🎓 Why freemium works

47.4% more people signed up for a basic plan when it was free (vs. $1). They overvalue free and were more tolerant of ads and worse service.                                                                                                                                                                                                                                                                                                                                                                                                                 July 30, 2024 | [Read Online]( Why freemium works 47.4% more people signed up for a basic plan when it was free (vs. $1). They overvalue free and were more tolerant of ads and worse service. [Thomas McKinlay]( [fb]( [fb]( [fb]( [fb](mailto:?subject=Post%20from%20Ariyh&body=Why%20freemium%20works%3A%2047.4%25%20more%20people%20signed%20up%20for%20a%20basic%20plan%20when%20it%20was%20free%20%28vs.%20%241%29.%20They%20overvalue%20free%20and%20were%20more%20tolerant%20of%20ads%20and%20worse%20service.%20%0A%0Ahttps%3A%2F%2Ftips.ariyh.com%2Fp%2Fwhy-freemium-works) New to [Ariyh](? This is a 3min practical summary of a scientific study 🎓 Join 28,531 marketers who use science, not flawed opinions📈[Subscribe here]( Today’s insight is brought to you by… [Ten Speed]( There are a lot of things you could be doing to drive organic growth. But where should you focus and execute? B2B SaaS companies like Bitly, Workvivo, [Teamwork.com](, and ProsperOps trust [Ten Speed](. Ten Speed is the organic growth agency that develops revenue-focused strategies, then creates quality content (in all the formats you can think of) and fixes content decay to deliver results. [Learn more]( Want to sponsor Ariyh? [Here’s all you need to know](. 📝 Intro Why and when should you offer a free version of your service or SaaS? Take Ariyh’s newsletter as an example. It’s free, which makes newcomers way more likely to subscribe when they discover it. Once you’re subscribed, that increases the chances that you will discover [Ariyh’s Playbooks]( or decide to upgrade to the [paid version]( (access to all 200+ Ariyh insights and case studies of how to apply insights to real problems). But that’s not all, each free newsletter has sponsored ads - which generate revenue. I can count on one hand the times I’ve received complaints about ads. This is not by chance (although I also like to think that it’s because I carefully curate high sponsors that you would find useful). Use this research to calculate whether offering a free service is worth it for you too. P.S.: For full recommendations on how to price your SaaS, and how to nudge free users to buy, you can refer to [The Science-based Playbook of SaaS Optimization](. Want to access hundreds more insights like these? [Explore Ariyh insights here](. Offer a free basic option of your product to attract users and generate ad revenue Topics: Pricing | SaaS For: B2C. Can be tested for B2B Research date: January 2018 Universities: University of Passau, Arizona State University 📈 Recommendation Consider offering a free version of your product or service - even if it has limited features. By highlighting that it’s free, people will perceive it as having more benefits than it actually does and will be more accepting of costs that come with it (e.g. ads, answering surveys, slower service). You will gain users which you can generate ad revenue from, or later convert to a paid version. 🎓 Findings - When a basic plan was free (vs. $1) people were much more likely to sign up, see more benefits to the plan, and are more willing to accept ads. - As part of a series of 4 experiments where participants compared and chose between a free basic plan, cheap paid plans (e.g. 2€), and premium plans (e.g. 14€) for a fictitious video streaming platform, researchers found that: - 47.4% more people signed up for the free basic plan. - People rated the benefits of the free service 18.4% higher and were 11.2% less negative about the non-monetary costs (ads). - People anticipated 9.97 seconds more advertisement time in the free version. - People using the free plan were 25.1% more willing to accept ads. 🧠Why it works - When something is given to us for free, we are aware that nonmonetary costs usually come with it (e.g. having to spend time watching ads). - We consider these [costs less significant]( when we’re receiving a free service, making us more accepting of them. - Recognizing that we’re not being asked to pay for the product or service gives us a [sense of reciprocity]( that makes us willing to accept non-monetary costs and other downsides. - If we have both a free and a paid option available, we tend to avoid the paid option unless we feel it provides enough extra value. ✅ 3 of my favorite resources for marketers Instead of a sponsor, today I wanted to give a shoutout to 3 people who I’ve worked with and highly recommend, in case they fit what you’re looking for right now: 1) [Jenna Alburger]( - Work with her to sharpen your positioning and messaging, she’s a pro at it. 2) [Alexander Vilinskyy]( - Work with him to design or improve your digital product - from websites to apps. 3) [Jason Feifer]( - Subscribe to his newsletter for quick tips on how to work better, and more happily. ✋ Limitations - The research focused on advertising as the non-monetary cost for paid plans. It’s likely that people on free plans might be less accepting of other non-monetary costs (e.g. having to fill out surveys frequently). - Though the experiments suggested that if priced correctly, a free basic offering wouldn’t cannibalize paid customers, a relatively small price difference between paid packages might impact sales by driving people towards the cheaper option. - The study looked at a relatively simple service - for some products, where status and prestige may be more important, customers might want to showcase opting for a premium package (e.g. LinkedIn Premium). 🏢 Companies using this - Several online companies provide ad-supported free basic options including Spotify, YouTube, Pandora, Hulu, Peacock, and Tubi. - Not all free plans generate revenue with ads. For example, Hubspot and WordPress offer free packages without advertising for basic users, with additional functionality reserved for paid plans. - Traditional media has long used both free, ad-supported channels (network television) and paid subscriptions (cable TV, newspapers). Digitally, this shows a distinction between ad-supported, free sites and paid subscription ones. Many including the New York Times offer a limited free package and a full package for paid subscribers. Website design and hosting company WordPress offers a free option with limited functionality, as well as paid plans at various price points. ⚡ Steps to implement - Offer a free, basic plan with limited functionality, support, or features as one of your product offerings. This should not be a free trial that is time-bound. - You can generate revenue from your free plan by: - Adding non-intrusive banner ads or sponsored content to your pages. Highlight that the ads allow you to offer a free service (e.g. “Sponsors like this allow our service to remain free to you”) to mitigate negative perceptions of the ads. - Other non-monetary means like asking your free users to share a link on social media, complete a survey, or sign up for a mailing list. - If you’re trying to convert your free users to your paid option, be mindful of a large price difference, especially if your paid package includes other downsides like usage limits or ads. [Other research highlights]( that adding a second paid option can play a key role in pushing free users to purchase paid plans. - For 62 SaaS Optimization recommendations, including how to design your optimal pricing plans, you can refer to the [Playbook of SaaS Optimization](. 🔍 Study type Online experiments 📖 Research [How Consumers Assess Free E-Services: The Role of Benefit-Inflation and Cost-Deflation Effects](. Journal of Service Research (January 2018) 🏫 Researchers - [Björn Hüttel](. Mercedes-Benz - [Jan Hendrik Schumann](. University of Passau - [Martin Mende](. W.P. Cary School of Business, Arizona State University - [Maura L. Scott](. W.P. Cary School of Business, Arizona State University - Christian J. Wagner. University of Passau Remember: This is a scientific discovery. In the future, it will probably be better understood and could even be proven wrong (that’s [how science works](). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely. What did you think of today's insight? Help me make Ariyh's next insights 🎓 even more useful 📈 [💜 Loved it!]( [✌️ Okay]( [🫤 Meh]( - 📈 Access 100s of insights and learn how other evidence-based marketers apply them, with [Ariyh Pro]( - 📘Supercharge your business with Ariyh’s Playbooks of [Pricing & Promotions](, [SaaS](, or [Ecommerce]( - 🎓 New to Ariyh? 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