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The Modern GTM

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Free plan vs. free trial in PLG

TL;DR

Top of funnel and conversion rates are entirely a function of market demand and product execution.

    If you have poor positioning and messaging or haven’t built a good self-serve experience, you’ll have poor conversion rates. If your product doesn’t add enough differentiated value immediately to your customers, you’ll have poor conversion rates. I.e., asking for credit card details upfront can limit your audience as well as result in high churn.

If you don’t want to fully serve SMB customers, it would be better to let them continue using your product for free instead of converting them into paying customers after a trial.

    Once you have paying SMB customers, make sure your product and customer success strategy are well aligned to give the right net revenue retention. This is where we see a lot of founders trip up — they choose a free trial expecting a better conversion rate, but end up with a big (low retention) SMB business they never really wanted to support.

Running a GTM motion that has both credit card–based flows and top-down enterprise sales is complicated and requires significant resourcing because you’re running two buying and renewing motions simultaneously.

    For this reason, offering a credit card payment only makes sense if you want to build a large customer base at a sub-$20k average selling price (ASP).

If you’re offering dev infrastructure, you’re likely considering maintaining an open-source version of your software.

    This can offer a lot of benefits like building trust, community, and essentially playing the role of a free plan (with some nuances) for your dev customers. Hence, you can use the same framework as the freemium strategy to make the decision about offering open source.

Conversion rates for product-led growth are a function of your product, target customer, and execution across messaging and UX.

    Here’s directional guidance on what to measure and ranges for gold-standard conversion rates:
    • Website sign-up: 5% conversion
    • Sign-up to activation: 20–30% conversion
    • Activation to payment (team plans): 20–50% conversion
    • Activation to payment (enterprise plans): 20–30% conversion with sales assist


Introduction 

A fundamental aspect of product-led growth in a Modern GTM strategy is to ensure customers can try your product for free and experience its value prior to making a purchase decision. However, there are many ways to try a product — the primary models being a free plan or a free trial. For companies building dev tools, open-source access often plays the role of a free plan or serves as a pathway to it. 

Free vs. trial: definitions and misconceptions

While both free plans and trials are essentially a self-serve product experience for customers, they differ based on limits imposed. If you limit the functionality or usage level in an always-free plan, it’s a freemium motion. If you limit the duration of time that a customer has access to the paid version of your product, it’s a trial motion. 

Not surprisingly, there are many misconceptions about whether free or trial is a better strategy for B2B tech startups. Typically, sales leaders tend to root for trials. 

Don’t take these common misconceptions at face value:

  • “Free plans create more top-of-funnel usage.”
  • “Free trials drive more revenue.”
  • “Both free plans and trials work as long as you get credit card details upfront.”

While these statements might sound true, the reality is that your top of funnel and conversion rates are entirely a function of market demand and product execution. If you have poor positioning and messaging or haven’t built a good self-serve experience for your product, you’ll have poor conversion rates. If your product doesn’t add enough differentiated value immediately to your customers, you’ll have poor conversion rates. I.e., asking for credit card details upfront can limit your audience as well as result in high churn.

The right choice between a free plan vs. trial entirely depends on the nature of your product and market as opposed to your target conversion rate. This is what makes it a strategic choice. The right strategy needs to maximize your long-term revenue growth as a company, not short-term sign-up and activation rates. 

When to offer a free trial of your product

These are the most important strategic considerations to offer a free trial as your product-led growth strategy and why: 

1. Trying is cheap


This is by far the most important criteria for choosing a free trial. Since you are only going to give customers a limited amount of time to make a purchase decision, they need to feel comfortable investing the time and knowing that there’s no “downside” risk if they choose not to buy. Hence, we measure “ease” of trial experience alongside two dimensions: time and risk.
 

  • Time: your customer can implement the product and experience the first level of core value within 15 minutes of work.
     
  • Risk: you are not a piece of critical infrastructure that powers the product/end-user experience for your customers and if you are, your customer can try your product very easily in a staging environment.

