Freemium offers basic product free, charges for premium features. Drives adoption (free tier), converts 2-5% to paid. Examples: Spotify, Slack, Dropbox. Works when: Free users cost little, premium value clear, network effects benefit free users.
Freemium = free + premium. Strategy: Offer core product free (unlimited time), limit features/usage/seats, convert subset to paid premium. When freemium works: Low marginal cost per user (SaaS—hosting costs pennies per user), Clear upgrade path (free users see premium value constantly), Viral/network effects (free users bring more users—Slack, Dropbox referrals), Large addressable market (need millions of users to convert 2-5%). Freemium tiers: Free tier: Useful but limited. Example: Slack (10K messages history, limited integrations), Notion (1 person, unlimited pages), Zoom (40-minute meetings). Paid tier(s): Removes limits + adds premium features. Example: Slack ($7/user/month, unlimited history), Notion ($10/user/month, unlimited team), Zoom ($15/month, unlimited meetings + cloud recording). Economics: Free-to-paid conversion: 2-5% typical (Spotify 25% because music valuable). Customer acquisition cost: $0 for free users (viral), CAC only on paid conversion (ads, sales targeting free users). Lifetime value: Paid user LTV must cover: Own CAC + subsidizing 20-50 free users. Challenges: Free users support costs (need cheap support—knowledge base, community), Low conversion rates (2-5% typical—need massive free base), Cannibalizing paid (make free too good → nobody upgrades). Hybrid approach: Reverse trial (paid trial → downgrade to free after 30 days). Spotify, Amazon Prime use this.
Freemium Viability = (Paid LTV × Conversion Rate) > (CAC + Free User Costs × Non-Paid Users). Need: LTV > 20x free user costsFreemium champion. Free: 10K messages, 10 integrations. Paid: $7/user, unlimited. Conversion: ~30% of active teams (high because messaging is critical). $27B+ company.
25% free-to-paid conversion (music is high-value). Free has ads (annoying), paid removes ads + offline. 200M+ paid subscribers from 500M+ total.
Project management tool: Free unlimited features, paid just "premium support." Nobody upgraded (free was enough). Couldn't monetize, shut down. Free tier too generous.
Freemium drives adoption—millions of free users become marketing (word of mouth, SEO links, network effects). Best for viral products (communication, collaboration). Dangerous for high-cost products (hosting expensive, support heavy). Spotify, Slack, Zoom, Notion all built on freemium—prove it works at massive scale if economics right.
2-5% typical for B2B SaaS, 10-25% for high-value B2C (Spotify, Netflix trial conversions). Below 2% = free tier too good or paid not compelling enough.
Freemium: If viral, low costs, mass market (Slack, Notion, Figma). Free trial: If high-touch, expensive to serve, enterprise sales (Salesforce, HubSpot, enterprise SaaS).
Limit free tier by: Usage (10K Slack messages), Features (basic vs premium), Seats (free for 1 person, paid for teams), Support (community vs dedicated). Make pain point of free obvious.
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