As a solopreneur with a limited budget, software or memberships with a free plan had always been my first option, Canva, Zoom, CapCut, ChatGPT (free), and Claude, you name it. After using them for a long period of time, I have realized that I might never be able to live without them, and now I am more than happy to pay for their premium plans. That’s the magic of the freemium business model.
What Exactly Is the Freemium Business Model?
The term “freemium” itself is a blend of “free” and “premium”. It’s a term that has been popularized by Fred Wilson, a venture capitalist.
A freemium is a membership business model that offers a basic version of a product or service with limited features completely free, alongside premium paid versions with additional features or expanded usage.
Here is a summary of what a freemium can be:
- Feature-limited freemium: Users get access to basic features for free but must pay to unlock advanced functionality. This is what companies like Canva do — you have access to some free designs and templates, but you have to upgrade to higher-tier plans for premium templates and elements.
- Capacity-limited freemium: The product is fully functional but limited in capacity (storage, users, usage time, etc.). Dropbox’s 2GB free storage limit is a classic example that you may be familiar with.
The difference between a freemium and a free trial is that a freemium is free forever; you can use the free version for as long as you want, while a free trial is time-bound. You only have access to some or all features of a product for a period of time.
The Pros and Cons of Freemium
After implementing and optimizing freemium models for numerous businesses, I’ve developed a clear-eyed view of both the benefits and drawbacks. Let me break these down for you:
Pros of the Freemium Model
Competitive Advantage
In markets where your competitors don’t offer a freemium but you do, it can be a significant differentiator. This is especially true for individuals or startups that have limited financial capabilities and are still looking for options to try out. When they fall in love with your product or service, they won’t hesitate to upgrade their plans.
Reduced Customer Acquisition Costs
Marketing can be expensive, but freemium can significantly reduce upfront marketing costs by leveraging word-of-mouth growth. It’s common for content creators to recommend tools or services that have a freemium to their audience with no affiliate commissions. It can help you attract a larger customer base without investing significant capital into marketing.
Building Habits and Dependencies
Free tiers are like an extended onboarding period. Users learn your product at their own pace without the pressure of a ticking trial clock. This period builds habit and dependency, which significantly increases conversion likelihood when users eventually hit limitations. This is one of the main reasons why the freemium business model works effectively, because it takes a considerable amount of time and energy to relearn another tool or platform.
Valuable User Data
Even non-paying users provide invaluable product usage data. These data can provide insights into customer behavior, preferences, and pain points and be used to improve your product or service. Furthermore, with the data you have, you can also segment your members and create personalized and targeted marketing to increase premium plan conversion rates.
Cons of the Freemium Model
Hidden Costs
Free users consume resources without contributing revenue. However, often you still have to provide customer support, and there are additional costs such as operational overhead associated with a freemium; these costs can be substantial.
Freeloader Issue
The hard truth is that some free users will never upgrade to a paid membership. Some members are only looking for the free features and never consider paying for advanced features. They bear with the limitations or inconvenience of using the free versions of your product or service. For example, some people are fine with ads on Spotify, so they don’t think upgrading is necessary.
Difficult to Scale Back
Once you’ve gone freemium, scaling back is problematic. A well-known example is CapCut, which initially offered generous features in its free version, including watermark-free exports. Now, however, watermark removal is a feature reserved for the paid plan, which has driven users to seek alternative video editing apps.
Cash Flow
Freemium models typically delay revenue generation. You may convert some free users into paid users, but that may take a long time. Capital is important for startups to keep the business going and for product improvement. You will need careful financial planning that accounts for delayed cash flow to make sure that you can stay afloat at the beginning of your freemium membership business.
When Does Freemium Make Sense?
While freemium might seem like an ideal business model for every business, the truth is, it’s not. If any of the following apply to your membership business, you might need to reconsider freemium.
1. Your product has network effects
Network effects mean that the value of the product increases as more people use it. A social media platform has more value when everyone uses it compared to when there is only a minority of individuals using it.
A good example is Slack, where free users invite teammates, expanding the network and eventually driving paid conversions when teams hit limitations. If your product has network effects, you can easily attract free users and slowly convert them to paid users without significant marketing investment.
2. You have a clear upgrade path
The only goal of providing free plans is to eventually convince your free users to upgrade to premium plans. Some companies offer generous free plans and therefore remove all compelling reasons to upgrade.
If you wish to use the freemium business model, you need to have a clear plan for how you are going to convert your free users.
