📂 The right activation model increases sign ups without increasing churn

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📖 The following is an excerpt from my work-in-progress book, Founding Marketing. It's a (very) rough draft of thoughts, notes, and research... so feel free to reply with your feedback on what I should expand more on and what needs to be clarified. Enjoy!

The right activation model and the wrong pricing model, and vice versa, is disastrous. You need both to work in conjunction.

You want to find the activation model that results in the most customers LONG TERM. Not the most leads… the most customers.

Most people focus on lead volume or lead conversion rate, but focus on what actually results in the most customers.

For Databox, offering a free trial actually helped them reduce churn because customers were essentially treating their first month like a trial anyways.

Making a simple tweak in their model cut churn in half.

Notion’s secret weapon is that you can use the product completely for free until you become a power user — right when you’re ingrained, hooked, and invested — which in their case is represented by a certain number of “blocks” you use in the app, and then they ask you to upgrade to a paid account.

Evernote’s lost opportunity was in their model. They couldn’t successfully monetize Scott because he could do everything he wanted to for free.

Evernote actually lost Scott because they couldn’t get him to pay money

Notion won Scott because they got him to pay money. Paying money (the right way) is a great way to improve retention.

Activation model success can be measured two ways:

1. Lead to customer conversion rate
2. 90-day new customer retention rate

Your activation model is the combination of terms and methods you use to get people into your product.

Brian Balfour explores the idea of Model-Market Fit in his series on 4 Frameworks to Grow to $100M+. Model-Market Fit is the concept that your market influences your model (i.e. pricing model and strategy) and is derived from Christoph Janz’s Five ways to build a $100 million business. In it, he explores the relationship between ARPU and the number of customers you need to reach your revenue goal.

Now, not everyone is trying to build a $100M+ business. But the principles remain. Delete one or two zeros from the number of customers you need for each ARPU threshold and you can translate this same framework for your business.

Want to build a $1M+ business? A low ARPU means you need a large number of customers, which also dictates the way that you go acquire and subsequently retain those customers. A high ARPU means you don’t need so many customers, but they may be harder to acquire and more critical to retain.

Am I suggesting that you simply choose your target ARPU, set a price that matches the ARPU you want to see, and then magically find Model-Market Fit?

Not so fast. As Brian explores with Model-Market Fit, your market dictates your model, you don’t.

Introducing a free plan to attract more users won’t solve your startup woes. Charging more won’t solve your startup woes. “Going upmarket” won’t solve your startup woes either.

The market determines the value of your product, it’s your job to find out what that value is and then decide on the Value/Price Ratio you want to deliver — which we’ll get into below.

Pricing your product at $100,000/year would never make sense for a stay-at-home mom selling earrings online, but for a national jewelry retailer? It’s probably normal. In fact, it could be a bargain.

This is why your model is so key. You don’t want to leave money on the table. And you also don’t want to be tweaking your pricing when maybe it’s your activation model that’s not right, or vice versa.

You have to match your activation model and pricing model with the way your customers test and find value in your product.

Let’s get into how you can use your model to engineer growth.

There are five major categories of the activation models

You have to consider what’s the best for you and not just pick something by default.

Freemium

Freemium like Mailchimp, where it’s completely free to use but you’ll be limited in what you can do.

The freemium model offers a version of your product for free and for an unlimited amount of time. Freemium essentially operates as a lead generation tool to lead users to upgrade to a paid version of the product.

The 3 main types of freemium are:

• Reduced features‍: Extra features or functionalities require upgrading to a paid plan—e.g. Slack​
• Reduced capacity or usage‍: Use of storage limits, data quotas, etc to restrict usage—e.g. Dropbox​
• Reduced support‍: Access to support docs, CS, etc. offered on a tiered basis—e.g. Heap Analytics​

The advantage freemium is that it makes it incredibly easy for your customers to experience the product. It can also be a competitive advantage in marketing when you can use a phrase like “Get started right now, completely free forever.”

The freemium model can attract mass adoption and even some virality. A strong referral program paired with happy free users can be a powerful marketing channel. It’s also easier to test and validate acquisition and growth tactics on a larger user base.

There are also many disadvantages. Free-to-paid upgrade rates are often incredibly low. Free customers are often your worst customers, with negative attitudes or unnecessary criticism. They may also suck up support and engineering time while giving nothing back.

It’s also possible that you’ll lose out on users that would have paid you but opted for the free plan instead. And while they’re probably cheaper to acquire, they still cost you money if they come through any paid marketing channels (ads, affiliate, etc.), which can be difficult to justify if it takes several months to convert a reasonable portion of those free users into paid users.

Weigh the costs carefully. Freemium almost caused Baremetrics to explode.

