How to increase your free-to-paid conversion rate (but not the churn!)
A free plan can be a great growth marketing tool for a startup. But crafting this plan requires a lot of skill, experience, careful calculations, tons of testing — and still it can end up ruining your conversion rate. The value of your product to a customer is not in the access to it. It is defined by how well your product is able to solve their problem.
You’ve built a product but honestly, customers are not lining up. You posted about it on Twitter, LinkedIn, Reddit, in a couple of Facebook groups. Got yourself some traffic, dozens of sign-ups for a free trial (yay!). But when the trial is over you still have almost no conversions.
That sucks! No worries, you tell yourself. It’s just a numbers game, right? You just did not have enough free trials to convert.
What do they say? An average conversion rate should be around 5%, and you had just 12 trials — no wonder you did not convert even 1 person.So you set out to get more traffic to your landing.
You launch on Product Hunt. You invest in SEO to be found more often organically. You spend $1K on Google Ads.
Trials are piling up. But the conversion rate still sucks. It’s far lower than 5% and you’re not sure when your $1K invested in paid acquisition is about to be paid off.
Does it resonate?
Then this guide is for you. It will most probably change your perspective and how you think about conversion rates, as well as the interconnected subject of retention. Let’s dive in.
Reasons for low free to paid conversion rate
Let’s try to figure out why the hell you might be getting free trial sign ups but no conversions to paid users. What are the possible reasons?
1. Expected value vs received value
You’ve obviously seen these hilarious “expectation vs reality” memes about people buying stuff on Amazon or Alibaba. Guess what?
The same thing happens all the time when users sign up for a service.
Sometimes the product manager is not the brightest star on the sky while a copywriter (or a person who built a landing page) is much more experienced and did a great job.
As a result users get very inspired and hopeful while scrolling down the landing, they have their expectations high.
They sign up – only to find out that the tool is not something they needed. This disappointment leads to a low conversion rate.
2. Activation problem
You expect your users to start digging into how everything works in your app as soon as they create an account. Unfortunately, that’s not what happens in real life. Many of those who sign up for a free plan would never make a one single attempt to try to use your product — and never get activated.
You have to actively guide users, nudge them gently to use your product to make it happen. ”Hey, but I can just ask for a credit card upfront. This will keep them motivated enough to at least try my stuff!” — you might be thinking.
Well, yes. And no. In many cases even a high subscription fee (over $100) and opt-out framework is not enough for activation.
Unactivated users most often churn after the first withdrawal and start writing negative reviews.
3. A “free” tier is too good
A free plan can be a great growth marketing tool for a startup. But crafting this plan requires a lot of skill, experience, careful calculations, tons of testing — and still it can end up ruining your conversion rate.
As Rob Walling, founder of Drip.com, once said, “Freemium is like a Samurai sword: unless you’re a master at using it, you can cut your arm off.”
What is a “normal” conversion rate?
Unfortunately, in the startup industry the “normal” conversion rate on free-to-paid users can be anything from 2% to 20%.
One parameter that has the biggest value on it is the annual contract value.
Annual contract value (ACV) is the average annual revenue generated from each customer. For example, if a customer signs a 5-year contract for $50,000, the annual average yield of their contract would be $10,000/year. If a customer buys a $10/month subscription the ACV will be $120/year.
This parameter doesn’t take into consideration how long the customer is going to really stick around.
How does ACV affect free-to-paid conversion rate? The higher the ACV, the more difficult it is to convert users. Therefore, the conversion rate will be lower
The best way to find your “normal” is to look at your competition numbers.
How to increase conversion rate: hacky ways
There are several “hacky” tactics that might help you increase free-to-paid conversion rates in the short-term perspective but they most probably have a negative impact on your churn rate as well.
Meaning, you will get more paid customers now. But they will churn faster in a month.
Why do we list them then?
These tactics can still be useful in two specific cases:
You’re desperate about cash and you need at least some inflow to keep you going for another month
You’re planning to seriously study these customers’ behavior in order to improve your onboarding processes, choice architecture and in general, service design. In other words, you need these customers as data sources.
1. Go with an opt-out framework
We have used this term before but you might not be familiar with it.
An opt-in free trial — it’s when a user gets access without providing payment information up-front.
Opt-out free trial — it’s when you ask for credit card details when an account is created.
The downside of the opt-out framework is that requiring credit card information is a huge friction for users and could result in a lot of them abandoning the product before even trying it out.
This outcome becomes even more expected if your product is not associated with a strong brand, you have not built a reputation around it and most of your traffic doesn’t come from social media where people already know you.
If your website visitors are total strangers, they know nothing about your product and the problem you’re solving is not super urgent, they are very likely to abandon the registration flow and go look for the alternatives that don’t require payment upfront.
More on this inRoberto Robles Guide on conversion:
Huge discounts and life-time deals tend to convert faster than a regular pricing policy. Users would convert being led by the fear of missing out.
How efficient can it be? Breakcold.io made $20K in 7 days by offering lifetime deals. Read more on this here.
Why is it still a hacky way? Life-time deals tend to have a low activation rate. People buy stuff not because they need it but because there’s a buzz around it, and the price looks good, so why the hell not?!
These users will be a burden in a long-term perspective if they finally start using the service, because they will require the same level of support and would mean the same level of expenses as all monthly paying users.
If they don’t start using the service, they will provide you with zero valuable data.
How to increase conversion rate without increasing churn
The only plausible way of increasing conversion rate in the long run is to find out 2 important parameters and work hard on improving them. What are those parameters?
User’s “Aha” moment
Time-to-value is an exact time needed for a user to start getting value from your product. The formula here is simple:
shorter the time-to-value = better conversion rate
Very short time to value is one of the main reasons why the conversion rate for on-off deals is much better than conversion rate for subscriptions. When you buy a hot dog at the street stand you get immediate value of eating it = it’s an easy decision for a customer.
The problem is for most SaaS products, the time-to-value is not immediate. It might seem a bit controversial because a user gets access to something useful immediately with SaaS, as well as with hot dog.
But that’s not the case. The value of the hot dog is in the eating. It’s value is defined by how well and how fast it is able to reduce hunger.
The value of your product to a customer is not in the access to it. It is defined by how well your product is able to solve their problem.
Therefore, time-to-value equals the time needed for your tool to solve a customer's problem. Moreover, it’s not about the actual time needed. It’s about the time when a user REALIZES they are solving their problem. In other words, it’s time to “Aha” moment.
User’s “Aha” moment and how does it look like
Therefore, “Aha” moment has two dimensions:
the ability of your product to solve the actual, not imaginary user’s problem
user’s ability to realize it
Both aspects are equally important.
If the product solves a problem the customer doesn’t really have, or if this problem is not important enough to pay for its solution — the conversion rate sinks while churn goes up.
If the product solves the problem but a customer doesn’t see it — the result is the same.
Therefore, the solution to improving the free-to-paid conversion rate in the long run is to tackle both aspects of the product: the problem and the realization.
The question you have to ask yourself and find answers to: What do my users really want?
Think of your customer’s path to the value as if it is a treasure hunt game.
Most assume that what lies at the end of a treasure hunt is a pile of gold—but not everyone cares about gold.
Some people want more time with loved ones, or to be free and travel around the world. Knowing what treasure lies at the end of the hunt helps the treasure-hunters stay motivated on their journey.
To help users succeed in experiencing the product’s value, you need to know what they qualify as treasure. What exactly do they want to achieve with your product?
The Jobs-to-be-Done framework developed by Clay Christensen, helps with digging deeper into specifics of your customers’ desires (Michele Hunsen talks a lot about it in our conversation with her, so you can listen to it instead of reading the whole book).
Because, let’s be honest — we all want to be healthy, live a long happy life and not work 60h week. But the devil is in detail — how exactly your particular customer is hoping to reach these (or other goals) and where your product can jump in to be “hired” and get the job done.
How to craft a user’s path to “treasure”
Your job as a founder to build a “yellow brick road” for your users. A path they can follow to get to the “treasure” your product provides as fast as possible. Treasure is what your users want most when they use your product.
How do you build a road to treasure for your users?
