Everything You Need to Know About Freemium Pricing

Kyle-Poyar by

Special thanks to Laura Rosca who helped compile this research. 

Freemium in SaaS is old news. The much-discussed pricing strategy took over the SaaS world and helped fuel the phenomenal success of SaaS pioneers like Dropbox, Evernote, SurveyMonkey and Hootsuite.

These successes then spawned a number of copycats, that bet big on freemium only to see free offerings become a resource-draining distraction. I actually wrote about the phenomenon, which I called ‘The Slow Death of Freemium’, back in 2016. Freemium appeared to be declining in popularity and, when it was in place, drove next to zero new ACV for most SaaS companies.

Flash forward to 2018 and freemium again feels cutting edge. SaaS companies have gotten much smarter about when to apply a freemium model to their products – and how to do it. They also better understand how to measure the success of freemium and strategies to convert free users into paying customers (hint: product qualified leads are your friend).

Clearbit, for instance, has seen great traction from tailored, hyper-specific free products that appeal to their target buyer without cannibalizing their paid products. One of those, their Logo API, went viral on both HackerNews and Product Hunt, creating tremendous buzz and brand awareness.

HubSpot now offers freemium versions of their CRM, Marketing and Sales products. CEO Brian Halligan describes their revamped go-to-market motion as “a flywheel where the customers are the main driver that pulls new prospects in” and boasts that half of HubSpot’s new customers use the free product before they buy. SVP of Product Christopher O’Donnell emphasizes that they’re following a PQL strategynot traditional freemium. “I would argue that freemium fell short in B2B and from its ashes rose the PQL,” he explained in a recent post.

With the emergence of product led growth, a business strategy that puts the product front and center in how companies acquire, convert, expand and retain their users, it’s more urgent than ever to revisit freemium. Product led businesses need to get their products in the hands of would-be users as efficiently as possible – hopefully at near zero CAC. Freemium, free product, and free trial strategies are particularly important in propelling non-linear growth.

Here’s a list of the top freemium pricing strategy resources:

Table of Contents

When is freemium the right strategy for your business?

Is Freemium The Right Business Model? 10 Questions To Answer
Is freemium an effective lead generation, conversion, and revenue driving strategy for your recurring revenue-based business? Or, is it e a high risk, dead-end approach likely to burden you with runaway costs and few paying customers? This guide, by LinkedIn’s Head of Global Monetization Strategy Josh Gold, is intended to teach subscription-based businesses how to evaluate whether the freemium model will drive revenue and lead gen for their business or result in failure.

Freemium benchmarks
According to this 2018 research report by ProfitWell, companies using freemium have 50% lower CAC with NPS scores nearly double those of non-freemium businesses. While the data seems to suggest serious benefits, businesses should keep in mind that freemium plans work best once a company has figured out their unit economics.

Can the ‘Freemium’ Model Work For You? Here’s How to Know.
Deciding between paid and free models isn’t just about what’s appealing. It’s about big-picture strategy. Think about your budget: if you can’t afford to spend on marketing, a free offering can help acquire customers. No business model is foolproof, of course. But if freemium is right for you, you’ll need to constantly innovate, iterate and evolve – and then, hopefully, gain the traction you need to stand out in a crowded market full of other free products.

Freemium Model for SaaS – The Good, The Bad, and The In-between
The basic premise that the freemium business model operates on is this: Several hundred thousands of users sign up for the freemium plan, and then a good cohort of them will convert into paying customers. So for the freemium model to work, one specific product attribute must already be in place – low marginal distribution and production cost. Follow Chargebee’s take on the philosophy of freemium, in order to avoid pricing mistakes.

A Look at the Impact of Freemium Pricing on SaaS Products
To be free, or not to be free. That is the question. On the one hand, you want as many people trying your product as possible. But on the other, you wish to stay away as much as possible from the the lack of commitment that accompanies the concept of “free” things. Explore the various types of “free” options and choose the correct to boost your business in this piece by Brent Chudoba, COO of Thrive Global and former CRO of freemium all-star SurveyMonkey.

Freemium vs. Free Trial: How To Pick the Right SaaS Revenue Model in 2018
Selecting the SaaS revenue model that’s right for your product is truly a business decision, and it should be treated as such. The model you choose will either be based on your existing revenue model or the decision will determine your revenue model. Either way, it is a fundamental question about how you want to structure your business.

