This is part of a mini-series of articles on pricing strategies.
Historically—and especially before the late 90s—most companies had one monetization strategy (and it probably wasn’t called that): the one-time transaction.
They had a product and people bought it. When it wore out, broke, or a new version came along, companies hoped customers would buy another one.
Of course, there were exceptions. Cable television, telephone service, newspapers, magazines, and even milk delivery were some of the pioneers of the subscription pricing strategy.
Then cloud computing and software as a service (SaaS) were born and everything changed.
Salesforce.com was the first software company to move to the cloud in 1999, offering enterprise applications on the web. Amazon started a couple of years later, and it wasn’t long until all of the big players in the software space joined them.
By 2010 most the small players were also looking to take advantage of this new way to do business. From all of this, very different pricing strategies from the old 'one-time transaction' were born.
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Over the next few articles, we'll look at many pricing strategies. But this post will focus on one commonly known as Freemium + Upsell.
What is a freemium pricing strategy?
In a freemium pricing strategy, a company offers a free-forever service, but also offers a paid version—or multiple versions—which include more features and functionality, and perhaps remove advertising. Freemium pricing is often used in the SaaS and gaming industries to encourage customers to subscribe to their basic features so they can then upsell them to become paid users.
LinkedIn is a good example of the freemium + upsell pricing strategy. Anyone can sign up for a LinkedIn account—it's free and all you need is an email address to get started.
Once you sign up you can create a profile and start asking people to join your network. There’s no limit on how long you can keep what LinkedIn calls this Basic account.
But, if you want to see a full list of people who’ve viewed your profile, use the service’s InMail feature, or get better, faster access to job posts, you'll need a Premium account. And that upgrade comes with a price tag.
LinkedIn also does a great job of incorporating advertising for its Premium account in the basic or free account. It ‘teases’ you by giving you some of the information, and then showing you how you can get more.
If you click one of the teaser ads strategically placed within the free account, you’re taken to a 'buy' page where you can pay a monthly or an annual fee—often offered at a discount—for a LinkedIn premium account.
Ultimately, the freemium pricing model is a customer acquisition strategy that depends upon bringing customers in with a great free service and then letting them convince themselves—with the help of some clever marketing—to upgrade to a paid version because they see value in it.
It’s about letting your product onboard customers and sell itself.
Freemium + upsell pricing as part of product-led growth
Product led growth is a strategy that uses a business’s product to acquire, upsell, and retain its customers. And the freemium + upsell pricing strategy is an important part of this.
Rather than doing a lot of research and sales calls, many customers would rather just try a product out for themselves to determine if it will be of value. And when they experience a degree of success or a meaningful outcome while using a freemium version, they become prime candidates for a more organic upsell.
- less effort needed to get them to pay you, and
- greater ownership of the lead because they’re already using and seeing value from your product.
Of course, there’s a lot more to product-led-growth than just a freemium pricing plan. To read more about the rise of product-led growth in SaaS, hop over here.
Will a freemium + upsell pricing strategy work for your SaaS business?
As an acquisition strategy, the freemium + upsell model can be a great way to quickly grow your customer base—especially if increasing the number of users adds value to your product.
This model emphasizes the product while reducing effort and spend in areas like sales and customer onboarding.
In fact, freemium products convert customers without the help of a sales team 25% more often than a free trial model. However, layering strategic sales efforts on top of either experience can increase the chances of upselling.
Of course, for other SaaS businesses, a more premium approach can be better than freemium. If your business targets enterprise-level customers with a more complex and customizable software solution, a freemium plan might not make sense.
This is just one of the various pricing strategies we’ll look at in this blog. Are you using one or several of these strategies?
To read more on our pricing strategies series, check out: