SaaS Freemium business models

Freemium models aren’t a new strategy, but they’re a significant and dependable one.

Dependable and reliable might not exactly line up with ‘free’. You’d be right to ask “Is this free product quality? Can I rely on it?”

The fact is, Freemium models must give customers a high-quality, free product offering. A Freemium model means:

1. Delivering a reliable, free product to your customers
2. Encouraging those same customers to upgrade to an equally high-quality, but advanced, paid version of the product.

Freemium is a dependable strategy that often supports open source software, specifically products that fit into the Software as a Service (SaaS) category.

This article explains how Saas Freemium business models work, and the pros and cons of establishing a Freemium strategy for your SaaS product.

What’s a Freemium model?

Quick question – If you were running a business in the 1850’s, who would you ask for advice? 

If you tracked down one Mr.Benjamin T. Babbitt, he’d advise you to give something quality away for free. The idea of giving away free samples began in the 1850s when Babbit realized that once customers tried his product for free, they were more confident in paying full price for the same item.

That’s the exact concept used in a SaaS Freemium business model. Except that SaaS gives users have immediate access to the SaaS software through an internet connection (not available in the 1850s).

It’s generally considered that SaaS Freemium business models became more active in the mid 2000s, however it’s been reported to have appeared as early as 1994.

How Freemium and open source interact

The practice of offering free products to stimulate usage and interest, is successfully used across consumer, business and technical marketing playbooks. Specific to the tech industry, however, is the added opportunity of incorporating  open source (community supported) offerings and/or products into a Freemium model. Doing this, you can:

• Invite public contributions to help refine and maintain your product.
• Collect metrics through your open source repository
• See how various aspects of your project are received by your community and customers.

What’s most important to consider when combining Freemium models with open source software – the product quality and your community.

If the difference in quality and useful functionality between your core, open source product and your paid, premium product becomes too great, you run the risk of customers and your community moving on from your project.

Freemium revenue and business models types

If you’re looking at trying a Freemium model, possibly with your open source project, take a close look at the different types of Freemium models.Also bear in mind that these are not prescriptive, and there can be combinations of more than one type within a single strategy:

• Time limited Freemium: Offers the product, full featured, for a limited time. Once the time runs out, the customer automatically changes back to the basic product.
• Customer type Freemium: Products are provided for free to a specific customer type – students, concession, NGO, startups – and is available at the paid level for all other customers.
• Support type Freemium: The product is available for free in its entirety, however support for setting up and maintaining the product is only available at the paid level.
• Alternate revenue Freemium: Income and value is indirectly derived from the data customers provide, or through their activity when using the free, SaaS product.
• Space limited Freemium: The product is available for free until a certain storage space or use threshold is reached. Customers can change to the paid level or adjust their use down.

Saas Freemium pros and cons

While Freemium is often remarked on as being successful, don’t forget that there are also possible downfalls:

1. Freemium may help you get your product to customers faster. But a major flaw in the model is that you need to make sure your customers remain loyal to the product. This requires you to build a careful strategy around retention, and tracking metrics. Remember, the number one goal of Freemium is to maximize retention.

2. Transparency is vital. Be up front with your customers if the Freemium model uses alternative revenue. For instance, the Google search engine is free, but the search terms entered provide a ROI (to Google) in the form of helping them refine Google advertising relevance.
3. Take extra care when planning support. When offering a free SaaS product, consider both sides:
   
   
   1.  The ongoing customer support determined by your Service Level Agreement (SLA) 
   2. The cost of maintenance

You can run the risk of having to maintain more features than expected.

If you need more Freemium information

Using TinyMCE as an example, you can see how the Tiny open source community has grown, and how the community encourages and supports our ongoing product development.

At Tiny, a freemium model has delivered results, such as the fact that the TinyMCE rich text editor sees more than 350M+ downloads every year, and supports the development of more than 100M+ products worldwide.

If you have any inquiries about incorporating TinyMCE into your SaaS product, contact us, or check on the ways that you can add TinyMCE to your project.