A free trial is a traditional customer acquisition model that allows customers to test a product or service before purchasing it. With a free trial, a customer can test a full version of a product or service.
The only limitation is the time of the free trial.
It’s one of the oldest existing marketing tools. Remember all the free snacks you had at promotions in supermarkets or the small packages of free cosmetics they gave you for testing?
It’s like that – you get a taste of it for free, but only once. Of course, here, we will not talk about food or cosmetics.
We will talk about free trials in software and app sales and subscriptions. Music and video streaming. Media content and online learning courses.
Free trials are among the most used marketing and sales techniques for all these businesses and many more.
They are also one of the most successful – if done right!
Table of contents
- Free trial vs. freemium model
- Why use Free Trial?
- How does a Free Trial work?
- Strategies for converting a free trial to paid
- Following the KPIs
- Free Trial Abuse
- Benefits of a Free Trial model
- Who uses free trials?
Offering a free trial can be very successful or a complete miss, so businesses must consider many factors before offering a free trial.
Even if free trials are generally the right way to go in software and online content sales and subscriptions, every case is different.
Free trial shouldn’t be mistaken for another common customer acquisition model – Freemium.
Free trial vs. freemium model
Firstly it’s essential to know the difference between the Free trial and the Freemium model!
The two are similar but with crucial differences. Where one model can be incredibly successful, the other can be completely wrong, and vice versa.
But, many times, the two models complement each other and are used together.
As mentioned, in a free trial, the customer receives a fully working product or service but only for a limited time. In the freemium model, the customer gets the product or service free for an indefinite period but with limitations.
If automakers used these models, it would look something like this! If you select the “Free Trial,” you can get the car for free with unlimited mileage, gas, and insurance. But only for seven days!
On the other side, with the “Freemium” plan, you can get the car for free forever! However, the engine will be limited to 20 HP, and the maximum speed will be limited to 25 miles per hour. In addition, it’s uninsured, and you can use only half of the trunk space and open the door only ten times a day.
We are joking with our example on cars, but anyone who has tried both models, especially on SaaS platforms, can surely relate.
Both models have pros and cons, especially regarding the whole product and its pricing.
Therefore deciding on one or the other is not a simple decision and takes much consideration.
Why use Free Trial?
For the company, the goal of a free trial is straightforward. They want to attract as many users as possible to test the product or service.
Hopefully, many will like it and then buy the product or subscribe to the paid version.
For potential customers, the buzzword is “free.” If something is free, they don’t risk anything. They can learn about product features, get the user experience and determine whether the product or service is a good choice for them.
A free trial or any other “free” model requires significantly less effort in attracting (onboarding) the users. If a business wants to sell a product from day one, it will need to invest a lot of time and money in promoting and advertising the product. It will also need to communicate the values of the product and educate users on how to use it.
With a Free Trial, onboarding is much easier, but it presents a challenge in keeping (converting) the user after the free period.
Businesses can use a free trial for the first contact with the potential customer or as a part of some other business model, such as freemium, or as a tool to demonstrate the benefits of a different higher subscription plan.
How does a Free Trial work?
Before offering a free trial, businesses must provide a variety of payment methods. It’s an important decision that must include intensive customer research. About 42% of customers don’t make the final purchase if they can’t pay with their preferred payment method.
When a user gets an invite to a free trial, usually, he must open an account and provide some basic personal or business information.
From this point on, there are two basic ways to activate the free trial.
One requires the input of payment method (Opt-out model), and one that doesn’t (opt-in model). Each option has pros and cons that significantly affect a business’s performance.
Opt-in free trial
An Opt-in Free Trial allows users to access the free trial without providing any payment information up-front. Standard time frames for a free trial are 7, 14, and 30 days.
Opt-in free trial is the easiest and most effective model for attracting a large trial user base. It’s fast and simple, and users feel the safest because no payment method is involved.
After the trial ends, the user has two options. He can provide payment details and buy or subscribes to the service.
If he doesn’t want to, he can’t use the product or service anymore or gets downgraded to a lower or free (freemium) version.
