Freemium isn’t a pricing model, it’s a marketing strategy.
If you pay attention to online business models, you might have come across the term “freemium” before. In this post, I want to explore what that means, as well as the upsides and downsides to choosing this model.
What does it mean?
“Freemium” refers to a strategy where a limited version of a product is offered for free, and users can upgrade to a paid premium version. Get it? Free + premium = freemium.
This is different from a traditional “free trial” model where users can try a product for a limited time because with freemium, there’s no time limit on how long you can use the product for free. Rather than triggering the payment based on a length of time, it’s triggered based on when the user wants to upgrade to get more features.
Because freemium requires supporting a large number of free users in addition to the normal paid users, it’s most commonly used by business with very low marginal costs such as software. It also works best with products that are simple to understand, because it relies on users being able to use the product without any help.
The benefits of freemium
There’s a lot to like about freemium. For starters, it creates alignment between the business and the customer. Normally, when someone starts using a new software product, they don’t get a ton of value out of it at first. Everyone has their own onboarding timeline, and in some cases it can take months or even years before the product is truly worth paying for. With a traditional free trial model, those customers are either forced to stop using the product, or pay for something that isn’t worth it. With freemium, they can keep using it until it’s really worth paying for.
Freemium can also make marketing/distribution easier for the business. It’s much easier to get someone to sign up for something that’s free, so there’s less friction involved in converting leads to customers. Also, while there are a lot of free users who never end up paying, they can still recommend your product to others, so it’s easier to get organic growth.
The downsides of freemium
The main challenge with freemium is that you have to support such a large number of free users relative to each paying customer. The numbers vary from business to business, but I’ve read that it’s common for only 1-5% of your users to convert into paying customers. That means that for every paying customer, you have to support between 20 and 99 free users.
This can have a serious impact on your business. For starters, it means that freemium basically won’t work for any product that can’t be offered at basically zero cost (software, digital content like online courses, etc.). It also means that personal customer service probably isn’t viable (at least for the free users).
Another thing to consider is that it can be difficult to set exactly what is available for free, and what is on the premium tier. If your free tier is too generous, no one will upgrade, and you’ll end up cannabalizing your own revenue. If the free tier is too limited, it won’t be useful, and no one will end up getting enough value to eventually pay. Not every business can find the sweet spot where the free tier is good enough for a lot of people, but not good enough for the ones who are willing to pay.
Here’s a useful way to think about freemium: It’s not a pricing model, it’s a marketing strategy. The free users aren’t customers, they’re leads. If you’re interested in product-led growth, you think you can support lots of users who aren’t paying, and you have a good plan for getting these leads to convert, freemium can make a lot of sense. If any of those things aren’t true, other marketing strategies might be a better fit for your business.