As interest rates remain high, many SaaS leaders are reconsidering how much value they give away in their free tier. When capital is cheap, it’s less costly to give away parts of your product for free since you can afford a higher CAC—but when capital is expensive, servicing each customer costs more, and leaders often need to focus on their margins. Case in point: many of the SaaS companies who most successfully grew with generous free tier offerings, including Slack, Asana, Airtable, and Mailchimp, have changed their free tier structure in recent years.
Recalibrating your free tier is also especially high stakes for growth-stage companies: you now have paying customers, a brand and reputation to maintain, and you don’t want to slow down your growth while monetizing.
There are a number of levers you can pull to adjust your free tier offering: changes to feature access, rate limiting, or seat maximums, or setting time limits on features and storage. Before you decide which lever to pull, you need to figure out what you’re solving for.
You’ll know your free plan is suboptimal if your conversion rates are low—below 5% in a year (cohorted) is our usual rule of thumb for SaaS businesses. But low conversion is just one symptom of a free tier problem. In our experience, growth-stage companies generally encounter three freemium failure modes: a too-generous free tier, a too-restrictive free tier, and a too-expensive entry paid tier. In this post, we’ll explore each of these pitfalls and how to address them.
Challenge: Your free tier is too generous
How to identify
You’ll know your free plan is too generous if you have a large base of free plan users that are active and part of your target buyer persona but do not convert even after a long time (usually 6 months) of using your product. This is the most common problem we encounter with growth-stage companies, thanks to historically low interest rates that made it easier for companies to give things away for free. Though a generous free tier can initially grow your user base, many users may not see any reason to upgrade to paid tiers if you’re meeting most of their needs in the free tier.
How to approach
Create the right level of friction to encourage your customers to upgrade.
The goal with a free plan is to give users that “a-ha!” moment of understanding why your product is useful—and then gate features that would scale that utility. In other words, your free tier should provide a core feature that offers value, but needs to be restricted in a meaningful way that stings just enough to encourage users to move to the paid tier.
Slack’s change from a 10,000 message limit to a 90-day message history per license is a great example. 10,000 messages on a free account is a lot of messages for a small team, such that many teams will never see the need to upgrade. Slack’s shift to a 90-day history allows teams large and small to learn the value of the product, while still putting a clear limit on usability that encourages all users to push toward a paid tier. Slack’s changes are smart because they make free tier limits more tangible and quantifiable, not just more strict.
Admittedly, scaling back your free plan isn’t easy to implement, and you’ll likely get pushback from some customers. But you’re also solving their problems for free, and need to communicate that in order to offer some things for free, you need to charge for others to sustain the business. You can ease the transition by clearly communicating the change to existing users: explain why you’re making the change, how it will affect their workflow and costs, and give them at least three months to adjust budgets accordingly. You can also ease the pathway to upgrade by offering a promotion to acknowledge their ongoing journey with you.
Challenge: Your free tier is too restrictive
How to identify
If your free tier is either too heavily rate- or feature-limited, customers are not likely to realize the value of your product before leaving. This is a crucial case for your product team to monitor for, as it’s harder to identify—in addition to low conversion rates, low usage or adoption at the free tier is a telltale sign. Imagine if Slack didn’t retain any history beyond one day, or if Google Sheets didn’t allow you to collaborate with your coworkers.
How to approach
Thankfully, this is the easiest problem to solve. Much like how you might address a free plan that’s too generous, you need to get your customers to their “a-ha!” moment—but this time, by adding more features.
Your product team and PMs can refine your offerings to hit that “a-ha” moment by doing user research, seeing how your customers use the product, and conducting focus groups. There are products that record how people use your product, which would let you watch trial onboarding. You can compare the activities of users before and after they upgrade, and if there are distinct actions or features that upgraded users tend to use quickly after upgrading, think about offering those features in a very restricted fashion on the free tier.
For example, we’ve seen companies roll out overly restrictive free tier plans when they want to expand their top of their funnel but are worried about giving away the farm, and end up making a very restricted free plan that doesn’t include the features that get users to convert.
When we were launching a free plan at Pagerduty—an incident management product for on-call developers—the product team knew exactly how to get the customers to the “a-ha” moment: create a schedule for the on-call team and get notified. These two actions are an essential part of the onboarding process. Another important insight was that a team needed to have five members before truly needing a schedule. Therefore, we included five seats in Pagerduty’s free plan. If we were to restrict any of this functionality, the customers wouldn’t have understood the true value of an incident management solution and hence, might not have upgraded.
Challenge: Your paid tier is too expensive
How to identify
Because pricing depends on your market, competition, and value you provide, it’s impossible to give a blanket threshold at which a product is too expensive. But if you have a low conversion rate with high free plan utilization—meaning that customers can and do use the bulk of your features in the free plan—you may need to reevaluate the cost of your paid tier. These are the same symptoms as a free plan that’s too generous, so it’s important to check both.
We see this happen most often in these instances:
- If customers use the free product regularly, but in a hacky or sub-optimal way that could be improved with features of the premium tier, they may find the product critical but can’t afford the higher price, even for a better experience.
- Your paid tier might not have the right feature packaging. For example, bundling a minimum of 10 seats as part of the paid upgrade may add too much cost for teams of two to five seats to justify. This is especially important to look at if you’ve got both a PLG motion and a traditional enterprise sales motion, since PLG motions tend to require a lower barrier to entry than enterprise.
- If one segment that is part of your buyer persona isn’t converting as well as others—e.g. small businesses—you may need to create a new pricing tier to capture their needs.
This happens often with prosumer products: users would like to have the paid tier plan because they know the product is more useful, but put up with a less-featured free or freemium tier because the paid tier is too expensive.
How to approach
Lower the threshold of your first paid tier, remove other high barriers to entry, or add an additional, lower-cost prosumer tier. To decide on an approach, you can survey your free plan customers and see where the hang up is.
One enterprise-focused company we previously worked with on this dynamic had a generous free plan and a very high starting price to their paid tier, which led to an outsized proportion of their user base sticking on the free plan. This company had 10x the amount of active free accounts (login within 60 days) vs. their paid customers, and found that free customers were using the product in hacky ways that weren’t nearly as optimized as if they moved to a paid tier. A customer survey showed a high willingness to pay for the product, but not at the existing price point. After lowering their cost to entry and eliminating their minimum user threshold for paid tiers, the company had a lower ACV, but ultimately quadrupled their conversion rate, raising ARR.
Freemium optimization, summarized
While the SaaS market is evolving, now is a great time to evaluate whether your free and paid tier offerings are optimized for continued ARR growth. Given the three opportunities to optimize outlined here, it’s important to thoroughly assess sales performance, your product roadmap, and customer feedback holistically before making refinements to your tier structure. Doing your research is crucial. Customers are so important in the pricing journey: listen to them, observe their behavior, and let them inform your decisions.