Identify benefits associated with the JTBD
Identify the features of your product that help users get those benefits
Map the steps that a user must take to use those features
Nudge users to actually take those steps!
Step 1. Identify the benefits associated with the JTBD
For example, your customer’s goal is to be found more often organically. There’s a number of “jobs” along the road that lead to this goal.
Job 1: find the keywords with the best opportunities
Job 2: get more backlinks for these keywords
Job 3: create more content around these keywords
Benefits will be:
Job 1: get the keywords with the best opportunities ⇒ outperform competition
Job 2: get more backlinks for these keywords ⇒ faster ranking
Job 3: create more content around these keywords ⇒ better domain quality
Step 2. Identify features that help with getting the benefit
In our example with SEO-related tool it could be features that help with:
Do the keyword search and competition analysis, provide insights on other opportunities
Backlinks audit and backlinks opportunity
AI-based taglines generator
Step 3. Map the steps that a user has to take to use the features
In our example we can split it into several sets of actions that we can (and maybe should) frane as user stories
As a user, I want to see the keyword opportunities for my website, so that I can choose the ones that have less competition and a higher monthly volume search.
As a user, I want to….
Step 4. Nudge users to actually take these steps
This part of the process is usually called “onboarding” in a narrow sense where you have to gently push a user in a proper direction using a choice architecture, popups, tutorials and email sequences.
The elements of onboarding flow that are considered to be helpful and efficient
Welcome message when a user signs up that sends them to tutorials or a dashboard
Empty states pre-filled with data or templates, or showing a clear guidance
When a user enters a dashboard and sees it totally empty they need guidance on what to do. Having something with pre-filled data (a bogus account), data already relevant to a user or templates, or very direct recommendations on what to do helps a lot.
Users need to see that they are getting closer to their goal to stay consistent. Otherwise, they lose interest and stop using the tool. Status and progress updates help a lot with this
When a user does something right — celebrate it. Having positive emotions associated with your tool helps tremendously.
Trial expiration reminders
If you’re using opt-in process don’t be shy — remind a user to update. But reminders can be also helpful when you use opt-out as well. They save you from angry users who forgot to cancel the subscription.
Use personal human connection in your email communication
As a bootstrapped founder, being personal with all your communication is your huge advantage. People trust people. People want to be liked and admired by other people. Getting email sequences signed by “the team” doesn't build this rapport. But when you sign all your emails with your first and last name, when you add a picture with your smiling face it has more chances to establish this one-on-one relationship between you and a user. Therefore, when time comes, they will have to reject your personal offer to upgrade. It’s much tougher to do than rejecting a faceless anonymous “team”.
Use assisted sales and demo calls when possible
One of the most interesting findings from Tom Tunguz's research is that a sales-assisted experience can increase free-to-paid conversion rates by 3.5 times when compared to unassisted, self-serve onboarding.
But the nature of your product, target customer, or the market you serve should help you determine whether or not adding salespeople to your buying process will move the needle on your free-to-paid conversion rate.
Crafting a data-based path
The important question is how do you get all these insights about the features, benefits and steps? Can you just guess?
Most founders do just that. They guess. But in this case, the result is 100% luck-dependent. It’s like rolling the dice — with the difference that the dice has only 4 sides and variants of landing, while getting the features and the path right might have dozens of variants.
Statistically, it takes 11 tries to get 6 while rolling the dice with >98% certainty.
Can you imagine how many tries you need to get >98% of success if you want to play a guessing game with onboarding?
The best way to increase your chances is to make data-driven decisions.
Again, run sets of customer interviews (that’s what Rand Fishkin from SparkToro did to pinpoint their onboarding process and identify the most relevant features that converted the most of their users).
Track users’ behavior and product adoption using tools like Amplitude, Mixpanel, Pendo, WalkMe or Appcues.
Using both will propel you to the market leadership position.
But what if you don’t have customers? What if you launched a product and not a single user has agreed to sign up to become a paid user? Might surveys of people who landed on your website but did not sign up help? Or just talking to random people — is it an option?
Unfortunately, running surveys on irrelevant audiences is not an option. It won’t provide you with results that will have any positive impact on the conversion rate.