What is Trial Conversion Rate?
The Trial Conversion Rate is a SaaS KPI that measures the percentage of free users that convert to paid users over a predefined period. In practice, the trial conversion rate – or free user to paid user conversion ratio – is a critical key performance indicator (KPI) to measure performance for SaaS companies.
How to Calculate Trial Conversion Rate
The trial conversion rate metric is of particular importance to companies with a “freemium” business model, most notably SaaS companies.
Conceptually, the trial conversion rate measures the percentage of users that converted into paying customers after testing out the product in the free trial period.
Under the freemium business model, a company’s go-to-market (GTM), customer acquisition strategy is to offer potential customers the opportunity to first use their product at no cost.
While there are several variations of the freemium pricing model, the two most common strategies are offering free trials and/or a free product with limited features.
- Premium Free Trial → For a temporary period, the customer can access the product to test its features. But one minor drawback is that the company might require customers to enter their payment information as part of the free trial, often with an automated charge processed on the date the free trial ends.
- Basic Product → A company can also offer a free, basic version of its core product with limited features. If the product’s capabilities suit the customer’s needs, the customer is likely to desire additional features (and thus eventually convert to a paid customer).
The rationale for companies offering their product (or a basic version) for free – either on a temporary or perpetual basis – is to establish a foundation for ultimately upselling the potential customer.
Since the customer already used the product and has become familiar with some of its features, the product can either “sell itself” or a sales team member can more easily convince the customer to upgrade.
Furthermore, the freemium strategy enables companies to build their user base without the need to spend substantial sums of money on marketing campaigns and sales initiatives.
Even if a customer does not convert, the company can still collect insights from the feedback of the customers that decided not to purchase the product.
From a long-term perspective, the insights obtained from customers that did not convert can often be more beneficial to the company’s longevity by improving its understanding of the target end market (and customer spending patterns).
Why? In a sense, both the customer and the company educate each other – because the customer provides valuable insights in exchange for the free usage of the product).
Trial Conversion Rate Formula
The formula for calculating the trial conversion rate is the ratio between free-to-paid converted users and the total number of free users.
Where:
- Free-to-Paid Converted Users → The number of users that converted into paying customers at the end of the free trial period (i.e. post-trial conversions).
- Total Number of Free Users → The total number of users that signed-up for a free trial (i.e. demo access).
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Enroll TodaySaaS Freemium Pricing Model: Dropbox Example
As a real-world example, cloud storage provider Dropbox (NASDAQ: DBX) is among many companies nowadays that utilize a freemium strategy.
Dropbox offers consumers and enterprises three paid options to pick from, which can be billed on a monthly or annual basis.
Consumers (Individuals, Households, Solo-Workers)
- 1) Plus
- 2) Family
- 3) Professional
Enterprises (Growing Teams, Complex Teams, Larger Organizations)
- 1) Standard
- 2) Advanced
- 3) Enterprise
The screenshot below displays the various pricing plans that Dropbox offers to its customers, along with the free option (i.e. “Dropbox Basic”).
“Choose the Right Dropbox For You” (Source: Dropbox)
While all the other pricing options present their features (i.e. higher pricing = more storage + additional sharing and security features), the free plan placed at the bottom states, “Just need 2 GB to store and share your files?”
Conversions frequently stem from users downloading the free basic version and continuing to use the product until the user realizes the value in the locked functionalities (and decides to then upgrade to a paid tier).
In the case of Dropbox, the ideal scenario would be a customer running out of space in their free plan and/or wanting additional features such as large file deliveries and stricter file security (and the customer has also been enjoying the user experience thus far).
Trial Conversion Rate Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Trial Conversion Rate Example Calculation
Suppose we’re tasked with calculating the trial conversion rate of Dropbox (NASDAQ: DBX) as of the end of 2021.
In February 2022, Dropbox announced its financial results via a press release from the trailing twelve months as part of the filing of its annual report (10-K).
The “Fourth Quarter Fiscal 2021 Results” section states the number of paying users at the end of 2021 was 16.79 million, while the “About Dropbox” section says the total number of registered users is more than 700 million.
- Free to Paid Users = 16.79 million
- Registered Users = 700 million
Since the number of registered users is expressed broadly as an approximation, rather than a precise figure, our calculation will inevitably be off.
We’ll also assume that the number of free-to-paid users represents all paying users, which is not accurate, since certain users purchased a paid plan without the need to test out the free plan.
Usually, the time period covered for the calculation of the metric should be a shorter term, since there is the option to isolate the period and accurately determine the amount of conversions.
For instance, Dropbox does not disclose precise numbers for its total registered users. While most would reasonably estimate “more than 700 million users” as being close to 700 million, that wide potential range can make a substantial difference to the company’s revenue, especially considering the number of paying users was only 16.79 million.
There are also numerous variables that can skew the data, namely the number of users with multiple accounts and inactive accounts.
Still, we can compute a trial conversion rate as a rough proxy for how efficient Dropbox is at converting its free users into paid users.
After dividing Dropbox’s free-to-paid users by its total number of registered users, we arrive at a trial conversion rate of 2.4%.
- Trial Conversion Rate = 16.79 million ÷ 700 million = 2.4%
