A B2B SaaS company with 10,000 monthly signups, a 5% conversion from free trial to paid, and a $50/month paid plan can easily bring in an additional $300,00 per year.
That’s the power of a freemium pricing model.
The appeal is simple enough: attract the widest possible user base by offering core features at no upfront cost, allowing customers to try before they buy. By removing financial barriers to entry, SaaS companies hope to bring in leads, demonstrate value, upsell to paid plans over time and lock in market share.
However, executing an effective freemium model is much more complex than simply setting select features to “free.” You need to walk a delicate line to drive conversion and revenue without giving too much away or diminishing the quality of your product.
In this article, we’ll take a look at the upsides, downsides, and best practices for deploying freemium models, including:
- When it makes sense to offer a free plan
- How to structure your pricing tiers
- How to optimize conversion from your free to paid plan
Want to see if implementing a freemium model makes sense for your business? Keep reading to find out.
What is a Freemium Model?
The freemium pricing model approach involves offering a basic version of your SaaS product to a broad customer base—entirely for free.
The free product serves as an entry-level tier allowing customers to try before they buy. In theory, this should give them enough time to experience the value of your product firsthand without needing to make any significant investments upfront. But the version contains limited features, capabilities, integrations or capacity compared to your paid plans. The end goal is to nurture leads, demonstrate value, build market share and eventually convert a percentage of users into paying for a premium version of your SaaS.
This might sound identical to open-source software, but it’s not.
Unlike open-source platforms, the freemium model provides continual access to a stripped-down version of your product versus giving away the whole thing for free. The limited functionality encourages users to upgrade to a paid plan, but customers who only need your basic features can remain on the free version indefinitely until they’re ready to upgrade.
Freemium vs. Free Trial
A freemium pricing model and a free trial are two different monetization models. And the model you pick can have a pretty big impact on the rest of your go-to-market pricing strategy (GTM).
While free trials typically allow users full-feature access, they only last for a predetermined window, often 7, 14 or 30 days. Then, once the trial lapses, customers must subscribe or lose functionality. This creates scarcity and prompts users to make a purchase decision.
In contrast, a successful freemium plan grants users unlimited access to a basic feature set. New users get locked into the free tier with no looming expiration date. This enables companies to cast a wider net and capture users downmarket who aren’t quite ready to enter their subscription billing details for a temporary trial. However, this limited functionality means customers only get to experience the “wow” factor of your premium features if they ultimately convert.
At Maxio, we decided to offer a 30-day free trial only because that’s what best fits our use case. You may choose a freemium model instead, depending on your industry and how you’ve designed your GTM strategy.
Maxio’s 30-day free trial (Source)
Pros of the Freemium Model
A freemium model offers clear advantages for SaaS companies and startups who want to tap into new customers downmarket. Among the reasons these software companies choose to introduce free tiers:
- Increased brand exposure and reach: For growing SaaS companies hungry for market share, freemium opens the door to attracting a large user base. A freemium product can broaden brand awareness, spread through word of mouth, and establish the company’s footprint with potential customers at low customer acquisition costs.
- Lower barrier to user acquisition: The lack of upfront financial commitment lowers user acquisition barriers. This broadens the top of the sales funnel to prospects who might be hesitant to pay straight away without testing the software first. These risk-averse customers are also more likely to try a free tier before considering paid plans.
- Opportunity to showcase value before commitment: Similar to value-based pricing, freemium options allow users to experience a product’s core features firsthand before buying. This can build familiarity, confidence, and trust in the software, making users more receptive to converting to paid plans after experiencing the benefits.
- Potential for viral growth and user referrals: Satisfied free users can become brand ambassadors and evangelists. This is because organic sharing thrives through network effects and word of mouth, in which users refer their business contacts. Freemium users can also become advocates for a product, helping to attract bigger enterprise deals by sharing it with their company or immediate team.
Cons of the Freemium Model
Despite all these upsides, freemium models introduce major risks if executed poorly. Some of the more common pitfalls include:
- High maintenance and support costs for free users: Extensive free user bases require investments in customer support, infrastructure, bandwidth, and product resources that may outweigh the potential revenue. Spreading these services across a high number of non-paying users can degrade customer experiences for an existing user base and increase churn.
- Lower conversion rates compared to free trials: Freemium conversion rates tend to lag without a forced decision point like a trial expiration. This is because users who enjoy basic features indefinitely may feel less urgent about paying for a premium version of a software tool.
- Potential for cannibalizing paid sales: Some users may find that the free plan meets all their needs, which can reduce the motivation to upgrade for additional features, potentially affecting sales.
- Risk of attracting non-serious users: Freemium models involve guesstimates about the percentage of users that will ultimately convert over time. But easy sign-up means that some of these users are just exploring their options and may stick to free services indefinitely.
Examples of Freemium Business Models
There are plenty of examples of freemium business models out in the wild. When done well, they make landing new users and nurturing conversion seemingly effortless. Here are how different industry-leading SaaS companies are implementing a freemium business model.
Spotify
Spotify pioneered freemium streaming. Their free users endure advertisements and limited skips incentivizing Spotify’s paid plans. Their premium model also provides mobile offline listening, high-quality streaming, unlimited skips and personalized curation—a crucial feature for avid music fans. This two-tiered funnel attracts casual listeners for free while monetizing more devoted audiophiles.