For opt-in free trials, a typical conversion rate is around 25%.
Opt-out free trial
An opt-out free trial requires users to provide up-front access to their payment method. That means that for activation of a trial, the user must first input a credit card, PayPal account, or any other payment method.
He doesn’t pay anything, but it guarantees that businesses can charge him after the free trial.
When the user uses the payment method, he also authorizes the company to make recurring payments after the trial is over. The user gets a notification at the end of the free trial period. In it, he is reminded that he will automatically become a paying member unless he cancels the subscription.
According to statistics, about 60% of opt-out free trial users convert to paying members at least for a month.
Strategies for converting a free trial to paid
When talking about converting free users into paid ones, there is no significant difference between opt-in and opt-out free trial models.
During a free trial, the user needs education and full support to properly explore the product. The worst thing that can happen is that the user gives up because the product it’s too complicated.
This support is usually in the form of tutorials, manuals, chatbots, and with the possibility of live help.
Once the free trial approaches the end, the strategies for conversion come into play.
First is an email that tells them all the benefits they will lose as soon as the trial is over. It is also important to outline the costs of upgrading so that users can think it through.
With an opt-out free trial, it is fair to politely inform the user that recurring payments (auto renewal) are in place. So if he doesn’t cancel (opt-out) the subscription, he will be charged every billing cycle.
Before the end of a free trial, the user can also receive offers with discounts or bundled offers if he decides to stay.
A company can also try to schedule a call or meeting with the client to get feedback on his experience and offer additional help.
Even with all the strategies, some users still won’t convert. Maybe the timing is not right, or the product is missing some required features. So companies must stay in touch with these users and regularly send them information on product upgrades and new promotions.
They might even offer another free trial at a later time.
Following the KPIs
Like in any business, it is crucial to follow the essential Key performance indicators or KPIs in SaaS and general subscription business.
While some are pretty easy to calculate, businesses need a billing and revenue management platform or subscription management software for a proper real-time analysis.
Here are some of the most important KPIs to follow if the company wants to evaluate if its Free Trial strategy is working. If possible, these KPIs should also be compared to competitors or the industry standard.
Free Trial to Paid Conversion Rate
The Free Trial to Paid Conversion Rate is the percentage of trial users that became paid customers after their free trial ended. It’s a straightforward indicator, but it doesn’t always show an accurate picture.
According to some research, 40 to 60% of people have at least once forgotten to cancel their opt-out free trial. They “converged” and were billed for the product. However, they canceled it on the first possible date.
This “forgetfulness” may result from careless customers, but it may also be a mistake or the company’s intent. Maybe the users are not receiving enough information and warnings about what will happen if they don’t opt out.
If the company has many customers like this, their Free Trial to Paid Conversion Rate will be high but unjustified.
Clearly, if the user feels he was tricked into paying, he will not be happy about it.
As a result, when they cancel, the company will have a much lower customer retention rate and a higher churn Rate.
Customer retention and Churn Rate
Customer retention and Churn Rate are two basic KPIs for any subscription business. The churn rate shows how many users canceled or downgraded their subscriptions.
A high churn rate is an alarming signal that usually indicates the product is not delivering what it promises or the conversion from free trial to paid version was not done right, like in the case mentioned above.
The customer retention rate is the opposite of the churn rate. It shows how good the company is in keeping the clients from the start till the end of the customer’s journey with the company.
Customer Lifetime Value (CLV)
The Customer Lifetime Value shows how much, on average, a customer will spend in the whole period as a customer. So the total a company will earn on him from the first to the last day.
The Customer Lifetime Value is a basis for companies’ decisions on how much they can afford to spend on getting a new client. After analyzing past CLV and forecasts for the future, they can determine their maximum Customer Acquisition Cost.
Customer Acquisition Cost (CAC)
When a business calculates all the costs it has to get new customers, it gets a business metric called Customer Acquisition Cost or short CAC.
For that, they need to look at the total cost of sales and marketing and the costs of property, human resources, and equipment.
Comparing CAC and CLV shows whether their efforts were successful and justified.
