Freemium vs Free Trail: Which one has better business growth?

When deciding on a product's business model, would you prefer a freemium model or a free trial model? In this article, the author explains and analyzes the pros and cons, decision-making basis, and successful cases of these two models. Let's take a look.

At the beginning of the development of the Internet industry, due to its low marginal cost, it was often known for being free, and it lost money to gain publicity. After more than 20 years of ups and downs, after the high growth rate slowed down, "free first, paid later" became a better business solution.

For example, Duolingo, a learning platform with over 100 million monthly active users and continuously growing revenue; Spotify, the music streaming giant; and Slack, the fastest-growing SaaS tool in history, all use this solution.

When deciding on a product business model, do you prefer a freemium model or a free trial model?

This article will explore the pros and cons, decision-making basis, and success cases of the Freemium and Free Trail models (with AIGC product examples) to help you understand and choose the product model that suits you. Whether you are an entrepreneur, product manager, or marketer, you can get valuable information.

Without further ado, let's go straight to the main text. Enjoy:

1. What is Freemium?

Freemium was first proposed by Fred Wilson of AVC in 2006. It refers to attracting users with free services , and then converting some free users into paid users through value-added services to realize monetization.

In the Freemium model, 90-95% of the content is free, and 5-10% of the content is charged. Following the "80/20 rule", a small number of high-end users who are not sensitive to price bring most of the revenue to the service provider.

Although Internet companies have high initial investment costs, their service marketing costs are almost zero, so the profits earned from paid services can quickly make up for their investment in free services and acquiring new users.

Under the Freemium model, companies usually adopt the following strategies to achieve business growth:

• The appeal of the free version: attract users to try and use the product. It should provide basic core functions, enable users to experience the value of the product, and build interest and trust in the product.
• The added value of the paid version: providing additional functionality, premium services, better performance, or other value-added features to attract users who are interested in the more advanced features of the product.
• User conversion and retention: Designing an incentive system, providing a good user experience, active customer support, and continuous product improvement are also key factors in improving user retention and conversion rates.

For example, on the Duolingo language learning platform, free users can use learning tutorials, but more value-added services require purchasing a membership.

Advantages and Disadvantages of the Freemium Model

1) Advantages

• Attract a large number of users: The free version can attract more users to try the product, build a large user base, and increase brand awareness and market share.
• User Trial and Awareness: A free version allows users to try out the product without any risk, thereby increasing their awareness and understanding of the product.
• Lower the market entry threshold: The free version can lower the user's purchase threshold for the product and attract more potential users to enter the market.

2) Disadvantages

• Profitability pressure: The Freemium model relies on paying users to support profitability, so the company needs to ensure that there are enough paying users to cover the costs and profits of free users.
• Low conversion rate: Due to the existence of a free version, users may be more inclined to use free features and are unwilling to upgrade to a paid version, resulting in a relatively low conversion rate.
• User abuse and resource consumption: Some users may abuse free features and consume company resources without the intention of upgrading to paid users.

2. What is Free Trial?

Free Trail is common in SaaS products, which means allowing users to try their products or services for free for a limited time . The goal of this model is to attract users by providing a trial experience and hope to convert them into paying users at the end of the trial period.

When implementing the Free Trail model, companies typically take the following approach:

• Trial period restrictions: Companies set a limited trial period, usually ranging from a few days to a few weeks, to allow users to use the product or service for free. After the trial period ends, users need to pay to continue using it.
• Trial features and restrictions: To attract users and demonstrate the value of the product, companies often provide full functionality and services so that users can fully experience the product's potential. However, to prevent abuse and meet conversion goals, some restrictions may be set during the trial period, such as the number of visits, functional restrictions, or data storage restrictions.
• Conversion strategy: Before the trial period ends, the company needs to design an effective conversion strategy to encourage trial users to upgrade to paid users. This may include offering discounts, personalized recommendations, customized plans or exclusive services to increase users' willingness to convert.

For example, on the NetEase Cloud Commerce SaaS platform, users can apply for a limited 7-day free trial, during which they can try out most of the platform's core functions. After the trial period, they will need to pay to continue using the functions.

Advantages and disadvantages of Free Trail mode

1) Advantages

• Increase conversion rate: By providing a trial experience, users can better understand the value and applicability of the product, thereby increasing their willingness and possibility to upgrade to paying users.
• Reduce abuse: Due to the limitation of trial period, users cannot use the product for free for a long time, which reduces the possibility of abuse of free features.
• Provide a real-world experience: Users can evaluate the product’s features and performance in the context of actual use, and thus more accurately determine whether the product meets their needs.

2) Disadvantages

• User quantity limitation: Due to the limitation of trial period, Free Trail mode may not attract a large number of users, and the number of users may be less than that of Freemium mode.
• High marketing costs: In order to attract users to try the product, the company needs to invest higher marketing costs, including advertising, trial promotion and conversion strategies.
• Limited evaluation time: Due to the limitation of the trial period, users may not be able to fully evaluate the long-term value and actual effect of the product and may make a decision before the end of the trial period.

