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Comparing Free Trial and Freemium Models

Comparing Free Trial and Freemium Models

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Published by Chris E Yin
Free trial periods and “Freemium” models have grown in popularity as ways to drive increased
adoption of recurring services. The thinking behind both is that giving potential customers exposure
to the service, even in a less-functional variant will entice some subset of free users to convert to
paying customers.
While there are many popular examples of successful products that have used free trials or freemium
offerings to develop large and loyal paying customer bases, not all services are a good fit
for such models. Furthermore, there are a number of considerations in approaching these models
that are important to help organizations achieve their goals in terms of adoption, conversion, and
long-term monetization. This white paper describes and analyzes both free trial and freemium approaches.
It highlights the inherent trade-offs and sometimes-difficult choices that must be made
to maximize success. It concludes with some recommended best practices for deploying free trial
and freemium offerings.
Free trial periods and “Freemium” models have grown in popularity as ways to drive increased
adoption of recurring services. The thinking behind both is that giving potential customers exposure
to the service, even in a less-functional variant will entice some subset of free users to convert to
paying customers.
While there are many popular examples of successful products that have used free trials or freemium
offerings to develop large and loyal paying customer bases, not all services are a good fit
for such models. Furthermore, there are a number of considerations in approaching these models
that are important to help organizations achieve their goals in terms of adoption, conversion, and
long-term monetization. This white paper describes and analyzes both free trial and freemium approaches.
It highlights the inherent trade-offs and sometimes-difficult choices that must be made
to maximize success. It concludes with some recommended best practices for deploying free trial
and freemium offerings.

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Published by: Chris E Yin on Jan 05, 2013
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ariasystems.com / experts
Whitepaper
Billing and Subscription Management Expert Series
Comparing
 Free Trial
and
FreemiumModels
 
WHITEPAPER
ariasystems.com / experts2
ExEcutivE Summary
Free trial periods and “Freemium” models have grown in popularity as ways to drive increasedadoption o recurring services. The thinking behind both is that giving potential customers exposureto the service, even in a less-unctional variant will entice some subset o ree users to convert topaying customers.While there are many popular examples o successul products that have used ree trials or ree-mium oerings to develop large and loyal paying customer bases, not all services are a good tor such models. Furthermore, there are a number o considerations in approaching these modelsthat are important to help organizations achieve their goals in terms o adoption, conversion, andlong-term monetization. This white paper describes and analyzes both ree trial and reemium ap-proaches. It highlights the inherent trade-os and sometimes-dicult choices that must be madeto maximize success. It concludes with some recommended best practices or deploying ree trialand reemium oerings.
Leng yo See Sell isel – Feetls nd Fee (Ft&F) odels
Many companies already use FT&F models as a mar-keting vehicle or their products and services to driveengagement with more prospects and to use reeevaluations to convert interested ree users into pay-ing customers. While there are some exceptions, themost widely deployed FT&F oerings generally sharea ew common traits:
•
Dgll-deleed wh led o zeo oss s-soed wh llowng ses o  he see
•
reng eene odel – reng nd sb-spon eene odels he beoe nes-ngl popl s. donl one-e phs-es. Whehe o onen (.e. Hl, NeFl, Newyok tes), B2c pplons (onlne ges,lod-bsed onse bkp sees) oB2B pplons (“Enepse” edons o opensoe pplons, web so nls),n Ft&F oengs pooe sees del-eed   sbspon o sge odel.
•
“tohless” sles le – Ft&F odels el onhe sspon h epeenng he see n sel-see shon, who sgnn Slesneon o le soe sppo, wll be s-en o de onesons.
Fee tls
For the purposes o this discussion, we will denea ree trial as access to a service at no cost thoughlimited either by time or usage. Sometimes ree tri-als provide access to a reduced-unctionality versiono the service, but in most cases oer access to aull-eatured version. Time-bound ree trials may lastor an arbitrary period such as 30 days or 3 months.Usually the service is automatically disabled aterthe specied trial period has elapsed. Usage-boundree trials typically involve some initial credit eitheras dollars or units o service. Usually the service isautomatically disabled when the units or dollar cred-its have been exhausted, similarly to the time-boundscenario. A good example o usage-bound ree trialapproach is LinkedIn, the popular proessional socialnetworking site that tempts potential advertisers withoers or $50 in ree ad placement credits to try ad-vertising on LinkedIn.
Op-n o Op-o?
One key consideration or ree trial oers is whetherto make it an opt-in or opt-out program. The opt-inmodel generally means that the user o the trial willbe inormed at some point that their trial is about toexpire or has expired, with an oer to sign up or thepaid version o the service. Clients can then opt in byproviding payment inormation or subscription ees
 
