.

Currently, you will find more than 48,800 plugins in the WordPress Directory, and more than 5,165 paid plugins in the CodeCanyon directory… 😱  This is insane for those looking for something specific, but fortunately, finding plugins is easier each time thanks to the reviews and rankings.

One of the main problems for plugins developers if they want to make a living out of it, is that it’s a very competitive market. Not only you have to make good quality products, but you must also make sure that your objective public is willing to pay for the added value that you offer for the non-free service.

Maybe one of the problems of free software, possibly because in English we use the same term, is precisely the wrong idea that free software implies that the software is also free in monetary terms.

Having said this, and without discouraging anyone who wants to enter this world, one of the first questions that come up is what business model should we follow with the sales of plugins. One of the most popular options is selling them directly through a marketplace. Another attractive alternative, and of which I would like to share our experience today, is that of adopting a “SaaS Freemium” business model.

Basic definitions

The business model of software as a service (Saas) is characterized by offering the service (or the use itself) of software through the internet, and charging for its use through a subscription.

Freemium is a pricing strategy in which some basic free services are offered, while others that more advanced or special are paid for.

Be careful! Don’t to mix the Freemium strategy with that of a period of free trial. When we talk about Freemium, we’re referring to a pricing strategy in which the user can use something free for an unlimited period of time. It’s very different to the free trial that offers a paying product for a period of 15 or 30 days for free so that the user gets used to it.

“Free Trial”: our experience

In fact, when we started offering Nelio A/B Testing, we first decided to offer the product for free for a period of 2 weeks. When the user signed up, we didn’t ask for any type of paying information, so that he would have the freedom to try it without any pressure or commitment involved.

The number of people who tried the free version but then didn’t subscribe was so big that it demoralized us. What’s the point of having people signed up that will simply disappear after 15 days?

Thinking that perhaps it would be a better idea to create a little bit more of commitment, we decided to do an A/B test (obviously, with our own plugin Nelio A/B Testing 😉) of the free trial. Namely, from all the visitors that signed up for our free trial, we asked half of them to give us the paying information to facilitate the conversion later, while we asked the other half for nothing, just as the beginning.

Indeed, and as we had suspected, the test showed the conversion amongst those who had given us their payment information from the start was higher. We had managed to avoid those subscribers who would never be willing to pay for the product. Thus, we decided to apply this second option.

Captura pantalla antigua Nelio AB Testing
Screenshot of the old pricing page of Nelio A/B Testing, in which we offered a free trial period of 2 weeks.

We made sure that, after the trial period, we warned our clients we would start charging for the subscription. Nevertheless, there was still a number of clients that, once the trial period ended and they saw the charge for the subscription, demanded a refund. Of course, the refund was always immediate, since client satisfaction has always been our main priority.

But even though the dropout rate had clearly gone down, having to do these refunds was an unnecessary expense and effort. This is how we reached the conclusion that we wanted to opt for a freemium business model.

SaaS Freemium Alternatives

When you choose a freemium model in which you will offer a “lite” plugin (for free) and a premium one (by paying), one of the hardest questions you must address is what the differences between the free and the paying versions should be.

The dilemma is always the same: a free version with a lot of attractive features will draw more potential clients, but you have to be careful not to make it so complete that the paying version is not worth the money anymore. On the other hand, if it’s only the paying version that has most of the attractive features, of course there will be more conversions, but you have to make sure the free version is not so simple that it doesn’t attract enough potential customers.

In general, the most attractive alternatives for WordPress plugins in which a SaaS Freemium model is used are:

From here, we can find variations in between the two previous alternatives.

What were our options?

Free plugin with a limit of volume

In the case of Nelio A/B Testing, once we were set on using a “freemium” model instead of a free trial, we decided to offer a free version with all the features included in the Basic Plan. This way the user is able to create all the A/B test experiments he wants. Such version has a limited amount of visits you can receive as part of your test.

Advantages: the greatest advantage of this option is that the user can create any type of A/B test and therefore, test all the features of the service. This was our objective: we wanted the user to know the capabilities of the plugin.

Disadvantages: by limiting the number to 1,000 visits, it’s possible that, for most part of the cases, this is not sufficient to reach significant results in an A/B test. However, we didn’t want to increase the number much more, since this would imply a higher expense for our cloud for a non-remunerated service. And as I have previously mentioned, it’s all about promoting the conversion.

In the case of Nelio Content, we also wanted the free version to have the maximum number of features, but with a limited volume. In this case, we found it a little bit harder to know where to set the limits. Finally, we opted for a free version that, to start with, basically had most of the features of the Personal Plan.

Nelio Content Pricing Screenshot
Nelio Content pricing screenshot showing the features available in the free version of the plugin

The main limitations of the free plan are the following:

  • in the free plan you can only connect to one profile per social network to promote your posts.
  • you have a limited number of social messages you can program. More specifically, it is only possible to send a message per social profile at the moment of publishing a new post in WordPress.

In any case, we have planned the development of new features that will only be available in the paying versions.

Advantages: the user can try most of the features. Also, if you have more than one profile per social network, or want to plan more messages to promote your posts, you should subscribe to a plan.

Disadvantages: the user cannot test the time he would save and the impact that planning many more social messages would have if he was paying.

In fact, in the case of Nelio Content, we have observed that it’s very important that the user can actually try and create more social messages on all social profiles he wants.

How can we manage to get our users to try all the features without a very elevated cost? Remember that it’s not only the cost of the cloud you’re paying for, but free users also expect a support service.

Other companies, such as Chargify, which almost ended up bankrupt with their freemium model, currently offer a free sandbox account. This means that they create a free trial (“sandbox”), in which the user can “try” all the features in a free version and then convert to a premium account.

In our case, we love to contribute to the WordPress community and offer free plugins. So in order to encourage the conversion, we find it more interesting to opt for a model similar to that of Freshsales, in which you subscribe to a free version and, from the product itself, you have the option to test the premium version for 30 days. Once this period expires, if you haven’t subscribed, you carry on with the free version.

Conclusions

Creating a SaaS Freemium model isn’t easy and it requires decision-making that, beforehand, you don’t know whether you’ll get it right or not.

The higher the amount of free users, the bigger the number of potential clients that can end up converting. However, this has a cost that can sink the business. It’s critical to keep a good control of this cost, so you should make sure that the free version is sufficiently intuitive and easy-to-use so that it doesn’t create too much support work. In fact, the majority of the problems that we have encountered are more related to the “cursed scripts of other plugins”, as David talked about on When WordPress’ Freedom Kills Your Business.

In addition, you must also take into account that if the free version is too amazing, it won’t have a big conversion.

On the other hand, if your free version is not sufficiently attractive, it’s much harder to get to your objective public and gain clients. What a dilemma!

Dilema del modelo freemium
Is the cost that I pay for free users smaller than the benefit provided by those who end up converting to the paying plan?

You should also be aware that you will find users who will never be willing to pay for a plugin and others that, fortunately, will pay for a service that provides an additional value.

So I believe here’s the key of your premium version: your plugin should offer a service that adds a value that’s worthwhile paying for.

What is your experience? Have you encountered the same dilemmas? Let me know on the comments.

Featured image by Clem Onojeghuo.

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Ruth obtained her PhD in Software Engineering at UPC and did a Master of Information Systems at DePaul University (Chicago). She has professional experience in the business world and at the University. Ruth has been University Lecturer at UPC, Vice-Dean for Corporate Relations of the Barcelona School of Informatics, and Associate Lecturer at ESADE. She specializes in software engineering and information systems management. She is also certified in Inboud Marketing.

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