Freemium: Why Nothing Is Really Free
“Art is making something out of nothing, and selling it.” ― Frank Zappa
MENTAL MODEL
Freemium is a mishmash of two words: free and premium. It is a pricing and business strategy when a product or service is provided free of charge, but money is gained through additional features or services. They expand the basic functionality of the product or service, often by so much, that the customers are forced into buying the “extras”. The business model has been used in software since at least the 1980s, and it’s a classic illustration that nothing is truly free—even free-to-play games and applications.
The idea: give your service or product away for free, then offer premium value-added versions to your customer. The former process attracts customers, and the latter converts them into revenue. Freemium invades many of the software companies today. LinkedIn, Discord, Spotify, Dropbox, Trello, Zapier, and Canva are key examples. This model leverages psychological and behavioral economics principles. It attracts us, since we feel like we are getting free value. And it converts us into paying customers, because we get attached to the product or the free service is no longer sufficient.
The buy-in makes long-term, sustainable business possible while selling “free” products. The free tier gives people access to core features, getting them the experience of the product with no financial commitment. Whereas the premium tier unlocks additional benefits—advanced features, faster access, exclusive content, or enhanced support. The goal is to get a large customer base and then convert a percentage of them into paying customers over time. Think Dropbox, the cloud storage program: their free plan allows you to store up to 2 gigabytes. This is, of course, not enough for active file sharing. Thus you upgrade to the Pro plan for a whopping 1 terabyte of space for only 9,99 monthly. Their freemium really only gives you a taste of how easy and utile it is to store your files in Dropbox, thus getting you to subscribe.
It works because freemium plays into human psychology. People are far more likely to engage with a free product than a paid one. This lowers the barrier to entry. Once users integrate the product into their workflow, they value it more, build a relationship with it, and are less likely to leave. When the free tier isn’t enough—when they hit a feature limit—they don’t want to lose what they’ve “built” so they pay up. Basically, the free tier expands the user base, visibility, and referrals. More users equal higher perceived value equal a product that is seen as useful. Take this, combine it with the habits built on the product that make it a day-to-day essential, and monetization happens naturally. When you have all your favorite music situated in carefully crafted playlists in Spotify, you’ll pay to get rid of those ads. It’s a question of time.
Freemium in action and how you might use it:
Software-as-a-service like Dropbox, Notion, and Zoom. Free plans include basic cloud storage, note-taking, and video meetings. Soon those won’t be enough. The premium tier bolsters more storage, longer meetings, and advanced collaboration tools. Users become dependent on the free version and eventually need more features. Teams in companies that use Dropbox push the firm for premium accounts as they scale their use.
Mobile apps such as Spotify, Duolingo, and Headspace. The free tier provides full access but with ads or exclusive feature limits. Paid versions give you an ad-free, seamless, exclusive experience. The ads make it inconvenient, encouraging the user to pay for uninterrupted usage. People invest their time—learning a language on Duolingo, creating playlists on Spotify—and don’t want to lose their “progress”.
Video games including Fortnite, League of Legends, and Genshin Impact. The free plan provides full access to the game with optional cosmetic purchases. The paid service gives you exclusive skins, battle passes, or even in-game advantages. It works since the free access garners millions of players, and the hardcore fans pay for cosmetics and status-based perks.
Content and news sources such as The New York Times, Medium, and Substack. The free version gives you access to a limited number of articles per month. Thus as you enjoy your reading journey, you buy into the unlimited access, premium content, and a faster experience. Users get hooked on quality content. Paywalling kicks in. By then the media outlet has become a regular place, thus you subscribe.
The best thing about freemium is the huge rate of adoption. Users come in without costly marketing. No friction. Those consumers then bring in more users if they like the platform. The disadvantage, however, is that the conversion rate is rather low. Free users still eat up resources. They might never pay. An example of this is Evernote. They struggled to implement a freemium model since their premium features were not compelling enough. Free users drained their resources and most never converted into paying customers.
Thus to make it work, try: (1) make the free version valuable, but not too good, since nobody upgrades if everything is free—the free tier is there to provide value, but the premium should be irresistible and a clear upgrade; (2) design an upgrade path, where users naturally hit a pain point that the premium solves—like the free Zoom meeting time limit, nudging professionals to upgrade; (3) leverage behavioral nudges, like reminders, loss aversion, and exclusivity to convert users—Duolingo reminds you daily to continue learning and then shoves a premium plan in your face to track progress better and access the service ad-free; (4) keep costs low for free users, making them inexpensive to maintain—such as by limiting storage or customer support for free accounts. The idea is a self-sustaining ecosystem. Free users fuel organic growth. Converts provide and maintain profitability. Win-win-win.