Software Growth

Freemium

Freemium is a pricing model where a permanent free plan is offered to everyone and paid plans unlock more features, usage or support.

Freemium means anyone can sign up and use a limited version of your product forever, and a small share of them eventually pay for more. Dropbox, Canva and Trello are the usual examples. It is a growth strategy as much as a pricing model, because the free plan is your main acquisition channel.

It is also the most common way for a small SaaS to burn money. Every free user costs you hosting, support and attention, and most of them will never pay.

How to estimate what freemium will earn you

Start from signups and the free-to-paid conversion rate, then compare the revenue to what the free base costs you.

Say you get 2,000 free signups a month and 3% convert to a $29 plan. That is 60 new customers and $1,740 of new MRR. If the 1,940 users who stay free cost you $0.50 each per month in infrastructure and support, that is $970 a month before you count your own time.

What good looks like

Lenny Rachitsky's survey of more than 1,000 B2B SaaS products puts "good" at 3 to 5% free-to-paid conversion for self-serve freemium products, and "great" at 6 to 8%. Freemium with sales assist does better: 5 to 7% is good and 10 to 15% is great. Free trial products typically convert more of the people who start, which is the tradeoff against freemium's higher signup volume (see Lenny's benchmarks).

The hard part is the line between free and paid

Rob Walling's advice to bootstrapped founders is to default to no freemium when in doubt. He points out that the real work is finding the line where the free plan is useful enough to get used, but not so generous that nobody upgrades. Dropbox, he notes, saw roughly 3% of signups convert after a year. He suggests a time-limited free trial as the simpler alternative (Startups for the Rest of Us, episode 754).

When freemium makes sense

  • Your product gets better as more people use it (collaboration, sharing, network effects), so free users create value for paid ones.
  • Marginal cost per free user is close to zero.
  • You depend on product-led growth and need volume at the top of the funnel.
  • Free users can be gated on a value metric that grows with their success, such as projects, contacts or seats.

Common mistakes

  • Giving away the feature people would have paid for.
  • Gating on time-to-value instead of usage, so people never reach the point of wanting more.
  • Counting free signups as traction. Measure paying customers and activation instead.
  • Skipping the middle ground. A reverse trial gives new users the paid product for a while, then drops them to the free plan.

For a bootstrapped product with a small team, support load from free users is the cost that surprises people most. If you cannot answer free-user questions at a sustainable pace, restrict support to paid plans from day one.

Sources

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