How to optimize your freemium model

How To Acquire & Monetize Freemium SaaS Customers
Two of the biggest challenges facing SaaS marketers who operate a freemium model is the acquisition of new users and then converting them into paying customers. In this podcast, Hubspot reveals valuable insights on how to build a successful freemium SaaS growth funnel.

How to Increase Your Payment Customers In a Freemium Model
Tomasz Tunguz of Redpoint Ventures found that on average, freemium companies convert between 2% and 4%. But you can find much lower rates – for example, according to recent stats by Dropbox, the service has almost 500 million users, but only 175,000 of them are paying customers. That is, for every 10,000 Dropbox users, only 4 pay. The key in the whole process of improving activation from free to paid is to get your users to know the added value of your premium version as soon as possible.

7 Tips for Successfully Introducing Freemium Business Software
One of the best ways for software providers to win over businesses is to show potential buyers what your tool can do for them. Some of the top software companies in business today use freemium models to engage customers. Here are a few tips from Entrepreneur to help you make it work for you.

5 Ways to Convert Loyal Freemium & Trial Users Into Happy Paying Customers
It’s easy to get someone to want your sample (or in the case of SaaS companies, your freemium plan or free trial) when there’s no risk or loss, but getting someone to commit with a monthly price tag is a whole new ball game. Moving free users into paid service plans has long been a pain point for SaaS companies and salespeople alike. From creating a sense of urgency for your product, to offering a promotion, here are 5 ways of converting a freemium and/or trial user into a paying customer.

Increase SaaS User Conversions from Freemium to Paid Plans
Average SaaS users “try out” 1 to 3 services or applications a week. Whatever doesn’t stick immediately gets lost in the great black hole where confirmation emails go to die. So how do you get more free users to convert? Find out here.

Freemium success stories

Product is the Future of Growth – Here’s Why
The future of growth belongs to product led companies. HubSpot realized this a few years ago, which is why they disrupted their own business model before anyone else could. Learn about their journey to product led growth here. 

7 Examples Of Freemium Products Done Right
As a SaaS company, you might be wondering why you should offer a freemium product versus a paid-only product. Here are a couple of good reasons: you can get more users hooked on your product, you can get more media coverage and you can get more word of mouth marketing exposure. Now that you know why you should consider offering a freemium product, here are 7 great examples of how other SaaS businesses do it and why their approach works.

How These Freemium SaaS Companies Are Redefining Customer Success
Spotify reaches millions of people who are uncertain about paying for music every day. But they’ve cracked the code on converting those skeptical users into paying customers. Learn how they and other successful freemium companies make it work.

What makes Freemium work? Lessons from Dropbox, Evernote and a Lemonade stand
In his book, Free, Chris Anderson explains that Freemium works on the 5 Percent Rule – where 5% of premium customers support the remaining 95% of free users. Get freemium success stories here.

SaaS Freemium: How to succeed and how to fail…
While freemium can propel a company to success, it can also suffocate a company’s financial and labor resources. In Chargify’s early days, the company suffered freemium mistakes early, but in the end achieved success with the strategy.

8 Types of Freemium Pricing
Pricing is critical to any startup and can often be one of the main drivers of adoption. Nailing your pricing and basing it off the value being produced is key to gaining adoption and hitting your growth targets. Check out this new interpretation of Lincoln Murphy’s 2011 ‘ 7 types of freemium’, in order to determine which freemium strategy might be right for your business.

The Best Way to Win the Freemium Model Is by Challenging the Very Model Itself
In their freemium plan, AWS offers a year’s worth of micro instance for free – a time-bound freemium model. AWS needs adequate time to get a skeptical developer to understand the value that they offer, to get the developer hooked on the product and build on top of it, and to eventually recommend AWS to a fellow developer. Pick the wrong value metric for your freemium plan and you’ve found yourself headed straight for disaster. Learn how to avoid catastrophe here.

Moving Customers From Freemium To Premium: The Art Of Monetizing Virtual Products
When online language learning platform busuu.com started business in 2008, they paid close attention to what people were asking for in additional features to understand what they could eventually charge for. They ultimately gated those features to convert more customers. Learn how here.