Dropbox
Dropbox builds on organic user sharing by limiting their access to free storage space. Free users get just enough space to share casually while power business users pay for terabytes. Dropbox even implemented referral bonuses to incentivize their paid users to expand the platform’s organic reach.
HubSpot
HubSpot’s inbound marketing software offers basic blogging, landing pages, contacts, and email. This draws users in to experience the platform’s core capabilities for free. But as these users’ needs begin to outscale these entry-level features, HubSpot pitches more robust premium packages with expanded analytics, workflows and customization to nurture leads toward established businesses.
Slack
Slack drives viral adoption by allowing unlimited users per team but restricting message history and third-party integrations. As organizations rely increasingly on Slack’s chat-based collaboration, they upgrade for compliance, administrative controls and interaction with other workplace apps. Slack bets on its free plan to drive team adoption, and then it monetizes off of this dependency.
LinkedIn attracts users with free networking and then prompts premium subscriptions for added search filters, messaging and profile analytics, which is especially important for recruiters, job seekers, and sales professionals. These premium accounts unlock Lead Gen forms, InMail messaging, and data sorting to identify prospects.
Zoom
Zoom meets basic video conferencing needs with free 40-minute sessions for up to 100 participants. But meetings longer than an hour, larger audience capacity, recording capabilities and transcription require a premium monthly plan—nudging professional usage towards paid accounts.
Is a Freemium Model Right for Your Business?
Before you decide to implement a freemium model, consider both your customer profile and business goals when weighing freemium. This model hinges on converting free users to paying plans over their life cycle at a profitable ratio.
On one hand, this approach can accelerate growth for some companies. On the other hand, it can backfire with pretty major consequences. Here’s how to determine if a freemium model is right for you.
When It Works
Rapid free user growth: For products focused on rapid expansion, freemium provides velocity. The lack of payment friction attracts new customers easily. Companies primed for volume can convert enough users over time.
High customer lifetime value: Products with multi-year subscription potential or add-on revenue streams lend well to freemium models. These free acquisition costs are easily justified if converted users stick around and purchase additional capabilities.
Viral product potential: Freemium can ignite exponential sharing for collaborative tools or social products. Each user becomes a conduit for growth by spreading the software through their networks.
Low marginal costs: If the bulk of product expenses are upfront development rather than ongoing delivery costs, freemium makes sense. Serving additional free users is relatively inexpensive—especially when you offset these costs with the potential revenue gained from your free trial conversions.
When It Doesn’t Work
High support or development costs: Products that require heavy customer support, infrastructure or continual enhancement are typically poor fits for a freemium model. This is because the cost of servicing the free user base could swamp the potential conversion revenue.
Historically low conversion rates: Past metrics indicating most users don’t convert even over long durations suggest a freemium model may not offer long-term ROI. Sure, offering free access would swell a company’s user numbers, but not its revenue.
Niche or high-end products: Highly specialized products or those tailored exclusively to enterprise needs rarely sustain freemium models. This is because their addressable audience is limited and unwilling to accept stripped-down capabilities. In other words, if you don’t have any plans to compete downmarket, then a freemium probably isn’t a good fit.
How to Optimize Your Freemium Conversion Rates
Effectively converting free users into paying customers requires SaaS companies to be incredibly thoughtful about the tactics they’re using across the customer journey. From tier limitations to upgrade prompts, you’ll need to ensure your freemium model balances the value you’re offering with the incentives to convert to a paid plan.
Here’s how you can optimize your freemium model and increase your conversion rate.
1. Set clear limitations between your free and paid versions
Build conversion triggers into your freemium tier by capping storage, time allowances, advanced feature access or any other dimensions that will most likely run up against user needs over time. Setting these distinct limits on key aspects of your service is the most effective way to incentivize these upgrades once your users’ free accounts no longer meet their needs.
2. Offer a full-feature free trial when onboarding
Allow new users to experience the full premium offering during their initial product ramp-up and education. This will allow you to showcase your product’s full capabilities before restricting access in the freemium tier. Give a glimpse upfront of what they’re missing so they know what to expect later on.
3. Provide dedicated support for your premium users
Offering superior customer service to your paying accounts further differentiates your freemium from your premium pricing tiers. Gaining access to a support team demonstrates the additional value your users will receive after converting to a paid plan and boosts the revenue retention of your existing paid users.
4. Upsell your premium features at every turn
Employ in-app messaging, prompts, and sale signage to consistently showcase your product’s premium features, add-ons and paid account upgrades to free users. You can also review your free subscriber analytics to identify opportunities to present these upsells across the customer journey. This kind of subtle visibility into your SaaS’s expanded capabilities will help build up the perceived value of what your free users can’t access.
Making Freemium Models Work for Your Business
Getting freemium right isn’t just about giving away a few features—it’s a balancing act that requires strategy, flexibility, and the willingness to evolve.
If you’re serious about using freemium to grow your B2B SaaS, check out our guide on How Product-led Growth is Changing B2B SaaS.
You’ll learn:
- Why product-led growth is rapidly becoming the preferred strategy for B2B SaaS businesses
- How offering free trials can attract qualified customers and build trust
- Why the traditional sales-led model still has its place in today’s SaaS environment
- How to successfully combine product-led and sales-led strategies for scalable growth
Remember, a great freemium model is always a work in progress, so keep an eye on your user behavior and conversion data to keep things fresh, impactful, and profitable.
