Freemium

Most individual users of a software product don’t necessarily need all the features that come with a paid subscription. To ensure users can get the most out of their product and benefit from all its features, businesses are increasingly turning to freemium plans to capture a larger market share.

What is Freemium?

Freemium is a type of subscription business model in which a product or service is offered for free, with the option for customers to upgrade to a premium plan that offers additional features. The idea behind freemium plans is to give users access to basic features and functions of a product, while allowing them the opportunity to upgrade for more advanced capabilities.

Freemium models are successful because they provide customers with the opportunity to actually use a product before accessing its advanced features. Unlike a free trial period, a freemium pricing strategy puts the product in the user’s hands without reminding them they’ll have to pay.

This type of business model has become increasingly popular in recent years in the Software-as-a-Service (SaaS) space as companies look to attract larger user bases and increase revenue.

Now, over 50% of app developers use the freemium model, with about one-third of them generating the most revenue.

Synonyms

• Freemium Plan: A pricing plan in which a product or service is offered for free, with the option to upgrade to a premium plan.
• Freemium Pricing: The pricing strategy used for freemium plans.
• Freemium Business Model: One of the many different ways a company can price its products and services, including a free version with limited features.

Types of Freemium Business Models

There are many different types of freemium strategies, and the one that a business decides to use will depend on its goals and target market. Here are some of the most common types of freemium models:

1. The Traditional Freemium Model

The traditional freemium model is the one that most people are familiar with—it’s a free-forever, feature-limited version of the product or service.

Using this simple version of the model, there is usually an inherent understanding on both the customer and company side that the end user will never end up paying for the product.

Examples include:

• Dropbox
• Google Suite
• Microsoft Office
• ChatGPT

These applications are usually so widely used that the customer’s expectation is that they will get a free version of the product with enough features to use it. Typically, this model is only possible with early-stage or heavily funded companies.

2. Land and Expand

Land and Expand is the model of choice for up-and-coming organizations, where the primary goal is to acquire users. In this case, the users and buyers are the same types of organizations.

The idea is that the company enables an organization to use a certain number of users for free, then charges them for additional users as they grow.

Since monetization is at the organizational level, this gives the company a chance to build customer relationships and develop brand loyalty before generating revenue.

Yammer (acquired by Microsoft in 2012) is an excellent example of this model. When organizations sign up for their trial, they get a certain number of users to use the service for free. When organizations decide to add a predetermined number of users, they are charged for them.

AWS (Amazon Web Services) is another example of this model, but they use it a bit differently. By presenting their advanced technologies as a freemium, businesses are inclined to invest in system integration, thus making switching costs too high.

3. Unlimited Free Trial

With this freemium model, users are able to access the product for an endless amount of time without ever having to pay. The vendor is certain that eventually, their customers will convert into paid subscribers, but the customer believes they can keep using it at no extra cost.

Examples of the unlimited free trial include:

• Spotify’s free version, which graduates to an ad-supported version after a few weeks
• Basecamp, which offers a free plan so limited that it forces customers to upgrade
• Echosign, which provides an unlimited free version with painfully limited usage caps

The expectation with the “unlimited free trial” is that the customer will be drawn in by believing they can use the product indefinitely without ever paying. But with such high limitations, advertisements, or a poor UX, the user eventually realizes that the free version is not enough and upgrades to a premium plan.

4. Freeware 2.0

‘Freeware is a fully-functional free product that provides access to its entire feature set. This product is either their principal offering or a brand-new, distinct collection within an extensive corporate structure.

For most free users, there is no expectation of conversion or cross-selling. Instead, the company creates add-ons that they can monetize.

Skype, for example, offers a free communication platform that allows users to make calls, send messages and files, and create video conferences. The company also provides premium services that are connected to the existing software, like an extended cloud storage option or a calling plan for international numbers.

Dropbox is another effective example of this model. While their base product remains free, they have additional premium plans that offer more storage and additional features like automated backups.

For iPhone users, iCloud is a great example of this model. It is free for anyone with an Apple device, but if you need additional storage space, you must pay for it.

5. Alternate Product Strategy

The objective of this freemium technique is to maintain the primary features free. The main concept here is cross-selling other products from the organization, instead of presenting a direct upgrade offer for alternative models.

In some cases, it is an effective (and helpful) strategy for individual users. When B2B companies sell their product to organizations, it’s usually through usage-based pricing or similar models.

What ClickUp, HubSpot, Trello, and many other software companies do is allow individual access to a robust free product, while charging to add more team members or specific products.

If a freelancer, for example, decided to scale to an agency, subcontract a few projects, or hire employees, the free plan can’t accommodate this. So the customer has to pay slightly more for additional team members, but they get to use a product they’re already familiar with.

Similarly, a HubSpot user might use CRM software and discover they need additional tools like marketing automation.

Since HubSpot couldn’t have predicted this, there is no clear upsell opportunity. But there is the option to add additional products like marketing automation, email campaigns, or social media tracking for a fee.

6. Ecosystem

The Ecosystem freemium model is based on a free-forever base product with monetization through third-party add-ons.

In this case, companies achieve product profitability by partnering with third-party providers and using a revenue share model. This is an intermediary between free products and freemium 2.0, as it doesn’t require customers to pay for additional features or services.

