What Is Freemium?

The word combines "free" and "premium". The investor Fred Wilson made it known on his blog. On 23 March 2006 he described the model as his favorite: give the service away for free, acquire a lot of customers efficiently through word of mouth, referral networks or organic search, and then offer that customer base premium-priced value-added services or an enhanced version. He asked his readers for a name and settled on "freemium" the same day, a suggestion from Jarid Lukin of the company Alacra.

Wilson did not present the model as new. He wrote that it had been around for a long time, for instance in shareware, and that it worked even better with web services, where a customer is only a click away.

The term is clearer once you separate it from two related ideas: - A free trial gives access to the full or nearly full product for a limited time. When it ends, the user pays or loses access. In freemium, the free plan does not expire. What is limited is the scope. - SaaS is a delivery model: the provider runs the application in its cloud and the customer uses it in a browser. Freemium is a pricing model. Some SaaS is sold only on paid plans, and freemium exists outside SaaS, for example in mobile apps or in the shareware Wilson mentioned.

The two can be combined: a product can have a permanent free plan and also a time-limited trial of a paid plan.

The core of the model is the line between the free plan and the paid plan. It can be drawn in several ways: - By usage: storage, number of projects, users or sends per month. - By feature: the free plan handles the basic task and the advanced features are paid. - By service: support, guarantees or integrations only on paid plans.

The user's path has three steps. They sign up with as little effort as possible. Wilson advised against asking for a credit card at sign-up even when nothing is charged to it. Then they use the free plan until the product becomes useful to them. Finally, they hit a limit that matters to them and decide whether to pay.

Whatever the user gets for free on day one has to stay free. In Wilson's words, nothing is more irritating to a potential customer than a "bait and switch". Cutting back the free plan later breaks the trust of the users who are already on it.

The free plan lowers the cost of trying the product. Each free user can also recommend it. That is why HubSpot's flywheel model lists a freemium model among the forces that speed up the cycle.

The design risk sits at the limit. A free plan that is too generous covers everything most users need and takes away their reason to pay. The product gains users without gaining customers. A free plan that is too thin fails the other way: the user never sees the value and leaves before reaching the limit.

Wilson pointed out where the line is easier to draw: when the customer understands why the paid part has to cost money. More storage costs more, and that makes sense to people. When the paid part is just additional features that carry no extra cost for the provider, he wrote, it may be harder to convert free users to paid users. A useful test for the limit is to ask whether a user who grows with the product will eventually need the paid plan. If the answer is no, the limit is in the wrong place.

Free users cost money too: servers, support and development. Whether the model pays off depends on comparing what each paying customer brings in over time, their customer lifetime value, with the cost of serving all the free users it takes to win that customer.

Someone else's free-to-paid conversion rate is only useful as a comparison if it states the source, the period and the type of product. The figure that counts is your own, measured by cohort, meaning for users who signed up in the same period, and over a fixed time window.

• Set the limit on whatever drives usage, so that the users who get the most out of the product end up on the paid plan.
• Show clearly on the pricing page what each plan includes and where the limit is.
• Ask for as little as possible at sign-up and get the user to a useful result quickly.
• Keep what the free plan offered from the start and do not cut it back later.
• Measure conversion by cohort, over a fixed window from sign-up.
• Work out the cost of free users and compare it with the value of paying customers.

• Putting everything a typical user needs into the free plan, so there is no reason left to pay.
• Limiting the free plan so much that users never see the value of the product.
• Calling a free trial with an end date freemium.
• Confusing freemium with SaaS, which describes how software is delivered, not how it is charged for.
• Cutting back the free plan later without regard for the users who already have it.
• Comparing your own conversion rate with a market figure that has no source or date.