3. Which company has the strongest business growth?

1. Difference: Both growth models have their own advantages

Although both Freemium and Free Trail focus on free, there are still differences in product design (trial period, payment and functional restrictions) and core business indicators (registration rate, payment conversion rate).

• How long is the trial period?
• How to define the scope of free and paid function permissions?
• How to set the paid price?
• Which maximizes business value: registration rate or paid conversion?

There are no standard answers to these more detailed questions, but they can be gradually optimized in growth experiments . After all, growth is not achieved overnight, but requires constant adjustment and polishing of each link to get the flywheel turning.

2. Decision-making: How to choose between different industries and product types

When deciding on a product business model, do you prefer a freemium model or a free trial model?

You may want to make a judgment based on the industry, product type, and market strategy , which may make your choice easier.

Industry characteristics and product types are easy to understand. Here is a further explanation of how “market strategy” drives decision-making:

• If your product is much better than the competition in the market and you charge significantly less than them, then both free trial and freemium models are fine, as they are both customer acquisition models and cost-effective. For example: Netflix.
• If your product is better than your competitors and solves a vertical, specialized, and long-standing problem, then you will charge much more. Then, you can use a free trial. For example, SaaS vertical products. Due to the limitations of market size and the professionalism and complexity of the product, the freemium model is likely to not work under this strategy.
• If your product is not better than the competition, has some flaws, but is simple and easy to use, and the price is relatively cheap, then it is more appropriate to adopt the freemium model, which lowers the threshold and quickly acquires customers. For example: Canva.

3. Case: Standing on the shoulders of giants

1) Spotify - the world's largest music streaming platform

Spotify is a streaming music platform that adopts the Freemium model. It provides free music streaming services, allowing users to access the music library without restrictions with advertisements. This enables Spotify to attract a large number of users and build a strong community effect. At the same time, Spotify also offers a paid version, called Spotify Premium, in which users can enjoy advanced features such as no ads, offline playback and high sound quality.

• Number of users: As of the second quarter of 2021, Spotify had over 365 million active users.
• Percentage of paying users: According to reports, about 30% of Spotify's active users are paying users, i.e. Spotify Premium users.
• Revenue: In the second quarter of 2021, Spotify's total revenue reached 2.27 billion euros, of which advertising revenue accounted for only 13%.
• User growth: In the first quarter of 2022, Spotify's global monthly active users (MAU) reached 422 million, a month-on-month increase of 16 million.

2) Microsoft Office 365 - the leader in office tools for 12 years

Microsoft Office 365 is a cloud office suite that uses the Free Trail model. It provides a 30-day free trial period, where users can experience the full range of Office applications and cloud services for free. After the trial period, users need to purchase a subscription plan to continue using it.

• Number of users: In 2021, Microsoft Office 365 has more than 390 million commercial and personal subscribers.
• Proportion of paying users: The global PC monthly active users are approximately 1.4 billion, and the annual membership payment rate for its subscription service is approximately 32%.
• Revenue: In fiscal year 2021, Microsoft Office 365 commercial revenue reached $122.5 billion, an increase of approximately 20% over the previous year.
• User Growth: In fiscal year 2021, the number of Office 365 commercial users increased by approximately 25 million, showing a continued user growth trend.

3) AIGC - the rising stars ready to take off

Last year, AIGC products represented by ChatGPT and Midjourney emerged, setting off a new wave of AI technology transformation around the world and giving entrepreneurs a new impetus: reducing technology development and operating costs and meeting customers' personalized needs.

As the AIGC wave sweeps the world, it is not difficult to find that a large number of products also adopt the Freemium and Free Trail models, bringing disruptive growth.

Freemium: ChatGPT is a large-scale language model developed by OpenAI. In just 2 months, the number of active users has exceeded 100 million, and there are now more than 2 billion users.

ChatGPT 3.5 and previous versions are free to use, and after the model is upgraded, the official monthly subscription fee for ChatGPT-4 plus is US$20, and API calls are charged separately based on response time.

Free Trail: Midjourney is a gold medal player in the Vincent Image track, achieving 10 million users and $100 million in revenue in less than a year.

Midjourney adopts a SaaS subscription model, with prices ranging from $10 to $60 per month. However, before paying, Midjourney provides free users with a limited-time trial opportunity.

Domestic AIGC products also adopt a similar model, such as Wenxin Yige, Doubao and other products, which acquire customers for free to seize the initiative and achieve business growth by converting product value.

4. Final Thoughts

Freemium VS Free Trail, disruptive growth is on the left, differentiated growth is on the right.

The Freemium model is suitable for industries that achieve network effects by building a large user base, while the Free Trail model is suitable for industries that require users to have sufficient time to evaluate the value of the product.

In addition to industry type , when choosing a suitable business model, companies also need to comprehensively consider factors such as product characteristics, target users, market competition and profit model .

Regardless of which model is chosen, companies need to ensure that the free version or trial period provides sufficiently attractive features , while providing more advanced features and value-added services in the paid version , and at the same time provide good transition guidance to attract users to smoothly upgrade to paid users.

The above is the content of "Freemium VS Free Trail Business Growth Analysis", which is based on user growth work practice & research. If you have any good insights, please leave a comment in the comment area below.