Mastering Freemium: Crucial Benchmarks
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: February 16th, 2018
Main Takeaways:
- Companies using freemium have 50% lower CAC.
- Net revenue retention is 15% higher for freemium companies.
- NPS is nearly double for freemium companies.
- Willingness to pay for tiers above freemium have increased over 500%.
To answer Hiten's question, we'll dig into the data from nearly 6,000 companies across both B2B and B2C, as well as roughly 300,000 willingness to pay data points. Let's jump in.
But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.
Freemium is an acquisition model
Freemium is an acquisition model, not a revenue model, so this is a measured strategy to unlock lower CAC and the top of your funnel.
CAC is increasing across the board with B2B and B2C CAC up nearly 50% compared to a few years ago as marketing density continues to increase.
That being said, CAC for freemium companies is only 25-30% higher than 5 years ago:
Content effectiveness is trending down
Diminishing returns of traditional free offers like free ebooks or white papers give us a look into this phenomenon. Note that the life of an ebook has dropped from being effective for roughly 6 months to now only being effective for less than a quarter. This is happening even though the quality of content as we saw in a previous study continues to increase.
Essentially, free products are becoming "premium ebooks" where the goal is to lower the activation energy required to start a relationship with a lead and push them to a purchase, as well as give you an opportunity to nurture that lead into perpetuity.
Free is positively affecting key business metrics
Free has actually become more effective than non-free alternatives. Retention is 15% better on an absolute basis for those companies utilizing the freemium strategy:
NPS is roughly 50% better for those companies utilizing freemium:
And the previous objection of a free plan eroding value is actually softening with the willingness to pay for an initial tier growing from a floor of roughly $150 five years ago to close to $1,000 today.
Freemium is a scalpel, not a sledgehammer
So should you jump on the free bandwagon? Probably. Although, while the data suggests some serious benefits, you should keep in mind that freemium is a scalpel, not a sledgehammer. We've seen the most effective freemium plans come when a company has been around for a few years and figured out their unit economics before opening the top of the funnel with free.
That's all for this week. We look forward to bringing you more data and insights about the subscription economy next week.
Want to learn more? Check out our recent episode: Pricing for Bottom Line Growth and subscribe to the show to get new episodes.
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You've got the questions
and we have the data.
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Each week, we dive deep on benchmarks
of the subscription economy that
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you just can't
get anywhere else.
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This is the ProfitWell Report.
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Hey, Patrick.
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It's Heaton and Ralph, and
we've got a question for you.
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If I'm starting a SaaS business
today and I'm considering
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freemium, what's the
latest and greatest data?
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What's the latest and greatest
information that I need to know
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right now before I start?
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Oh, freemium. I have been on
both sides of this debate.
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So to answer Heaton's question,
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we'll dig into the data from
nearly six thousand different
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subscription companies
across b to b and b to c,
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as well as roughly three
hundred thousand different
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willingness to pay data points.
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So let's jump in.
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It's important to note that
freemium is an acquisition
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model, not a revenue model.
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So this is a measured strategy
to unlock lower CAC and
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increase your top of the funnel.
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CAC is increasing across the board with
b to b and b to c
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CAC up nearly fifty percent
compared to five years ago as
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marketing density
continues to increase.
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That being said, CAC amongst freemium
companies is actually only up twenty five
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to thirty percent
versus five years ago.
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The diminishing returns of
traditional free offers like
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free ebooks or white papers give
us a look into this phenomenon.
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Note that the life of an
ebook has dropped from being
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effective for roughly six
months to now only being
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effective for less
than a quarter.
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This is happening even though
the quality of content as we
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saw in a previous study
continues to increase.
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Essentially, free
products are becoming give
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you
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an
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opportunity
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to nurture give you an
opportunity to nurture that
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lead into perpetuity.
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Free has actually become more
effective than non free alternatives.
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Retention is fifteen percent
better on an absolute basis for
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those companies utilizing
the freemium model.
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NPS is roughly fifty percent
better for those companies
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utilizing freemium,
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and the previous objection of
a free plan eroding value is
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actually softening with the
willingness to pay for an initial tier,
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growing from a floor of roughly
a hundred and fifty dollars
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five years ago to close to
a thousand dollars today.
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So should you jump on
the free bandwagon?
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Probably. Yeah.
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Although, while the data does
suggest some serious benefits,
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you should keep in mind
that freemium is a scalpel,
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not a sledgehammer.
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We've seen the most effective
freemium plans come when a
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company has been around for a
few years and figured out their
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unit economics before opening up
the top of the funnel with free.
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We wrote more on this in our
hundred plus page research
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study on freemium entitled
the freemium manifesto,
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which you can find below.
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But that's all for now.
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If you want us to dig further
into this data or any other
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data out there, ship me an email or
video to p c at profit well dot com.
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Let's also be sure to thank
Heaton for sparking this
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research by clicking the
tweet in the link below,
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and we'll have more
data for you next week.
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This episode of the ProfitWell
Report is brought to you by
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AppCues.
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experiences in
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AppCues dot com.