Freemium is best suited for products that:

• Get more valuable the more you use them
• Can afford possibly high technical or support costs
• Can use with little to no help from a human being
• Target beginner-level users
• Best communicate the value of using the product by experience
• Have a viral-loop to get exposed to other prospective customers

Example: Mailchimp​

Mailchimp disrupted the email marketing space several years ago when it first introduced its free plan. It’s been a staple to the business’s value prop and strategy to acquire and grow users.

Example: Webflow​

Notice the subtle messaging to try Webflow for free. Use Webflow all you want, and then when you’re ready to use it for a real project, upgrade to unlock more features and get it hosted on your own domain.

Free trial

Free trial like Baremetrics, for example.

Try it free for 14 days, no credit card required.

The free trial model offers a version of your product for free, but for a limited time.

The length of free trials can vary from a couple of days, a week, two weeks, or even a month. The time ranges I see the most often are 3 days, 7 days, 14 days, and 30 days.

This limited window of time creates urgency for users and gives you opportunities to engage while you have them for a short while.

Generally, the shorter the trial the better it is for you as it reduces the length of your sales cycle and gets you to revenue quicker, but it’s important to still give users adequate time.

Products using a free trial either require a credit card to sign up or wait to require a credit card to upgrade to the paid version of the product. Each has their advantages, but as a rule of thumb it’s best to start with a lower-friction option (no credit card required) and then you can require it later if you’re finding that you have too many unqualified leads to properly handle.

Requiring a credit card upfront will almost certainly do two things for you: lower your sign up rate and increase your lead quality. A credit card indicates more purchase intent so it’ll likely weed out many unqualified or lookie-loo users. If you already have a large number of signups or unqualified trialing users are taking too much of your resources, this could be a great way to focus more on qualified users.

One disadvantage that I can speak from experience with many business SaaS apps, is that not everyone has access to the company credit card or feels comfortable putting in their own credit card for the trial. If a user doesn’t feel comfortable asking for access to the company credit card, having someone with a company credit card start a trial for them, or putting in their own credit card, you’ll lose out on the opportunity entirely. Unless you can say with confidence that 95%+ of your users have access to a company credit card or will use their own, requiring a credit card upfront is not advisable.

If you do require a credit card and many of your users don’t have access to a company credit card, consider adding a mechanism that encourages those users to invite someone to the account to add a credit card for them.

Not requiring a credit card upfront requires the lowest amount of commitment and ensures you’re not prematurely disqualifying or turning away users. Especially in the early days, it may be more important to get the most users into your product as possible, even if some don’t have any intention of becoming a customer.

Like I mentioned before, if you do use a free trial, I recommend starting with no credit card required by default and then you can always move to make it required later if you need to slow things down, which is a good problem to have.

The advantage of free trials is that it makes it incredibly easy for your customers to experience the product. It’s also an easy ask to get started for free. And you can start conversations once someone is in the app to help them get value.

There are also many disadvantages. You may not be able to get back to customers in time to help. They also might forget about it. Or they may not be the right person at all – either unqualified or even a potential abuser.

Free trials are best suited for products that:

• Need to be experienced and evaluated to make a purchasing decision
• Can give users a complete picture of how your product benefits them during the trial period
• Are simple or intuitive enough to use with minimal guidance
• Can’t be abused or used for the wrong reasons

Example: Calm​

Calm offers a full week for free to make a habit of meditation and see if it’s for you before subscribing to an annual plan.

Example: RightMessage​

With a bit more set up and education required in a B2B SaaS app, RightMessage offers two weeks for free.

Example: Customer.io​

​Customer.io offers a full 30 days for free, given it takes a considerable amount of time to migrate, set up, get acquainted, and test to see if it’s a good fit.

Paid trial

A paid trial like Ahrefs does with a 7 day, 7 dollar trial.

This was perfect for them because they found a lot of shady people kind of taking advantage of the free trial and they also had a lot of honest people who didn’t want to subscribe because maybe they were a freelancer or just using it for a one-off project

So this way they can ward off the bad people and still extract some value from the good people.

The paid trial model offers a version of your product for a fee and for a limited time. Paid trials are also often described as “Pilots.” Products using the paid trial amount often require a fixed or fractional amount of the normal subscription price to prevent users not serious about using the product or potential abusers.

The length of paid trials can also vary from a week, a couple of weeks, or even 1-3 months.

The advantages are that you get a bit of additional revenue, because it’s not technically recurring, higher commitment from leads, and you also ward off potential abusers.

There’s one big disadvantage: it’s a high barrier to entry. It literally costs customers to try your product. Which is definitely an obstacle.

