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The BLUF (Bottom Line Up Front)

1. A freemium promotion strategy should be used when value accrues to a customer gradually over time, unlike a free trial where it accrues quickly and plateaus.

2. Getting your freemium wrong can really stunt your growth. Look no further than the music streaming industry.

3. When choosing a freemium metric and setting the right fence, use usage data analysis to make sure your metric grows over time.

A Promotion Strategy Primer

Promotions and discounts lie at the intersection of pricing and marketing, and while we always discuss promotion strategy with our clients, we don’t spend nearly as much time on promotion strategy as we do on the other 2 P’s (pricing and packaging).

That’s for 2 reasons. First, optimizing your promotions is one of the few areas of pricing that really benefits from A/B testing, rather than primary research. Second, promotions simply don’t have as large of a revenue impact as packaging and pricing do.

That said…if you get your promotion strategy wrong, you can be in a world of hurt. We’ll cover one of those case studies later.

Let’s dive in.

Free Trial vs. Freemium

Free trials and freemia¹ are two of the most common promotion strategies and are uniquely available to B2C and B2B self-service businesses. In case you’re wondering, new customer discounts and reverse trials are more popular in enterprise B2B.

For consistency, let’s define a “freemium” as a free tier that is limited by usage or features, but unlimited by time. A “free trial” would be the opposite: time bound but with the full product experience.

The whole point of a promotion strategy is to help the customer price in their own risk to trying your product. Often it takes some time for a customer to fully realize the value of your product, and their willingness-to-pay drops during that time period.

If you’re selling me software, but I don’t know if it’s going to work or improve my business, I’ll be understandably skeptical about it’s price and value. Promotion strategy addresses that.

How do you pick which of the 4 strategies to employ? It all has to do with how value is realized by the customer over time.

Freemium is ideal for when your value grows slowly over time. In my example above (Dropbox), on day 0, the box is empty and therefore has zero value. As you gradually put things into the box, the value of the box grows. All one needs to do is fence the size of the box and blamo! we have the perfect freemium.

A free trial is best employed when the value is realized immediately (or in a short time period) and does not grow over time. Netflix is a 7-day free trial rather than a 1st-season-free model. Since the value of Netflix is access to their library, rather than usage, it makes sense for them to be a free trial.

In a B2B SaaS context, most CRMs are freemiums, while most email marketing systems are free trials. That’s because a CRM requires building an active funnel to be valuable, whereas an email marketing system often requires a list upload before sending your first “blast”.

Yikes! What happens when you get it wrong?

Let’s turn to the music streaming industry. In the early 2000’s, there were two² main music subscription companies: Spotify and Pandora. Both companies operated with a freemium promotion strategy, which was very trendy back then. By 2015, here’s how both companies looked:

Circa 2015 was also a MAJOR time for new streaming services. Let’s look at their strategies:

• Apple Music (2015) launched with a free trial

• Amazon Music Unlimited (2016) launched with a free trial, or included w/ Prime

• YouTube Red (2015), later rebranded to YouTube Premium, launched with a free trial

• Tidal (2015) a premium music service acquired by Jay-Z launched with a free trial

Notice anything about those launches? They all went free trial, not freemium. Let’s see how the players are doing today

It’s hard to argue about what would have happened if Spotify and Pandora had been free trials instead of freemiums, but what is abundantly clear is that free trial music streaming services grew twice as fast as the freemiums. Remember, Spotify started in 2005 and Pandora started in 2000.

It’s also interesting to note how Spotify has moved away from being a freemium and toward being a free trial. For example, their free tier is barely usable in a mobile first world, with no ability to pick songs, use the app offline, or listen without being bombarded by ZipRecruiter advertisements.

Also, their ratio of free to paid users (2 to 1) is hardly typical of a freemium model. Pandora’s is much more typical (8 to 1). Lastly, have a look at their premium conversion landing page:

How to set the right freemium limits

There are really 2 parts to this question:

1. What should be the right fencing metric?

2. How many customers should we catch in the fence?

The first question is best answered using our previous analysis on picking good price metrics. Make sure it’s tied to value, feasible, communicable, and segmentable. If you don’t know what those mean, go back and read those linked posts.

But in a freemium context (and ONLY in a freemium context)³ , we have to add 1 more - the metric needs to naturally grow. This is best seen by analyzing usage data.

Case Study: Evernote vs. Dropbox

Back in 2014, Evernote and Dropbox were two of Silicon Valley’s darling unicorns. Both companies:

• operated with a freemium model

• had a $1 B valuation, funded by top VCs (Accel and Sequoia)

• had super cool offices with fancy perks (hello fresh coconut water)

• stored digital stuff to the cloud - files, pictures, notes, websites, etc.

• had roughly a 2.5% free to paid conversion rate

There was 1 crucial difference between the two however - their freemium model fencing metric. Dropbox fenced based on the amount of space (in gigabytes) while Evernote fenced on the uploads (in gigabytes per month). That choice (decided at accounted for the majority of the trajectory of the two companies.

For a user that consistently used Dropbox, the storage they needed would inevitably rise. On the other hand, take a look at this data from Evernote.

Each line represents a percentile cut, so the top blue line is the top 2%, the orange below is the next 5%, then the next 10%, 25%, and lastly the bottom 50%. Two big takeaways:

1. The fence only captured the top 2% of users

2. Users DID NOT INCREASE their usage over time —> 98% of users would be perfectly happy hanging out on the free plan indefinitely

When we finally set to turn around the monetization model in 2016, the primary way we did so was to adjust the freemium price metric. Over the next few years, the team managed to increase conversion significantly, and though it’s no Dropbox, the company is doing well today.⁴

Get in touch

Crescendo works with medium-sized software companies to improve their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at [email protected] or schedule time via the button below.

1  Obviously the plural of “freemium”

2  Ok maybe there were more. Fight me if you were a Sirius XM subscriber in that ‘05 sedan of yours…

3  I have strong opinions about this and I disagree with some very smart pricing people out there

4  It’s no unicorn, but it’s a thriving part of Bending Spoons, an Italian software conglomerate