2. Spend category is well established

Your buyer has good access to technical stakeholders (for implementation) and program budget, and you are not creating an absolutely new category of spend for them.
 

3. You want to grow SMB revenue 

You’re interested in building out a SMB customer segment, whether that’s “main street” business or other small startups. This is an important consideration for self-serve product experiences that attract a lot of small customers. If you’re not interested in building a revenue line and serving these customers fully, it would be better to let them continue using your product for free instead of converting them into paying customers after a 30-day trial. 


Once you have paying SMB customers, you need to make sure your product and customer success strategy are well aligned to give the right net revenue retention. This is where we see a lot of founders trip up — they choose to offer a free trial expecting a better conversion rate, but end up with a big (low retention) SMB business they never really wanted to support. 

Free trials have been implemented exceedingly well by Docusign, Datadog, Shopify, Zendesk as well as smaller startups like Intercom, Launch Darkly, and Orum.  

When to choose a freemium strategy

These are the most important considerations to offer a free plan in perpetuity as your product-led growth strategy and why: 

1. Trying is costly



This is by far the most important driver for choosing a freemium motion. Again, we measure “cost” of trial experience alongside two dimensions: time and risk.
 

  • Time: if your product takes multiple weeks and stakeholders to implement, adopt, change behaviors, and experience the core value of your product, you want to offer your customers a free plan in perpetuity.
     
  • Risk: If you provide infrastructure that powers your customers’ end user experience, it can feel risky to try your product in production to just get locked out in 30 days.

2. You’re creating a new category


If your product isn’t trying to disrupt a well-established area of spend, there will be no existing budget for you to slot into. This means that your champion will need significant time to drive adoption and create a budget for your platform within their company.

3. Your business has network effects


In most B2B software, there are very limited network effects. If you’re one of the rare exceptions, make sure you have a compelling free plan as an acquisition channel/marketing investment.  

The freemium strategy is increasingly popular among PLG companies in every vertical that target high, voluntary adoption from their customers — including Atalssian, Slack, Webflow, Amplitude, and Styra.

Avoid these pitfalls


While the above framework offers a strong set of first principles to build on, there are some market-related tactics you should also take into account, namely competition, UX, and your product’s key differentiators. These are three pitfalls we recommend founders avoid:

Limited always-free plans in a competitive market

Before you make your decision, look at what your top competitors are doing. If your free plan doesn’t showcase any differentiated functionality, you will soon develop the reputation of being a very basic product compared to your competitor’s paid products. This is a non-intuitive reason why it can sometimes hurt to be the only player in a market with a free plan if your competitors are all focused on demo/trial motions. This is doubly harmful if your competitor’s trial showcases their best features and your free plan doesn’t include them.

Free trials with poor onboarding 

Not every founding team can make onboarding and activation an early strength. If you are looking to get better, learn more about how to nail your self-serve experience here. What’s important to remember is that a focused and friction-free onboarding experience is critical for free trials to work. Without a great self-serve onboarding, you’re likely to lose most of its benefits.

Bad payment experience 

Whether you have a free trial or a free plan, you will need to design your payment call to action (CTA) and buying experience thoughtfully. The first decision to make is whether to offer a credit card–based plan. 

Running a GTM motion that has both credit card–based flows as well as top-down enterprise sales is complicated and requires significant resourcing because you’re running two different buying and renewing motions simultaneously. For this reason, offering a credit card payment only makes sense if you want to build a large customer base at a sub-$20k average selling price (ASP). If not, it’s a better customer experience to offer a free plan and make sure that your customer doesn’t get “locked out” and frustrated when they hit their usage limits. Allowing trials and free plans to be immediately extended by the account executive who owns the account is critical to ensure good customer experience.


Conversion metrics


Conversion rates for all product-led growth are a function of your product, target customer, and execution across messaging and UX. Be wary of survey-based metrics that claim to give you exact percentages in benchmarks — often these surveys have conversion definitions that are widely open to interpretation and vary from company to company. 


