Today, there are 30,000 SaaS companies around the world. And while the market can seem a bit saturated, the truth is that software is a booming industry and it shows no signs of slowing down. If you’re thinking about launching a new product of your own, there are plenty of things to consider before writing your first line of code.
How you acquire customers is probably the biggest challenge of all. There are a few growth models that are popular with SaaS, but which ones makes the most sense for you is something up for testing and research. There isn’t a one-size-fit-all solution.
Let’s discuss each in detail to help you make an educated decision.
The SaaS business model
Software as a service is a subscription-based business model. This means that instead of selling a product for a one-time fee, you charge customers monthly for the “service”, i.e. using the product. This means that instead of a one-time fee of e.g. $997, you charge customers $19 per month to use your software.
This is SaaS at its simplest. The models we’re going to mention below differ in some aspects but at their core, each of them is based on subscriptions rather than one-time transactions. The subscription model is popular because you get a constant income every month, rather than hoping to sell big-ticket items at a bigger price point.
It’s easier said than done because there are many pitfalls with SaaS pricing and growth. This is why there is no single way to grow a product. Rather, there are several that we’ll discuss now.
Opt-in free trial
The free trial model is one of the most widely used in SaaS. The concept is simple - instead of trying to charge customers immediately for using your product, give them some time to try it out for free. The idea is that they perceive the value in the product quickly and upgrade from a free trial to a paying customer.
However, not all free trial products are the same. In the opt-in free trial model, customers don’t need to leave any payment information to get started. All it takes is signing up with their contact data and they’re ready to start using the product.
The upside to this growth model is that there is less obligation for the customer to try it out. According to research by Totango, this results in high free trial conversion rates, of about 10%. With no thresholds such as leaving their credit card info, starting is less of an obligation.
The same research states that the paid user conversion for this model on average is 15%. This means that out of all the free trials that were started, 15% should upgrade to a paying customer. Note this number for future reference.
If you don’t have a well-known product and you’re battling against fierce competition, this might be the best model to get started with. Since starting out is easy for customers, you’ll have a higher number of free trials and a better chance of converting some of them to paying customers later along the way.
As you build a brand and get more paying customers, you can slowly transition to the next growth model.
Opt-out free trial
In this SaaS model, the user also starts with a free trial to get a taste of the product. The only difference is that here, they have to give their credit card details when signing up. Once the free trial expires, they get billed just like any other paying customer.
The obligation from the customer here is higher as they have to provide more than just their contact details in order to get started. Naturally, the conversion rates are different.
According to the same research by Totango mentioned above, the free trial conversion is significantly lower compared to the opt-in free trial, at 2% (versus 10%). As they have to give their credit card info, the number of customers willing to try is naturally lower.
However, the paid user conversion is significantly better - at a whopping 50% compared to 15% when they do not provide credit card data. Logically enough, those that provide their payment info are more willing to pay once the trial is over.
This pricing and growth model can extremely lucrative if you’re certain that your conversion rate from a free trial to a paid customer is going to go through the roof. It’s not the most ideal model to use if you’re just starting out, but once you get some traction and build a name for yourself and your product, it’s a surefire way to grow your customer base and revenue.
Usage-based free trial
The usual free trial period is 7, 14 or 30 days, depending on the industry and niche. However, you might want to take a different approach. Some SaaS products limit the free trial based on the use of the product and once you run out of credits (or whatever the currency is), you need to upgrade to a paid plan.
This is a double-edged sword as you need to figure out how much customers use your product before upgrading to a paid plan. There is a chance that they may never upgrade if the free trial is too generous. On the other hand, set the bar too low and their free trial expires before they see enough value to upgrade.
A great example is MailChimp, one of the best-known email marketing software companies. They have a forever free plan that allows you up to 500 people in your email list and up to 2,500 emails per month. If you don’t go over that, you can keep using the product for as long as you want.
While we can’t tell you the conversion rates for MailChimp, there’s a pretty good chance that this model simply works and gets a lot of free users to upgrade. If you use the software properly, you’re going to go past 500 subscribers in a flash and 2,500 emails per month is actually not a lot. Then there is the fact that in this plan, you have to use the MailChimp logo in all the emails you send.
Dropbox is another example of this model that lets you use the storage service for free but you only get a certain amount of storage in the free plan. As you want to add more files, you’re either forced to pay or constantly overwrite existing files with new ones.
This is a handy model that is not too common but if it works for giants such as MailChimp ($800 million annual recurring revenue), it can work for many other products as well. The trick is finding out what aspect of your app to limit and how.
If we were going to pick nits, we could say that usage-based free trials belong in the freemium category. Nevertheless, this SaaS growth model deserves its own section. There is a high chance that you’ve already used a freemium product and that you’re using one right now.
The freemium model means that the product is entirely free and can be used for free indefinitely, but in order to get access to the high-value features, you need to upgrade to a paid plan.
One of the most famous examples of freemium is probably Canva - a design tool that has become a staple in many marketers’ toolboxes today. You can continue using the free version for an endless amount of time after signing up. However, the paid plan is where the fun starts.
With the paid plan, you get access to features such as the brand kit, background remover, magic resize tool, a large pool of stock images, a content calendar, and much more. Sure, you can do a lot with the free version, but there is immense value in subscribing to the paid version of Canva.
They are doing it right, though, with a whopping $1 billion annual recurring revenue. The trick with freemium is knowing which features to leave in the free plan and which features that bring value should be a part of the paid plan.
Needless to say, it’s an excellent pricing model, and just like the ones mentioned above, it requires careful consideration about what (not) to include in order to get the most revenue.
Which growth model is the best?
There really is no right answer here. The model that works for you will depend on your industry, niche, type of product, target audience, monthly pricing, and much more. The great thing is that you don’t have to firmly stick to one growth model. However, if you do change it, make sure to keep in mind the customers that are already paying for your product.
And don’t worry, there are very few SaaS founders and product experts that get it right on the first try.
You don’t have to feel your way in the dark, though. You can use FeedBear to collect feedback about your pricing, features, or literally anything in your product. Sign up for your free trial today!