A well-known example of this is the WordPress plugin ecosystem, where developers can build and monetize extensions that are hosted on the WordPress repository.

7. The Network Effect

There’s an old saying: “If you aren’t paying for the product, you are the product.”

The Network Effect freemium strategy follows this concept, with companies offering free services to create a network of users.

In this approach, monetizing a product is done through data exchange and targeted advertising. For example, Facebook offers its social media platform for free but collects user data to target ads and generate revenue from advertisers.

The same goes for Amazon and its Kindle platform, or Google and its search engine. With the Network Effect strategy, companies create a digital ecosystem in which they can monetize services through customer data exchange.

Free Trial vs. Freemium

The primary difference between a free trial and freemium is that a free trial typically allows a user to use the product or service for a predetermined amount of time before requiring them to upgrade.

On the other hand, freemium users have access to basic features without any specific limitation or expiration date.

A free trial is sometimes used in combination with a freemium model, allowing customers to try the full version of the product or service and then downgrade to the free version if they don’t need all the features.

This allows companies to convert users from free accounts into paying customers by demonstrating the value of their premium features.

Advantages and Disadvantages of Freemium Pricing

The freemium model is one of the most popular strategies for product pricing in the software industry. It allows companies to acquire new customers quickly and cost-effectively, while still generating revenue from higher-end plans.

Benefits of the freemium model include:

• Lower customer acquisition cost (CAC): Under a pressure-free pricing model, potential customers are likelier to try out the product or service and convert into paying customers.
• Increased customer satisfaction: Users can test out the product for free and upgrade when they’re ready. This makes them feel like their needs are being met before committing to a paid plan.
• Larger pool of potential customers: Having a free tier can help businesses attract more users and expand their customer bases.
• Brand awareness building: When more users can access a product, the organization can build brand awareness and credibility through word-of-mouth marketing.
• Fast way to grow user base: For startups that are trying to scale quickly, a freemium model can be an effective way to attract new customers.

However, the freemium model also has its drawbacks—it can drive down prices for premium services due to competition, making it difficult for companies to make a profit from them.

Drawbacks of freemium products include:

• Decreases the perceived value of premium plans: Having a free tier can make it difficult to convince users to upgrade to a premium version, as they may not feel the need for additional features.
• Risk of distrust: If a customer finds the freemium version of a product to be underwhelming, they may feel as though they were manipulated into upgrading to a paid plan.
• Lower revenue per customer: Achieving revenue growth can be a challenge if companies don’t have enough users to balance the costs of providing free services or the infrastructure to monetize their data.

To maximize the potential of a freemium business model, companies should add enough features to their free tier to attract users, but not so many that customers don’t feel the need for premium plans.

They should also focus on engaging users and providing value-added services to convert them into paying customers. 

How Businesses Improve Their Freemium Conversion Rates

Some organizations are fine with minimal conversions, but most survive on paying customers. To increase their conversion rates, businesses should take the following steps to optimize the freemium model.

Expanded Free Trial Features

An expanded free trial is an effective technique to allow users to test out the full version of the product or service while still offering them a free tier. This way, they can experience all the features and decide whether they need them before committing to a paid plan.

When using this strategy, the key is to show them how powerful the product is and provide valuable content that can help them get the most out of their free trial.

Then, when it’s taken away or changed, they’re more likely to upgrade.

Remind Users to Upgrade

As simple as it sounds, reminders to upgrade can be effective in increasing conversion rates. Especially if a customer is already in the buying decision process, a reminder might be all they need.

Companies should use email campaigns, automated messages, and other methods to remind users of the benefits of upgrading.

These reminders should focus on how the premium features will help them save time or money, as well as any new features that have been added.

Remember not to bombard your customers with messages, though. Data indicates that a maximum of four rounds tends to be the most effective.

Optimize Based on Analytics

Business intelligence plays a critical role in understanding how users engage with your product or service.

Analyzing user behavior will help you identify which features they’re using the most and which areas of the free tier can be refined.

Analytics should focus on:

• Uncovering details about customer journeys
• Identifying user segments that are more likely to convert
• Finding out why some users drop off
• Optimizing pricing and features accordingly

By improving the customer experience and providing more value based on this data, businesses can design their freemium model to be more attractive to potential customers.

In-App Promo Codes

Giving customers a discount for upgrading to the premium version can be powerful in helping to increase conversions.

There are a few different types of discounts that work:

• Permanent discounts: Offer a discount that doesn’t expire, such as 10% off for a specific customer segment.
• Time-limited discounts: Provide incentives to upgrade within a certain time frame, such as 15% off for the next two weeks.
• First-time user discounts: This is particularly useful for new customers who haven’t yet experienced your product or service.

Combine these with in-app notifications and other tactics to maximize the impact of each promo code.

Refund Policy

A good refund policy builds trust and gives customers the assurance that they won’t be tied into something they’re unsatisfied with.

By offering a money-back guarantee within a certain period after purchase, you can create a sense of security and encourage users to commit to your product.

For B2B companies, refund policies can be tricky, especially if they use subscription-based pricing.

What many organizations do is allow a refund for annual users who cancel within a certain number of months and let them keep using the product until those months are up.

In the case of monthly users, a refund is usually not given and customers are allowed to use the product until their current billing cycle has ended.

These policies should be clearly communicated, and customers should know exactly what they’re signing up for before purchasing.

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