The quick guide to the freemium model

08.4.2022
Nathan Tufts-Brown
4 min read

Photo by Lance Grandahl

The freemium business model has become increasingly popular over the past decade. When it comes to offering your product or service for free, there are several things you need to focus on: making sure that your users have a great experience as they’re using your product, making it as easy as possible for them to upgrade, and incentivizing upgrades by giving early adopters special privileges.

1. What to focus on with the freemium business model?

Step1 – Provide a high quality product

This might seem like a no brainer, but the first step is to make sure that product is high quality. What does a high quality product mean? The short definition is a product that consistently and quickly delivers value for the user. Users will notice poor products much faster than good ones. This is because there is little to no friction in good product experiences. One of the best ways to accomplish this is having a strong user onboarding experience. Accomplishing this isn’t easy. It requires having a product rooted in deep user research and user segmentation, presenting an experience that understands and fulfills the goals of each user.

Step 2 – Have a fair price

The second step is to make sure that your pricing is fair. If you’re charging too much for your product, people won’t be willing to pay for it (duh). On the other hand, if you’re not charging enough, you won’t be able to make a profit. So how do you find the middle ground?

Consider these following points as your compass, navigating the way to the best and fairest price.

The strength of your brand
Your competition
Your users
The condition of the market itself
The demand for your product

Another way to guide your way to fair pricing (and profit) is making sure that your CAC (customer acquisition costs) is lower than your CLV (customer lifetime value). One of the best ways to lower your CAC is to invest in your product’s UX. A strong user onboarding experience will go far in lowering your CAC.

Step 3 – Make it easy to upgrade

This is one of the more important tenets of having a successful freemium product. The only reason that it isn’t number one is because the previous steps are needed to reach this stage. No one is going to feel motivated to upgrade if the first two conditions aren’t met.

The secret to this step is making it beyond easy to upgrade.

The goal of the freemium is to stoke user engagement and interest. By showing a “stripped down” version of your product that still delivers some value, you can start to build trust with your users. The trick is showing just enough value. I know, a tricky balancing act.

There are a few ways to help nudge users towards upgrading.

Have a feature limit with your products. (Slack has this with their limited number of stored messages)
Use prompts based on specific user behavior. (Dropbox has this with their business upgrade “nudges”)
Offer financial incentives. (Spotify offers a discount for yearly plans)

... people wanted to feel in control of the purchase path and that means actually consuming the stuff for themselves. Extracting some value to see if it’s right for them. And, then, deciding to pay you money once they’ve made that decision.

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2. How is freemium different from trials?

Freemium is offering a limited version of your product while still providing some value. Trials, both opt-in and opt-out, are offering a fully functional version of the product for a limited time. The time period is usually 2 weeks. The psychology of trials has a more upfront investment due to both the time constraints and, with opt out, the knowledge that their credit card will be charged.

The respective models are not just a reflection of the product but also the business goals. If you are willing to play the long game and have a good understanding of your organization’s unit economy, go with freemium. If your goal is more immediate user adoption and benefits from capitalizing on near term revenue, go with trials.

3. What are the benefits of a freemium business model?

The freemium business model has several benefits. First, it allows you to offer your product for free to a large number of users. This can help you to grow your user base quickly. Second, it gives you the opportunity to upsell users on premium features. This can help you to generate revenue from your free product. Finally, it can help you to build brand awareness and loyalty among your users. The Harvard Business Review’s research revealed that a free user is typically worth 15% to 25% as much as a premium subscriber, with significant value stemming from referrals.

When executed well, it can have a positive effect on your organization’s NPS score. Freemium products have roughly 50% higher NPS scores than the free trial products.

Think of freemium less as a “watered down version of your product” and more like a way to broaden your marketing funnel. It captures more interest and eventually, if the previous steps are followed, those users percolate into customers.

4. What are the drawbacks of a freemium business model?

There are a few potential drawbacks to using a freemium business model. First, if your product is free, people may not value it as much. Second, if you offer a limited free version of your product, people may never upgrade to the paid version. Finally, free products can attract a lot of low-quality users who are only interested in the free version and have no intention of ever paying for anything. When a large base of your users are of this mindset, it can take a while for users to financially invest in the product. In 2017, 0nly 7% of Evernote’s users upgraded to the freemium platform.

5. Conclusion

So should you invest in a freemium model? Yes.

But only if you and/or your organization has a deep understanding of their unit economy, the specific revenue and cost related to an item, or “unit.” The freemium model can definitely be an expensive investment. There is the high cost of developing the product itself, designing an experience that engages and drives eventual user adoption. There is the “gamble” of the model itself, with each organization needing users to convert to make the model viable.

The competition of SaaS products has spurred the “free” arms race in the last decade. Free e-books and other content driven resources do not have the same pull as they used to. It has become product driven experiences that convert users into loyal customers. Freemium can definitely be the center of a product that drives adoption and retention, if deployed well.