Should you offer a free tier, a free trial – or both?

When it comes to growing your ARR, it truly is an uphill battle.

First, you have to outshine your competitors. That takes a well-designed product, a killer marketing strategy, and the ability to ship new features faster than other companies in your niche. Next, you have to add consistent value for your users if you want your product to be sticky enough that they’ll stay around month after month. Executing all those things well can feel overwhelming.

A bad pricing strategy is like shooting yourself in the foot. You might be able to survive but your revenue growth will hobble along much slower than it should.

That said, everyone who remembers America Online or Netflix when it first launched knows the benefit of free trials. And anyone who has used the free version of Slack at their startup before splurging on the paid tier understands that free tiers can be an excellent conversion strategy.

So, what should your company do? Here’s the secret – there are no hard and fast rules to follow to get it right. What’s right for your company depends on a bunch of factors. But don’t worry, we’ll walk you through everything to consider.

A free tier can be great – or not​

Free tiers are great ways to encourage mass adoption of your product. Gmail’s free personal email offerings, for example, creates more awareness of Gmail as an email provider, leads to people becoming power users, and fuels business upgrades.

That’s great for Gmail. But Alphabet can absorb the costs of mass free tier adoption and has the infrastructure in place to ensure that it doesn’t cause the company (and their paying Gmail customers) latency headaches. That strategy might not work for a smaller company with significant per user costs that is trying to control their burn rate. Or increase their profit margins. Or scale sustainably. For example, AI startups paying by the second for each query might not want to offer a free tier indefinitely and database companies offering a free tier could end up paying a significant amount hosting the sites of customers that will never convert.

That doesn’t mean free tiers can’t work for smaller companies. For many companies, offering a free tier has negligible costs. In that case, you get a huge audience that you can attempt to upgrade. You can even do this by creating problems in the product that your paid tier solves. For example, an app that removes the backgrounds of photos can offer a free tier where you get the finished photo at a lower quality. Or you might offer a free tier at a database company where your site goes into sleep mode if you don’t make any updates to it for a month.

Free tiers can also be great publicity. With Canva, free trial users are creating media to be shared and users then talk about how things are made and promote Canva fueling subscriber growth. Product-led growth fanatics swear by free tiers for a reason, after all. But the numbers have to make sense – and you have to be prepared to absorb the cost of a number of users who will never upgrade their accounts to a paid tier.

The truth is that free tiers are often a revenue sink rather than a smart investment. For example, Netflix viewers cost the company a lot of bandwidth and there aren’t easy ways for the streaming service to recoup its costs. Spotify offers a free-tier with advertising but its bandwidth costs are considerably lower and if Netflix wanted to get into ads it would need to invest heavily upfront to build out that revenue stream. Not likely worth it since offering ad-funded content would likely erode their subscriber base.

When you should offer a free tier​

• To quickly obtain as much market share as possible in a competitive space
• To help users understand your product if you’re creating a new category
• To expand your contact database and create multiple channels to contact and convert
• To show the core value your product provides
• To hook users and create a clear on ramp to a paid tier (with more capacity or features)
• To gain a foothold in an organization by making it free up to a certain number of users
• To turn low value customers into free marketing
• To build network effects to increase adoption of your product (like LinkedIn or Zoominfo)
• To learn about how people use your product to improve it (during beta and/or after)
• If you have ways to monetize free users (ex. Data, advertising, ect)

When you shouldn’t offer a free tier?​

• When there’s a high cost of a free tier with low lifetime value or high churn for your product (due to things like high cost AI, physical goods, or payroll)
• When there isn’t a good way to provide differentiation between your free tier and paid tier
• When the free tier provides too much value and has limited monetization opportunities

What can a free tier achieve?​

The good​

A well-designed free tier can help you quickly acquire a lot of users. That could help you iterate on and improve your product, outperform your competition, convert more users to a paid tier, generate great brand marketing, or even effectively monetize your free tier so it becomes a revenue center rather than a revenue sink.

The bad/ugly​

A badly designed free-tier, however, could see you burn through your capital at a surprisingly fast rate if you don’t plan for how popular your free product is going to be. You might also miss out on conversions to your paid tier if they aren’t well distinguished or you might divert too many of your resources trying to monetize your free tier rather than grow your paid tier. You could even end up with such high customer acquisition costs that your path to profitability is narrow.

Not things you want.

A free trial can make your business – or break it​

Free trials are great ways to convert your free tier users to paid accounts or to give new users a chance to try out your product before they invest in it – increasing your conversion rate. For example, SEO planning apps like SEMRush allow new users to poke around their application for 30-days so that they have enough time to understand all the features they offer and how those features can help their SEO strategy.