Best Freemiums: 11 Phenomenal Freemium Products Actually Worth Paying For
Offering a freemium plan, like Slack’s, is an easy way to get people to give your product or service a try and for you to win them over. While users get to experience the benefits of your product without risk or losing anything in the process, you get their foot in the door and can capture their contact information. From there, learn how to nurture that user into a paying customer.

The dark side of freemium

How freemium nearly caused our business to implode
In August 2015, Baremetrics introduced a Free plan…and it nearly brought them to their knees. They were adding over a dozen new accounts a day, but that’s about where the fun stopped; within a few weeks “free” customers outnumbered “paying” customers and the amount of data the company was storing and processing on their behalf had doubled.

The Slow Death of Freemium – And What Comes Next
Now more than ever, SaaS startups are under pressure to prove that they have a sustainable revenue model and can generate paying customers, not just free users who drain scarce resources. Consequently, freemium has pivoted from being at the core of a SaaS company’s revenue model to just another lead gen tool in the marketing toolbox, albeit one with some pretty significant downsides. But there are viable alternatives to “traditional” freemium options: from free trial to tailored, hyper-specific free products for lead gen, the concept of “free” is constantly evolving, in order to better suit today’s needs.

How to Rescue Your Failing Freemium Startup with Product Qualified Leads
As a freemium startup, you live and die by your ability to convert free users into paying customers. But thanks to higher customer expectations and intense competition, freemium conversion rates have been slowly declining. Migration from a Marketing Qualified Leads (MQL) strategy to a Product Qualified Lead (PQL) strategy has proven to be a powerful antidote.

SaaS Pricing Models – A Smarter Alternative to Freemium and Free Trial
Freemium services offer a light version of the product with basic, often limited functionality that you give away forever and at no charge. How will you convert freemium users into paying customers? You should keep in mind that the average freemium conversion rate for a SaaS company is as low as 1-2%. Therefore you’ll need to attract a high volume of free users to stay profitable. There are a few types of freemium pricing models; let’s take a look at the most popular varities here.

Why Product Qualified Leads are the Answer to a Failing Freemium Model
Not finding success with freemium? Learn how to develop and implement a product qualified lead model here to save your struggling business.

SaaS Pricing: The two sides of Freemium
Not all freemium models are created equal. Here’s what to consider before implementing any one of a variety of free plans.

A few years ago, everybody was giving business software away for ‘free’ — here’s why that’s no longer the case
In a 2015 report, Pacific Crest and Matrix Partners stated that more than 70% of cloud software businesses derived absolutely no sales from freemium strategies. That’s in contrast to the consumer space where over 98% of App Store revenue comes from freemium apps. But some SaaS companies have achieved massive success with freemium. Learn how.

The SaaS Freemium Trap – Photobucket vs Meetup
The freemium revenue model is the go-to-market strategy for many web-based software solutions. Unfortunately, it can turn into a costly trap for the service provider. But it can work. Here, a look at two sides of the freemium coin and its outcomes.

The ‘Freemium’ Model: Top Flaws And Potent Fixes
How to attract customers with free content without going broke in the process? Avoiding the four mistakes outlined in this piece won’t guarantee your success, but doing so will reduce your chances of failure and set you on the right path. 

Stories of ditching a freemium model

Scott Heiferman looks back at Meetup’s bet-the-company moment
In April 2005 Meetup.com went from free to paid and started charging meeting organizers. Many customers were outraged but eventually relented. Learn about the journey here.

LogMeIn Kills Its Eponymous Free Service, Uproar Ensues
LogMeIn, a provider of remote connectivity services, made a name for itself offering easy-to-use, free services with the idea of eventually upselling free users to paid services. The company ultimately did away with its LogMeIn Free plan. Learn why and how here.

The Case Against Freemium – 3 Reasons Why Free Is a Wrong Price
Freemium or premium, that’s the question many entrepreneurs ask every day. But determining the right model for their businesses is hard to answer. Learn why free might not be the best strategy after all.

Dropping Freemium: How One Company Killed Its Free Plan and Grew 40% — And You Can, Too
PopSurvey decided to try something radical. They dropped the company’s freemium plan, eliminated its trial period, and doubled the prices of its other plans. The result? A 40 percent increase in revenue in the first month. Learn how in this article.

Free or Cheap Plans (Probably) Won’t Help your SaaS Business Grow
If you‘re trying to grow a SaaS company, freemium and low cost plans will no doubt cross your mind at some point. Learn how Proposify deal with the decision.