Paid trials are best suited for products that:

• Need to be experienced and evaluated to make a purchasing decision
• Can give users a complete picture of how your product benefits them during the trial period
• Are simple or intuitive enough to use with minimal guidance
• Could be abused or used for the wrong reasons
• Could give away too much value in a free trial
• The extent of the product’s usage is unknown or unclear without trying

Example: Ahrefs​

The Ahrefs team noticed that many of their novice users and consultants were signing up for their free trial, using the product extensively, but then never subscribing to a paid plan. So they decided to move to a paid trial model, which is beneficial to both sides.

Money-back guarantee

Money-back guarantee like MeetEdgar.

Where they will refund you no questions asked within 30 days.

The money-back guarantee model offers a version of your product for the full or discounted price with the promise of issuing a refund if the customer wants to cancel within a certain time period.

Here’s what Manuel Frigerio of ReferralHero told me about why he decided on the money-back guarantee model:

“I have tested many models: free trials, freemium model and money-back guarantee just to name a few. I ultimately decided to adopt a money-back guarantee model for two reasons: more committed users and better feedback from people who don’t stick around. ReferralHero is not a one-click type of web app. You need to invest some time to think about your campaign, create it and embed it onto your website. I think this model works well to curb out people who are not ready. This, in turn, gives me more time to help the people who are actually ready to give it a go.”

The advantage of money-back guarantee is that you immediately get revenue and that the customers are generally more serious about using it.

There are also many disadvantages. You may have to deal with refunds, which are both annoying and also expensive. And of course not as many people may be willing to pay upfront, especially if you have a competitor who has a free trial or freemium.

The money-back guarantee model is best suited for products that:

• Are simple or intuitive enough to use with minimal guidance
• Could give away too much value in a free or paid trial
• Is priced low-enough that a user feels comfortable risking that money
• The value and functionality is clear immediately or within a short amount of time
• Requires considerable setup and commitment to understanding the value

Example: MeetEdgar​

While many other social media tools start with a free plan or free trial, MeetEdgar took a starkly different approach.

Example: Mailshake​

Mailshake leads with a 30-day guarantee on their pricing page to make it clear as day to everyone who’s interested in starting a subscription.

Example: Kinsta​

Kinsta takes a slightly more subtle approach presenting their money-back guarantee for each selected plan.

Consultation

Or a consultation model like salesforce or other enterprise softwares.

The consultation model requires a meeting, discussion, or demo before allowing users into the product. The consultation can either act as a gateway to one of the other models mentioned above or could completely replace them. For example, after a consultation, the next step could either be a free trial, a paid trial, a money-back guarantee, a setup fee, a signed contract, or just an activated paid subscription.

The advantage of a consultation model

One advantage of using a consultation model is that you don’t have to publish pricing and can build pricing around the customers’ needs. It’s difficult to test and gauge demand for price points in a self-serve model, but a consultation model allows you to get feedback directly from potential customers and create a price point you can be confident about. It also allows you to build a more personal relationship with users, handle objections, and understand your customers on a deeper level.

A notable disadvantage is that it requires considerably more commitment from the user. Time, privacy, and even the energy to make a decision on whether or not to get in contact with you are all real factors you have to consider.

And of course a lower lead volume.

The consultation model is best suited for products that:

• Need a walk-through, tour, demo, or training to understand the value
• Requires extensive setup or commitment
• Has an extensive decision-making process
• Requires a fundamental shift or change in process
• Requires an extensive migration or transfer of data or workflow
• Sufficient lifetime value from your customers to warrant the extra work.
• Have a hefty price tag
• Have many products or modules packaged and sold together

And believe it or not, price actually doesn’t have very much to do with your activation model.

The perfect example of this is Superhuman, a Baremetrics customer.

Superhuman costs $30/month. Does that mean that you can sign up and get started for free? No!

They meet and onboard every single customer, in fact, you’ll probably have to wait in line to even book a meeting to sign up. Because that’s what they’ve found results in the most happy customers.

Superhuman requires some training and some practice and so they help you configure your inbox, practice keyboard shortcuts, and go over what you need to know to really see the value of the product.

Even with a relatively low price and elusive “prosumer” market, Superhuman has managed to create scarcity and demand for their product through a waitlist that ultimately requires a personal onboarding meeting. Unorthodox, but also very effective at educating and creating a personal relationship with each and every user.

One of their employees hit a milestone for 1,000 customer onboardings. I think that’s pretty amazing.

A lot of people would argue that this is completely unscalable and that they could grow a lot faster if they just let people sign up and try it themselves, but the fact is that they’re growing like crazy and they also have really solid retention — so you tell me if they’re smart or not.

Example: UpLaunch​

UpLaunch leads with a gentle request to spend 30 minutes with them.

Example: Cordial​

Cordial positions their consultation as a personalized demo rather than a discovery call, pre-recorded demo, or presentation.

Example: Carthook

Carthook even asks potential customers to apply to work with them so they can qualify disqualify inbound leads.

—Corey

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