Microsoft, Adobe, Google Workspace, Netflix and E-commerce are just a few of the public cloud services used every day to run businesses and to provide entertainment. While their purposes vary, these Software as a Service (SaaS) companies share a common thread: a subscriber’s first touchpoint with them often begins with a free trial.

But how successful are these trials at converting users to subscribers? Research by Alice Li, associate professor of marketing, explores the efficacy of these tactics and reveals what SaaS companies should be focusing on.

“Software companies spend lots of marketing dollars on emails, banner ads and search engines to try and convert prospects into subscribers, but there is usually a low conversion rate,” Li said. “SaaS managers are grappling with the question of whether and to what extent free-trial usage and marketing efforts can help enhance conversion rates, so I began to study these questions empirically.”

SaaS is growing. On the heels of the COVID-19 pandemic, research featured in Harvard Business Review shows that SaaS companies began to focus on sustainable growth by adding subscriptions to their core product lines.

Li’s paper, published in Production and Operations Management, examined how various marketing touchpoints by SaaS companies are impacting consumers’ subscription decisions. These touchpoints included impressions and clicks of display ads and emails, organic and paid search clicks, types of message content and frequency, and the variety of free-trial usage.

“There are two routes that SaaS companies use to attract and retain customers. One is to spend money on display advertising, email and search engine marketing,” Li said. “The message content could either provide information or awareness of a product or persuasive messaging like ‘Go buy this product today and I’ll give you a discount.’ The other is to offer prospects free trials of the software.”

She found consumer-initiated touchpoints, more frequent free-trial usage of a product, persuasive messages sent to frequent users and featured messages sent to variety-seeking users all encouraged consumers to convert to being subscribers.

What didn’t work was providing a greater variety of software to explore and too many firm-initiated touchpoints conveying persuasive messages.

“The more the merrier is not always the case when it comes to software. When a consumer has too many choices, they feel overwhelmed and their overall satisfaction goes down,” Li said. “Adobe or Microsoft can offer 100 or 200 applications for a seven-day or month-long trial, but learning digital software is time-consuming. Consumers really need to spend some time with the software to understand and really learn it. Having fewer options makes it easier to decide to subscribe.”

Another consideration to conversion success is variability across industries. A 5 percent conversion rate is normal for most industries, and a 10 percent conversion rate or higher is considered excellent.

“The churn or turnover rate of subscribers after one year can be as high as 80 percent,” Li said. “While they may come back, digital companies have to face the fact that more than half of their new subscribers will leave after one year. The only real exceptions are when there are no other software alternatives.”

So how can companies drive subscriptions?

Because subscription margins are so thin and discount offers are minimal and limited — maybe a $5 to $10 discount the first month to join — software companies need to understand how all of their touchpoints, whether consumer- or company-initiated, complement each other, Li said.

“SaaS companies need to decide how to spend their marketing dollars — either on a set of targeted products or by providing free trails frequently on highly demanded products,” she said. “These decisions can help companies keep their customers rather than having constant churn.”

Another takeaway from her research is that an over-reliance on email marketing tends to negatively impact SaaS conversion rates.

“Some customers do eventually come back in one or two months or one year later, but companies need to consider and study their marketing efforts in order to earn revenue from subscriptions,” Li said. “Too many emails can be a hinderance to subscribing.”

“The bottom line we see as marketers is that unlike a product like Coca-Cola, where consumers are brand faithful, digital products have much more competition, do not have the same loyalty and need to focus their marketing efforts wisely.”