Freemium offers a permanently free tier as the top of the acquisition funnel.
Freemium is a business model choice that looks like a pricing decision. The strategic question isn't 'should our free tier have 5 or 10 seats' — it's 'do free users produce something valuable enough to subsidize serving them?' If free users invite paying users (Slack, Zoom), generate SEO content (Notion, Figma community files), train your model (Grammarly), or reach network critical mass (Discord), freemium is a compounding asset. If they consume infrastructure and support without producing any of those, freemium is a tax the paid customers pay, and a reverse trial or straightforward paid model is usually better.
(1) Viral acquisition — free users bring paying users into the product (Slack: free team invites the CFO who signs the contract). (2) Content or data flywheel — free usage produces indexable content (Notion templates, Figma community) or training data (Grammarly writing corpus) that acquires the next cohort. (3) Network effects — the product is more valuable to paying users when there are more free users (Discord, LinkedIn, marketplaces). (4) Land-and-expand where the buyer must experience the product before purchase (dev tools, PLG software). If none of these describe your product, freemium is likely the wrong model — reverse trial or free trial is usually cleaner.
Rule: gate on power, not on core value. If a user can't get real value from the free tier, they won't invite anyone, produce content, or stick around long enough to convert. Common gating axes: usage volume (rows, messages, storage), collaboration size (seats, projects), advanced features (SSO, audit logs, API), support level (community vs. email vs. dedicated). Best-in-class freemium: the free tier is genuinely useful for its target user (individual, small team, hobbyist); the paid tier is genuinely necessary for growing users. Failure mode: the free tier is a crippled demo that annoys users into churning.
Free-to-paid conversion rates vary wildly by category: consumer freemium (Spotify, Dropbox) 2-5%; PLG SaaS (Notion, Figma) 4-10%; developer tools (GitHub, Vercel) 1-5% (but with very high LTV on converters). If you're below 1% and not compensating with virality or ad monetization, the model is broken. Time-to-convert typically ranges from days (impulse purchases in consumer) to 6-18 months (enterprise PLG). Cohort your conversion by activation depth — users who hit a specific milestone (5 documents, first team invite, 30-day active) convert at 5-10x the baseline; those are your real prospects.
Model it explicitly: infrastructure cost per free user (compute, storage, bandwidth), support cost per free user (they open tickets too), acquisition cost of a free user, and the marginal cost of trying to convert them (email, in-app prompts, ads). Divide total cost by conversions to get an effective CAC that includes the free-tier tax. If effective CAC exceeds LTV/3, the model is not self-sustaining and needs either better conversion, cheaper infrastructure, or a smaller free tier. Companies that grew freemium too generously and later had to tighten it (Evernote, Loom) paid heavy user-trust costs; sizing conservatively at launch and expanding is safer than the reverse.
Signals that freemium isn't earning its keep: (a) conversion rate under 1% and no obvious lever to improve it; (b) free users generate <10% of new paid signups via referral/virality; (c) infrastructure cost per free user is meaningful and not falling; (d) the paid product would be materially better without the free-tier constraints (e.g., you can't ship advanced features because they'd need to be gated). Alternatives: reverse trial (everyone starts on paid tier features, downgrades to a light free tier after N days if they don't convert — captures the trial-driven signups without permanent free load) or straight paid with money-back guarantee.
Investor directory · Fundraising library · Articles A–Z · Company funding database