early.tools

Freemium

Definition

Freemium is a pricing model where the core product is free forever, but advanced features, higher limits, or premium support require payment. The free tier drives adoption, paid tiers drive revenue.

What is Freemium? Pros, Cons & How to Price | early.tools

Freemium works when: (1) Your product has network effects (more users = more value for everyone), (2) Marginal cost per user is near zero (software, not services), (3) A small percentage of power users will pay a lot, (4) Free users provide value even if they never pay (data, content, virality). Freemium fails when: (1) High cost to serve free users (you go broke before conversion kicks in), (2) Free tier is too good (no reason to upgrade), (3) Free tier is too limited (users don't see value and leave), (4) Conversion rate under 2% and you can't achieve scale. Designing the free tier: Make it genuinely useful but leave clear gaps that paying solves. Spotify free: ads between songs. Notion free: limited blocks for personal use. Loom free: 25 videos. The pain of the limit should drive upgrades without crippling core value. Freemium conversion benchmarks: 2-5% of free users converting to paid is typical. Slack is around 30% (exceptional). If you're under 1%, either your free tier is too good or your paid tier isn't compelling enough. Freemium alternatives: Free trial (everyone starts paid, limited time), reverse trial (start free, forced upgrade after taste of premium), usage-based (pay only for what you use—Freemium-adjacent). The Freemium trap: You need massive scale to make it work. If you have 10,000 free users and 2% convert, that's 200 paid customers. If your pricing is $10/month, that's $2,000 MRR. But serving 10,000 free users costs money (support, hosting, bandwidth). Only works at scale or with near-zero marginal costs.

Examples

Dropbox: 2GB free, pay for more storage. Superhuman: no free tier (anti-Freemium). Calendly: free for 1 event type, pay for unlimited. GitHub: free for public repos, pay for private. Each balances value vs. upgrade incentive differently.

Related Terms

CAC (Customer Acquisition Cost)

CAC is how much it costs to acquire one paying customer. Calculate it by dividing total sales and marketing spend by the number of new customers acquired in that period.

LTV (Lifetime Value)

LTV is the total revenue you expect from a customer over their entire relationship with your business. It's the north star for determining how much you can afford to spend on acquisition.

PLG (Product-Led Growth)

PLG is a go-to-market strategy where the product itself is the primary driver of customer acquisition, conversion, and expansion—not sales or marketing teams.

Product-Market Fit (PMF)

Product-market fit happens when your product solves a real problem for a specific market so well that people actively seek it out, use it regularly, and tell others about it.