Free Trials vs. Freemium
ariasystems.com / experts3
(i.e. rst month or rst-year subscription ees) i theywant to continue using the service. The opt-out model allows companies to automatical-ly convert ree trial users to paid users when the trialhas expired. Typically in an opt-out model, paymentinormation is captured at the start o the ree trialperiod so that no additional user action is necessaryto convert the ree trial user to a paying customer.Instead, the burden is on the user to interrupt thisprocess and make it known that they do not wantto sign up or paid access to the service. Personalcredit monitoring services are a good example o thismodel, with most oering 3 months o ree monitor-ing service that automatically converts ree trial usersto paid customers ater 3 months. It is critical in theopt-out model to make sure that users are complete-ly aware when they sign up that i they take no ac-tion, including never even using the ree trial service,that they will be charged and subject to some kindo commitment (i.e. a one-year subscription). Oth-erwise, users will eel misled, complain about yourcompany online, demand their ees back or ght thecharges through their credit card provider. Too manyo these disgruntled customers can actually causeyou to lose money on your ree trial program anddamage your business’ reputation.
FeeOengs
 This white paper will dene a reemium oering as aperpetual-use/non-time-bound service. In most cas-es, the ree oerings in a reemium model are a unc-tional but degraded version o the or-pay “premium”oering. But importantly, it is not time-bound so the-oretically the user can use it or as long as the serviceexists without paying any ees. For B2C online servic-es, such as personal e-mail accounts, individuals cansubscribe to a ree Hotmail, Yahoo, or Gmail accountand use it perpetually or ree. However, you will beoered a paid upgrade to the “premium” service thatmight oer some combination o expanded le stor-age, better spam or virus checking, mobile devicesupport, no advertisements, and more. In B2C, somereemium oerings are actually supported by third-party advertising, with ree mobile device apps beingthe best example o this model. For B2B applications,such as commercial open source products, compa-nies can use products rom MySQL (database), RedHat (Linux operating system) and Pentaho (businessintelligence) who all oer both ree versions as wellas “Enterprise” versions. The Enterprise versionsinclude additional eatures, technical support, andother services. The key challenge when using a reemium model is tond the right balance between adoption and conver-sion to paid usage. To illustrate this point, let’s con-sider a couple o extreme examples.First, imagine a reemium service that allowed us-ers to watch 15 seconds o any movie or ree. Thisreemium service would be perceived as nearly non-unctional and would likely achieve very low adop-tion. However, the vendor may see a very high con-version rate o the ew reemium adopters since theywant to view the entire movie.Now imagine an alternative where a service oeredunlimited ree movies in its ree oering, but the Pre-mium oering also gave you the option to watch themovies with subtitles in Japanese. This reemiumservice would probably lead to extremely high adop-tion given the value provided in the ree oering, butvery limited conversion in non-Japanese-speakingcountries because o the low value o the Premiumservice to most users. Again, the key to reemium models is striking theright balance that drives healthy reemium adoption,but also healthy paid conversion. And that begs thequestion, what are “healthy” adoption and conver-sion rates? This is a hard question to answer since
This freemium servicewould probably lead to extremely highadoption given the value provided in the free offering

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