The Psychological Difference Between Freemium & Free Trial Plans
I’ve been in hiding for the last few months, mainly to work on my startup, serpIQ. We just passed the one year milestone, which is an awesome and surreal feeling simultaneously. And in that year, to say that I have learned a lot about startups and business would easily win “Understatement of the Year” at the StartUppies (That’s what I assume an award show for startups would be called).
One major misstep I think that we made was back in February of this year. Amongst other things, we switched from a usage limited free trial plan to essentially a freemium plan. Previously, you could sign up and analyze 5 keywords for free, then you’d have to upgrade to continue. Now, you can sign up and analyze 5 keywords the first day, then 2 per day after that. When we made this switch, the mentality was that this would allow for people to have a longer time period to test out serpIQ before pulling the trigger and upgrading.
However, after doing a lot of research (and looking at our numbers) it appears that there was a more subtle thing going on that was negatively impacting our bottom line.
Before I dive into the psychology here, I want to define freemium and free trial and also drop in some cautionary statements. So first, here are the definitions:
Freemium: A free plan (usually limited in how much you can do with a product, whether that’s save pictures, analyze keywords, etc) with premium plan options to upgrade to once you outgrow it. Usually, freemium is feature or usage limited, but unlimited in duration.
Free Trial: These can have a few permutations, but I’ll explain the most common one (and the one we’ll be using in the next iteration of serpIQ): A “mini-plan” that allows you to try all of the aspects of a product or service for a limited amount of time (usually 7 days, 14 day, 30 days, 45 days, or 60 days). Sometimes companies will charge you at the end of the trial, sometimes they won’t take your payment information until after the trial is over. Regardless, the main point is that free trials end at some point.
Now, time for my cautionary statemenst:
- I am not a psychologist, I just like psychology (and read about it) a lot.
- Most of my post here is going to be anecdotal, I can’t share performance numbers yet as we haven’t launched our new setup yet. I’m merely explaining the mindset behind the changes we’re making. Freemium works. Free trials work. Your mileage will vary, of course.
Ok, so let’s get going.
There is a subtle psychological difference between Freemium and Free Trials in the mind of your potential customer.
When a customer sees that you have a free plan, you’re planting a seed in their brain that your product, in some form, is free. This has a domino-like effect on your customer’s mindset that will affect their purchasing decisions from the moment the seed is planted.
What’s happening here is that when a customer gets the idea that your product is free (even if they don’t have all of the features of a premium plan) they immediately start categorizing it with all of the other free products and services that they use online. Over time, friction will begin to grow in their minds towards the idea of ever having to pay for this supposedly free service of yours, and your product will need to overcome this friction in order to convert them to a paying customer.
Additionally, by offering your product for free, you’re subconsciously telling your customer that “yeah, our service is so cheap to run that we can afford to let you use it for free”. This puts your customer into the mindset of “well if it doesn’t cost them anything for me to use this, why should I pay them for it?” If that thought is running through your customer’s head, you’re dead in the water.
Of course, there are thousands of instances where the freemium model works for companies, but the reason it works for these companies is that they have architected the freemium plans very very well to essentially be the equivalent of getting a cheap buffet at a nice restaurant while all the other patrons are eating their awesome steaks behind glass a few feet above your head.
These freemium customers need to be enticed by all of the cool stuff they *could* have if they just cross that divide and upgrade their account to a premium plan. You’ll notice that companies that employ a freemium plan model are usually companies where the cost of offering what they do for free is extremely cheap (to the point of being negligible in the overall scheme of things).
A good example of this is Evernote. The cost of storing the data you could possibly put into Evernote is ridiculously low. That allows them to offer you the whole product for free, where you can fall in love and start incorporating it in your life. But then one day all of a sudden, you’re out of space. You can’t bear to part with Evernote at this point, you rely on it every day. So the friction to upgrade your plan is nearly gone and you punch in your credit card info.
As you can see in this graphic of various Evernote conversion numbers, they don’t reach peak conversion numbers until TWO YEARS after signup:
Now, with serpIQ, we incur costs on every keyword that’s processed in our system. Granted, it’s a small amount, but we’re still paying for premium APIs and other services, where there’s a direct data processing cost for each keyword that comes through our system. And there are a lot of companies out there with similar setups where there are real costs associated with usage (beyond negligible storage and usage costs, like with Evernote or maybe Basecamp). These types of company’s are much better suited for a Free Trial as you can control your costs better and you can position your product better as a Premium Service that costs money to use.