3. You have patience and funding
This isn’t a get-rich-quick strategy! It can take a while for a free member to convert, it can be weeks, months, or years. You need a runway to play the long game. If your business doesn’t have enough funding, freemium might actually drain your resources without delivering returns.
4. You have the right customers
Your target customers and your product have a massive impact on the viability of implementing freemium in your business. For instance, if you create project management software with a free plan and attract students who can’t afford premium plans, they will never convert. In a situation like this, freemium is not an ideal model for your business.
How to Structure a Freemium
Getting your freemium structure right is like walking a tightrope — lean too far in either direction and you’ll fall. Give away too much, and nobody upgrades. Give away too little, and people will rather pay for your competitors. Finding the right balance will require some experiments. Here is what most businesses do to create a successful freemium business model.
Step 1: Identify your product’s core value
What do users value most about your product? Is it storage space, number of users, processing capacity, or premium features? This should be the main limitation on your free tier.
For instance, email marketing services such as Klaviyo have their value metric as the number of emails that can be sent. Klaviyo’s freemium has only an email send volume of 500; businesses that wish to increase the number will have to convert to paid plans.
Step 2: Set meaningful limits
Your free tier should be genuinely useful but have intentional limitations that align with user growth or provide some friction to having a good experience. If they want to enjoy an awesome experience while using your product or service, they will need to pay for it.
Using YouTube Music and Spotify as examples. Constantly being interrupted by ads is annoying, and being unable to download and listen to your favorite playlists offline is annoying. These factors are sufficient to make some individuals subscribe to their premium plans.
Step 3: Create multiple paid tiers
Whether a simple ‘free’ and ‘premium’ model is sufficient is industry-specific; in some niches, this approach makes sense. However, in most cases, offering multiple paid tiers is more effective because of various psychological principles at play in the tiered membership model, and it creates natural growth paths for different types of users.
Both ecommerce platforms and email marketing providers are good examples, as their clients grow, they provide the capability to accommodate the growth.
Step 4: Develop a conversion strategy
You need a conversion strategy to make this work. Simply including limitations in your freemium is not enough. There are different strategies you can use, such as usage notifications (e.g., you’ve used 80% of your free allocation) and in-app ads to educate your free users about premium features (e.g., Duolingo runs ads to educate free users about the premium features they can enjoy when they sign up for the paid plan, Super Duolingo).
Figure out the most effective strategies for your membership business, and implement and test them.
How Do You Know Your Freemium Isn’t Giving Too Much (or Too Little)?
The conversion rate is the metric you should track to understand whether you’ve struck the right balance between attracting users and motivating them to subscribe.
If your freemium is attracting tons of free users, but the conversion rate is low, it suggests that your offerings are probably too generous. The benefits and features of your freemium are adequate for your users, and therefore, they don’t see a compelling reason to pay for additional features.
What about a high conversion rate? Is that a good sign? Not necessarily. It could mean that your freemium may not be attractive. Your freemium doesn’t attract many users, and most of them would rather upgrade to a paid plan.
A 2%-5% conversion rate with high traffic is generally the benchmark, and that’s likely what you should aim for. However, the conversion rate may vary in different sectors.
Freemium Success Stories
Learning from companies that have mastered freemium is invaluable. Here are some successful freemium examples:
Canva
Canva transformed the design industry by offering a robust free version with thousands of templates. They make the platform entirely functional for free while charging for premium elements and advanced features. This allowed them to reach over 170 million active users in 2024.
Zoom
Zoom’s 40-minute limit on free calls is just inconvenient enough to drive business upgrades without preventing adoption. Although the growth has appeared to slow down after Covid-19, the freemium business model during bad economic times was what drove the adoption and growth of the company.
Spotify
Spotify and YouTube use another approach — their free tiers have the same music catalog as premium but include ads and lack offline listening. This approach provides enough value to attract users while maintaining clear benefits for upgrading.
The lesson from these successes is consistent: they all found the sweet spot between generosity and limitation.
Conclusion: Is Freemium Right for Your Business?
After reading all this, you might be wondering if freemium is right for your business. Here are the questions you should ask yourself:
- Can I afford to support free users while waiting for conversions?
- Does my product become more valuable as more people use it?
- Is there a natural progression that will lead active users to need premium features?
- Do I have the right customers for a freemium business model?
If you answered “yes” to most of these, the freemium business model might be the right option for you. If not, consider alternatives like a conventional free trial or a money-back guarantee instead.
Choose your membership platform carefully! Different membership site platforms have different strengths and weaknesses, so you want to pick the one that suits your membership business the most. Check out the 6 best membership site platforms and find the perfect one for your business!
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