Here’s directional guidance on what to measure and some ranges for gold-standard conversion rates. This assumes you have executed well on three foundational pillars: messaging to attract the right sign-ups, good UX to onboard new users, and a basic nurture campaign to help convert them to paying customers. 

• Website sign-up: 5% conversion

Whether you have a free plan/trial, the “qualified” leads you get will likely be in the range of 5% of unique visitors to your website. A free plan typically attracts a larger proportion of unqualified users that might make this metric look more attractive at first glance.

• Sign-up to activation: 20–30% conversion

As you iterate and improve your onboarding flow, you should be able to “activate” as much as 20–30% of your website sign-ups. This means you’ve gotten them to an early “aha” moment with your product. A critical driver of how high your activation rate is the number of stakeholders who need to be involved for activation. Rates are higher with one stakeholder and lower with two or more.

• Activation to payment (team plans): 20–50% conversion

This is where conversion rates start to vary between free trials and free plans. However, a lower conversion rate to paid accounts is not necessarily a bad thing if your paid product has higher ASPs. Again, the choice here is all about what’s right for your company. 

You can let cost-conscious customers continue on a free plan and only monetize a few with high ACVs or convert more customers from a free trial with a low ACV to get them started. For instance, you could convert 50% of all activated users with a <$500 /month ASP. Or you could allow them to continue on a free plan while you cherry-pick the 20% customers of your activated base who want to pay for a $2K/month team plan. 

• Activation to payment (enterprise plans): 20–30% conversion with sales assist


As your brand awareness grows, you will increasingly find enterprise employees (say, companies with fewer than 1,000 employees) start trying your product for free. Your sales team should get involved with these trial users immediately to drive conversion to enterprise contracts with $50K+ ACVs. 

In a land-and-expand motion, a small $50K land with one enterprise team can quickly grow into a $500K contract that covers three or four significant teams. As Alex Bilmes, founder of Endgame says, this is why customer segmentation is the foundation of product-led sales. The large account potential is likely true for less than 10% of your activated free users but they are the most high-value segment of all.

Hybrid approaches to SaaS sales

At Unusual, we’ve observed two trends that deserve to be called out. First, more high-growth SaaS companies are starting to offer always-free plans over trials. The split toward trials is moving down from about 40% a decade ago to about 20% now, in 2021. My hypothesis is that this is driven by a growing need to offer collaboration and integrations early in the customer journey. 

Another trend is a hybrid experience where you offer a free plan with an automated trial to a paid plan for teams that are coming up on usage limits. I think of this as a product nurture (vs. email nurture) strategy. While these are non-trivial to develop and maintain, they might be necessary based on your situation. For example, if you don’t want to monetize SMB customers, we recommend offering a free trial to your pro/enterprise plan but then let small, cost-conscious customers default to a limited free plan when the trial expires. 

What about open source?

If you’re offering dev infrastructure, you’re likely considering maintaining an open-source version of your software. This can offer a lot of benefits like building trust, community, and essentially playing the role of a free plan (with some nuances) for your dev customers. Hence, you can use the same framework as the freemium strategy to make the decision about offering open source. However, there are two important caveats to add: 

  • As founders, would you enjoy being deeply involved in your open-source community? If not, this can easily become a burden to maintain and grow.

  • As developers, are your customers getting real value out of a self-hosted open-source edition of the software? If no one is using it or contributing to your codebase, you might be maintaining your open-source project more as a checkbox than a product-led growth strategy.

Implications on customer success and support 

A question we get often from founders is how much to budget for the cost of onboarding and supporting a free tier. Wouldn’t it be better to not have a free plan so you don’t have to support free customers? Yes and no. 

While a free plan does require more investment in ongoing support, remember that you are picking the strategy to maximize your revenue potential and not minimize short-term costs. Additionally, if you want to run a product-led growth strategy, you must invest in a good self-serve onboarding experience to minimize the need for upfront customer support. Scope your free/trial product in a way that customers don’t need your team to help every time. Then you can cherry-pick the most high-potential target accounts to offer a white-glove service to. Learn more about how to approach customer success for free/SMB plans here.  


Written by
Sandhya Hegde
Partner
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