The main motivating force behind the freemium model is that you can use it to grow a very large userbase and then even with low conversion numbers, you can still become profitable. The risk you run is that even with the cheapest services, there are still costs that can add up (especially when you start getting thousands upon thousands of users) so if you don’t start converting like you thought you would, your growth might actually be the death of your product.
Remember, more users does not mean more profit. I can’t stress this enough. You have to monetize effectively to grow a profitable business, otherwise you’re just becoming the popular kid in school.
The Psychological Impact of Offering a Free Trial
The important psychological difference with a Free Trial is that from the moment the potential customer comes in contact with your product (and free trial) they are being reminded that they’re being allowed to TRY your product, and that they have a LIMITED amount of time to try it before they have to BUY it.
Your product is in no way free, you’re just reducing the the initial signup friction. This is a huge difference from using a freemium plan, where a user signs up under the pretense that as long as they stay within certain limits, they can always have free use of your product. With a free trial, the clock starts ticking the moment a customer registers and they’re completely aware of this.
This opens the door to a very different marketing strategy for the Free Trial companies. Let’s say you’re going to offer a 7-day Free Trial to your product. When your potential customers sign up for your free trial, you need to be doing everything in your power to show the true utility/power/greatness of your product in those 7 days.
You need to not only walk them through your product and show them how it all works and make sure their engagement is high, you also need to be emailing them with tips, tutorials, testimonials, videos, anything that will convince them to come back and USE YOUR PRODUCT.
You need to force your customer through your product’s entire workflow repeatedly in that 7 day period so that they can feel what it’s like to actually own your product, and hopefully become dependent on your product to the point where stopping use of it will be a bigger burden than paying for it and signing up.
The advantage you have when offering a free trial versus a freemium plan is that this push to convert your users to paying customers is transparent. They knew when they signed up for your trial that they were doing a digital test drive of your product, and they’ll subconsciously already be in a buying mindset, whether or not they end up buying your product.
From day 1, you’re showing the customer that your product costs something to use, and your job is to show them in that trial period that the benefit your product brings to them blows away the cost they’ll incur by signing up.
Nothing is hidden from your users in the trial period: they can use your product and its features, and if they want to continue, they need to become a paying customer. They get a taste of everything, which opens the door to your customer growing dependent on your product and the benefits it provides them, which is how you convert customers. You gain control of your funnel and subsequently gain leverage in the sales process.
A perfect example is HelpScout (I actually got a trial-ending reminder email while writing this post). I’ve already started using their product, and I like it a lot. And since it’s a time limited free trial, they have me right where they want me. I now need them for my company, so when I get this email:
…my first thought is “OH SHIT my company is going to go under without this, of course I’m going to sign up right now!”
Boom. They converted me.
Now of course, this all will vary widely by niche and market. serpIQ is in the Internet Marketing and SEO niche, where customers seem to be divided between people who want everything for free or who will pay a premium for a product, with very little left in between for a modestly priced product. So I’m in a position where I have to decide what direction I want to aim in terms of acquiring new customers. As I’ve been looking at our freemium option numbers, it just doesn’t seem like the right position for us: customers in this space will gladly use something for free indefinitely if they can.
This is a topic I’ve been thinking about A LOT in the last few months. Freemium and Free Trials seem roughly equivalent on first thought, but the subconscious differences can have a massive impact on your bottom line. You have to look at what you’re offering, what your competitors are offering, your costs, and ultimately your growth strategy to determine what is best for you and your company.
The bottom line is this: with both freemium and free trials, your job is to convince a potential customer that your product is worth paying for. With a freemium option, you will be creating your own friction by making your customer treat you like all of their other free services they use, making it hard for you to ultimately convert them. With a free trial, you have much more control over the sales process and funnel and can architect everything around the VALUE of your product and the BENEFITS it will bring to your customers (once they sign up).
I plan on covering this topic a few more times from some other angles, so I would love to hear your feedback on this post so I can use that feedback with future posts.
Plug: I learned a ridiculous amount of stuff regarding Free Trials and SaaS marketing in general from this course: Free Trial Dominator Lincoln is a smart dude and is super responsive, and this was a great investment considering how much I’ve already taken away from it. I recommend you check it out if you’re into SaaS products.