The Customer Acquisition Cost is a basis for future planning. A company can afford high acquisition costs if it sells a high-value product with a high Customer Lifetime Value.
For instance, they can spend a lot on advertising. In B2B sales, they can even personally approach all potential clients.
On the other side, if they want to keep their CAC low, they will use cheaper and more mass-oriented approaches like Free trials or Freemium.
Monthly and Annual recurring revenue
Ultimately, a business must have the financial resources to pay for all its customer acquisition and operational costs. It’s where Monthly Recurring Revenue (MRR) and Annual recurring revenue (ARR) come into view.
Both metrics predict the business’s monthly and annual recurring fees and its business model’s success.
Free Trial Abuse
As said, a free trial is an excellent option for many businesses, but it comes with some challenges. One of them is preventing users from abusing the free trial feature.
Once they experience free service, many users may feel tempted to use it again. They come up with different strategies, and the most popular one is creating multiple accounts and then deleting them after free trials.
Businesses implement various tactics to prevent this. The simplest is to allow only one trial per email address or phone number. Some businesses offer coupons per email; every user gets a coupon code which can only be applied once per email address.
More advanced options include restrictions on payment methods or even blocking the user’s IP address.
Benefits of a Free Trial model
A free trial can benefit the business if it is used well. It can add to:
- A positive first-hand experience for customers
With a free trial, users can experience the product or service without limitations, like in the paid version. They can see for themself if it fits them and if it’s easy to use and get used to it.
Recent research has shown that around 42% of people think the free trial is beneficial and lets them try a product or service before buying.
From a customer’s perspective, it’s much better than a demo or a freemium. Especially a very limited freemium can be frustrating to use if, for most operations, you receive a message “only available in the paid version.”
Because users can test it thoroughly, a company will also get much better feedback about its product.
- Easy to implement
From the business side, it’s also easy to implement. The product is already developed and needs no adjustments.
All the business needs is appropriate billing software. It must be able to handle the free trial model and automatic recurring billing when the trial ends.
- Easy to promote
The buzzword “free” will draw much more attention than any other message. Free Trials are now well known, and users appreciate the option to test the product without the fear of long-term commitment.
- Lower Cost of Acquisition
If the product is good, the cost of acquisition for a free trial is low. The word “free” draws the users, and the product persuades them to stay.
Unlike direct sales and other techniques, a free trial requires less marketing and sales team involvement and reduces HR costs. It also requires less investment in advertising and promotion. All of this reduces the Cost of Acquisition.
Who uses free trials?
With so many competing services, many businesses are using the free trial to give potential users a view of what they offer. It’s so common in the SaaS industry that it would be harder to find someone that doesn’t offer it than someone that does it.
It’s also widely used in the media and entertainment industry by the giants like Amazon, Apple, Hulu, Spotify, Paramount, or YouTube.
Amazon Prime is Amazon’s paid subscription service that offers many different benefits. One of the most famous Amazon Prime services is the Amazon Prime Video streaming service which millions of people use daily.
Amazon Prime’s free trial users can use all the same features as paid members for that 30-day free period. Users can also cancel the free trial anytime. If they forget to cancel their subscription before their free trial expires, they will be automatically upgraded to a paid plan.
The cost is $11.59 per month as part of 1-Year Prime Membership. With Prime membership, this feature is free; otherwise, it is payable either as $14.99 per month or $139 a year. Students can use an Amazon Prime Student membership and pay only $7.49 per month or $69 per year.
LinkedIn Freemium and Free trial combination
Free Trial is also many times used in combination with a freemium model.
The probably best-known example for the general public is the social networking platform for professionals, LinkedIn.
Anyone can set up a personal profile and a company page for free. But Linkedin has many other tools that users can use to build their personal and company brands.
It also enables advertising, lead generation campaigns, learning courses, recruitment tools, and more as a paid service.
It provides a free opt-out trial for users and companies that want to test these options.
A Free Trial is a powerful customer acquisition model if done right. However, a free trial is probably the worst model to use if the product is not so good or overpromises.
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