Freemium is a pricing strategy in which a product has a permanently free tier with limited features or usage, and users can upgrade to a paid tier for more capability.
Why it matters
A free tier lowers the barrier to trying the product and spreads it by word of mouth. The business bets that a share of free users will convert to paid. The model only works if free usage costs little to serve and the paid tier offers a clear step up.
Example
A note-taking app gives 50 notes free and unlimited notes for 5 USD a month. If 100,000 people use the free plan and 3 percent upgrade, that is 3,000 paying users, or 15,000 USD in monthly revenue, before serving costs.
Common mistakes
- Making the free tier so generous that nobody needs to upgrade.
- Making it so limited that users leave before seeing value.
- Ignoring the support and infrastructure cost of a large free user base.
Related
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