The BLUF (Bottom Line Up Front)
Use paid trials when your sales funnel is extremely wide and costly. Introducing a paid pilot period can improve CAC while not sacrificing growth.
Two other situations can make good use of paid trials: cutting through thick red tape in procurement and getting customers to implement faster.
Don’t use paid trials to cover your costs or market a beta program. Double check that you should use a trial at all, rather than employ a freemium promotion strategy.
It. Has. Been. A. Minute. And for that, we at “The Best Damn Pricing Newsletter on the Internet”1 are sorry. Ok, enough apologies - on to the post.
Why paid trials don’t make any sense
I have always had a problem with paid pilots2.
The problem with paid pilots / paid trial periods is that they go against good economic and pricing theory. In theory, when a product has a delay to delivering value, you should delay the price, to better match price and value (i.e. a free trial). You also might need to incentivize non-customers with a cheaper price, to account for the risk inherent in trying a new product with something like a new customer discount or a money back guarantee.
My problem is this: how can we live in a world where sometimes you should give away a free trial, sometimes you should give away a paid trial, and sometimes you should do neither. Surely if a discounted intro price is good, then a very discounted price is better, and free is best, right?
What Robot Dishwashers Taught me about Unit Economics
Recently, Patrick and I hosted a founder dinner in SF for some of our favorite movers and shakers. Amid stuffing my face with dumplings, one of my tablemates said something fascinating:
We charge $20,000 just to do a demo!
After taking a pre-order for my new kitchen appliance / best friend, I asked my tablemate how he managed to get away with such an expensive demo, not even a trial period.
Me: Don’t you completely dry up your top-of-funnel activity with a paid demo?
Him: Yes, but that’s the point. If we let every lead book a demo, we’d spend all our time chasing dead deals that are never going to convert. By forcing them to pay, we only spend time on the serious deals.
Me: So you sell the same number of deals, but don’t need nearly as large of a sales team?
Him: Exactly.
Paid Trial discourages “Riff Raff” and makes sales much more efficient
Which brings me to…
The 3 Good Reasons to Use a Paid Trial
1) Reducing Customer Acquisition Cost
As our Robot entrepreneur explained, if your top of funnel activity is so large relative to your closed deals, you may want to consider using a paid trial to deter bad leads. By adding friction to the buying process, you are forcing customers to self-select into serious and non-serious buyers.
For this strategy to work, you need a few things to be true:
Customers can self-identify as “serious” vs. “non-serious”. If you need to qualify them (rather than them self-qualifying), then you can’t do this strategy.
It is costly to move customers from “lead” to “qualified” stages of the funnel. If moving down-funnel or disqualifying customers does not require more sales people, then this strategy is simply drying your funnel without saving you costs.
Paid trials do not affect your total wins. This seems obvious, but if total new logos / mo. drops with a paid trial, customers will require a different promotion strategy. Note that it’s total new logos / mo. NOT closed-won rate. You are turning the funnel into a pipe, so win rate will change.
How can you see this strategy working? Check the following KPIs:
Total TOFU pipeline dollars should go down as top of funnel3 activity dries up
Deal ACV * probability of close per FTE should go up as sales spends less time chasing bad leads
New logos per month should remain unchanged
Time to close should theoretically remain unchanged, but may actually go down as sales can focus more
Remember to model out how much each of these KPIs needs to change by for you to actually make money. Ping us if you want to see how we do it!
2) Cutting Through Red Tape
We tend to see this version of a paid trial most commonly in GovTech, Education, Financial Services, and Healthcare. The story goes something like this:
Procurement is a 1 - 2 year long process
A pilot period is required, paid or not
Procurement does 1.5 million checks on your product and service to check compliance and references. It may even require RFP.
The pilot period is expected to be fully operational, but may be a limited scope (e.g. only 1 hospital)
Finding the budget is crucial, so going from $0 to “not $0” is way harder than the specific price, which will be negotiated later anyway
A paid trial front-loads the red tape part of procurement - finding the budget. By putting the budgetary process upfront, you disqualify leads that would force you to go through the painful pilot period, but that would ultimately get mired in red tape.
Cheerful procurement people who are about to ruin my day
3) Sunk Cost Consumers
The last reason to do a paid trial is my least favorite type of pricing strategy - psychological warfare. I don’t like using behavioral pricing for 2 reasons: in the long run it doesn’t work and it’s really hard to research. That said, in the short term, these tricks do work, especially in fast moving sales cycles like consumer or SMB products.
There has been a LOT of ink spilled on how people do not behave rationally when purchasing stuff. One of the more common examples of this is the “Sunk Cost Fallacy”, where if you’ve already put some money down, you’re more likely to just continue buying, even if you’re having a negative experience. As an example, I might continue to fund a bad project, because I already funded the first half, or I might buy a product because I already paid for the trial.
For more cutting edge research, check out these papers from “The Society for Judgement,” which sounds more like an apocalyptic tribunal than a behavioral economics journal.
In B2B SaaS, we commonly see this during a paid implementation. By forcing the customer to pay during the trial period, some of our clients report that customers are either more likely to finish their implementation, or work “faster” through the process.
I want my customers to have some skin in the game
The thing with any behavioral pricing technique is that you must test it to verify that it’s actually working. Try paid vs. free pilot periods and see to what extent customers actually abandon or slow down their process. You may find that the paid trial is not speeding up the process, but it’s almost certainly hurting conversion.
The Bad Reason to Use a Paid Trial
Watch out for these sound bites in board rooms - the paid trial decision may still be the right one, but don’t do it for the wrong reasons.
My Implementation Costs Are Too High! As we’ve covered before, your costs probably don’t matter and are distracting you from good pricing. There are plenty of examples of free trials with real marginal cost (our favorite example is a free iPhone when signing up for Verizon).
My product is in beta, this is a design customer. That may be true, but you should frame this as a “early partner discount” rather than a “fee to try it out”. Beta testers are taking a risk with untested features and products and should be compensated, not taxed (even if economically, it’s the same thing). Don’t fall into the trap of taking feedback from unpaid customers.
You really should be a freemium, not a free trial. It happens - check out this post for how to optimize your freemium offering.
Get in touch
Crescendo works with medium-sized software companies to improve their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at [email protected] or schedule time via the button below.
1 Self-proclaimed
2 “Proof of concept”, not the people who fly planes. Please continue to pay airline pilots.
3 aka. TOFU, not the stuff in egg rolls