Similarly, meal kit services like Hello Fresh or Blue Apron give new customers a free trial so they can taste the meals they’ll be buying without worrying whether they will like the food. Essentially, it takes away the hesitation both consumers and businesses feel when trying to decide whether to adopt premium priced products they’ve never tried before and whose value they might not fully appreciate.

“Your product is overpriced,” is a frequent complaint SaaS companies encounter. But a user who truly understands the value of the service after using it and seeing how much time it saves them or how much it improves the quality of their SEO work – or their dinners – is much less likely to say that.

Of course, a free trial doesn’t make sense for every business. Offering a free trial, for example, won’t work for a tax filing software program. It also won’t work for something like a fundraising database where setting up, training, and onboarding users is extremely costly for both the non-profit and the technology company.

When you should offer a free trial​

• To demonstrate the value of your product – especially if it’s a premium product
• To help people understand your product
• To get a list of potential customers in your database
• To get a foothold in large organizations
• To overcome hesitations and objections
• To get users to convert from your competitors
• To get people to subscribe automatically at the end of their trial

When you shouldn’t offer a free trial​

• When the product is useful for a single task or short period of time (ex. tax software)
• When there are significant setup or onboarding costs
• When a free trial requires custom work (a money back period might be a better choice)
• When the costs of offering the free trial makes your acquisition costs too high

What can a free trial achieve?​

The good​

A well-designed free trial can help your company overcome user objections and show your product’s value – leading to runaway subscriber and ARR growth. It could help you convert users from your competitors and increase your database size. All good things that would make you more competitive.

The bad/ugly​

A badly designed free-trial, however, could see very low adoption rates after your trial ends. Or it could burn through your capital because of significant labor or other input costs involved. You might end up with astronomical (and unsustainable) customer acquisition costs.

A nightmare for any business.

Using free trials and free tiers… together​

Given the pros and cons of both options, you might be wondering when it makes sense to use the two strategies together. Does it make sense to have a free tier AND also offer a free trial for the paid version of your app?

It could make a lot of sense. Look at LinkedIn. Their social network is free to join and use and they also give free trials to job seekers and recruiters who are interested in trying out LinkedIn’s Premium or recruiter options. They’re able to ensure their network remains valuable through a free tier while also allowing users to try out their paid offerings before buying.

But that wouldn’t work for a streaming service like Netflix. Offering both a free tier and a free trial is a great way to ensure that they lose subscribers to the free tier – and then get free trial users whenever a new season for a bingeable show comes out.

When you should offer both​

• When a free-tier is vital to your business model (ex. LinkedIn) but you also want to encourage upgrades
• When you have a well-monetized free tier and want to increase upgrades
• When you have a well-developed funnel from free users to paid users
• When your free tier and paid tier are significantly different
• When your free users aren’t too expensive
• When you want to leverage your network effects into revenue quickly
• When its standard in your industry to offer both and customers expect it

When you shouldn’t offer both​

• When your customer acquisition costs for using both are too high
• When only one strategy has a strategic value to your company
• When the two strategies will work against each other
• When your two tiers aren’t well distinguished

What can using a free trial and a free tier achieve?​

The good​

The two strategies can sometimes work in tandem to hook users and then quickly upgrade them to a higher tier or more seats. That can help your company create an effective funnel and help you increase your revenue quickly – while outperforming your competition.

The bad/ugly​

You should never do something just because other companies outside your niche are offering it. They can have different input costs, customer lifetime value, and cost-of-revenue calculations. Using both when there isn’t a clear business case could result in your company giving up revenue that you could have otherwise gotten had you offered one or another – or neither.

The Bottom Line​

As you can see, it’s important to carefully consider your free offerings and whether they actually make sense for your business. While you should do that in advance, continually reviewing your pricing and acquisition strategy to better understand the costs involved in it is also critical.

Know your numbers! That includes your customer acquisition costs, conversion rates, customer lifetime value, and cost-of-revenue. All of these metrics are key to understanding how much you’re making off each of your customers – and whether that’s sustainable over the long term.

Behind one door might lie the success of your business. Behind the other might lie lackluster growth or even sustained losses. Know which door your business is walking through.

Whichever you choose, Upollo can help. We help you turn repeat trialers and account sharers into happy customers. We’re so good at it that we have boosted some of our customers’ MRR by $100,000+ in a month. Curious how we convert the un-convertable? Sign up to get started for free.