What Is the Freemium Business Model? Pros, Cons, and Tips

It might not sound intuitive, but what if you could grow your business by giving your services away for free? Or, more specifically, a limited version of your services: enough to entice users to use your product, while encouraging them to switch to the paid version.

What we’re describing is a freemium business model. Read on to see if it might be the right strategy for you.

What is the freemium business model? 

Freemium is a business model that provides customers a baseline version of your product or platform for free, while offering the full suite of features, often referred to as the premium version for a fee. This model is commonly used by software-as-a-service (SaaS) companies—such as game developers, streaming services, or software tools. Free plans are often monetized by showing users ads, while premium versions are ad-free.

Though they sound similar, the freemium model isn’t the same as the free trial model. The primary difference is time: Whereas the free trial model sets a pre-defined trial period during which customers can access your product or platform free of charge, the freemium model allows customers to continue using the free version in perpetuity. 

Benefits of the freemium business model 

Giving your customers a limited version of your product or service for free can help you expand your reach. Here is how adopting the freemium business model can benefit your business:

• Boosts adoption rates. Price-sensitive customers are likely to find a free product appealing. A freemium model can boost adoption rates and increase brand awareness. 

• Lowers customer acquisition costs. You’ll likely need to spend less in marketing dollars to convince customers to use a free service. Once they’re users, you can focus on converting them into paying customers. 

• Allows data gathering. Having many free users means access to their customer data. Collecting and analyzing information on how your customers are using your product can help you further optimize it.

Drawbacks of the freemium business model 

The primary potential pitfall of the freemium business model relates to conversion rates. Even if the free version of your product proves extremely popular, that won’t get you very far unless you can get a suitable percentage of those users to become paying customers. It’s a tricky balancing act. Your free version can’t be so good that people are never incentivized to convert, but it has to be good enough to entice people to buy the premium version of your product.

How to implement a freemium business model

• Carefully map limited features vs. premium features
• Ensure customers understand the value of the paid version
• Market differently to free and paid customers
• Make it painless to switch to paid

When it comes time for you to implement your freemium business model, here are a few tips to keep in mind. 

Carefully map limited features vs. premium features

The success of the freemium model depends on picking which components should be the basic features you offer to your free users and which ones to charge for.

The free features are typically your core product. Once customers have signed up for that, converting free users to paying ones comes down to successfully highlighting the benefit of the additional features—like ad-free viewing, more user profiles, greater functionality, and priority customer service.

It’s also important to note that you can always adjust the way you split up your features based on the customer data you get back from your users. If the usage patterns you’re observing point you toward a different cutoff point for full access, then you can reconsider where you’ve drawn that line. The patterns of your user base and how frequently you convert free users are your best possible sources of data for recalibrating which features belong in which version. 

Ensure customers understand the value of the paid version 

You want your free users to have a good understanding of what they’re missing with the paid version. Make it tempting to switch. Some companies make this distinction with advertisements. Music platforms like Spotify or Pandora, TV and movie streaming services like Hulu or Peacock, and even a language learning app like Duolingo, have ad-supported tiers that allow users to get familiar with their offerings and incentives (like discounts for the first month or year) to encourage them to convert.

The job isn’t finished after users convert. Then you need to keep your churn rate down, making sure your customers continue to see your premium version as worth paying for. Essentially, your paid version needs to sufficiently distinguish itself as something your users wouldn’t want to lose.

Market differently to free and paid target customers

Ultimately, your free and paid versions are different products, so it makes sense to market them differently. When trying to reach free customers, you might focus more on broader awareness campaigns, using tools like influencer marketing and app store optimization.

When trying to reach paying customers, you focus more on value-based selling, highlighting the value of the premium features. This is a strategy you can apply both to high-value, first-time customers (such as mid- to large-sized companies for a B2B software) and existing free users. 

Make it a painless switch to paid

Make the option to switch readily available to customers on your website or app and make the process as seamless as possible. Ideally, customers should be able to convert their existing accounts without needing to sign up, verify their identity, or fill in their information again.

Avoid ambiguity around costs and special offers, such as discounted annual rates or penalties for canceling early. For example, if users think they’re signing up for a monthly subscription, but get billed for the whole year upfront, you might end up with misled and disgruntled customers who don’t just cancel their paid subscription but unsubscribe from the free version too.