Freemium business model examples: key pros and cons

Freemium business models can be a great way to attract new customers to your business and showcase your brand’s value.

In this article, we’ll guide you through everything you need to know about freemium business models and provide some tips for converting free users to paid customers.

What is freemium?

Fremium is a business model that offers users free access to basic features and limited functionality, but offers additional features and full access for a premium.

A combination of the words “free” and “premium”, freemium is a useful model for web-based businesses. It attracts users to your service by offering them something for no charge. Once a user decides they get value from your service, they’re more likely to opt to pay for the premium version.

By convincing users of a service’s merit and only charging for extras, freemium models help companies build a loyal, happy customer base that’s more likely to continue paying for premium features. As a result, it’s often used by new software companies, both in B2B and B2C sectors.

Is a free trial freemium?

No, free trials are not the same as a freemium business model.

Time is the key factor here. Free trials give users access to a product or service for a limited period to test it out before purchasing. After that period ends, access is revoked.

Meanwhile, freemium products and services remain available to users indefinitely. They can pay to upgrade their experience, unlocking additional features, benefits and more.

Both fremium products and free trials have their own unique advantages. Freemium models lower user acquisition costs and can generate awareness faster. But free trials provide a greater return on investment for each individual customer that converts.

Pros and cons of freemium

Pros

Freemium business models attract more users who can contribute subscription revenue in the future. Users are often happy to try out a product as long as there is no financial obligation on their part. This gives businesses time to get onboard them and eventually convert them to paying users.

For example, Spotify had converted approximately 46% of its users from free to paid by 2022, helping to make the brand a premiere audio streaming service.According to Harvard Business Review, the average freemium-to-paid conversion rate hovers between 2-5%.

Cons

A drawback of the freemium model is that it’s easy to onboard many free users, but harder to convert them to paying subscribers.

One way to avoid this issue is to evaluate the features offered in your free version. You need to offer free users enough value to stay on your platform while incentivising them to upgrade. Be careful when adjusting this balance — changing your free features too drastically will frustrate users and lead them to abandon your platform.

Moreover, some users can grow tired of the free version but don’t see enough incentive to start paying for the premium version. This compares unfavourably with other business models, like free trials with payment details taken up front.

Examples of freemium business models

There are a number of hugely popular platforms that have achieved success using the freemium business model. These include:

Spotify

Spotify is one of the most famous freemium subscription platforms. The free version of the service allows listeners to stream from a library of over 100 million songs. However, this access comes with restrictions. For example, users can’t skip ads, download songs for offline listening or change the order in which songs are played.

Spotify Premium packages remove these limitations. Users can stream or download unlimited songs in any order with no ads.

Today, Spotify boasts more than 626 million active users, with more than 246 million paying for Premium plans. While Spotify’s expansive and highly desirable catalogue of music has driven its success, its ability to convert free users to monthly subscribers is what allowed it to reach profitability in 2019.

Trello

Trello is a workflow management platform that took a unique approach to the freemium model. Where other services often limit the number of users on the free version of their platform, Trello instead limited the number of platform integrations, refraining from capping collaborators on free plans until April 2024.

This means free users could benefit from near-total access, allowing multiple departments or even the entire business to build their reliance on the platform. This incentivised users to upgrade as their company scaled and they needed greater integration options.

Dropbox

Dropbox was one of the first services to offer a freemium model. With the free version, users get up to 2GB of storage space for teams of 10 people or less.

Data storage represents an ideal sector for freemium pricing. As users become accustomed to the service and add more and more files, they’re likely to hit the limits of the free plan. When that happens, they’re more likely to upgrade, acquiring more storage space and gaining access to other features aimed at power users.

How to make freemium work

Freemium can be a great model for attracting customers, encouraging word-of-mouth marketing, and growing your company. However, in order for it to work, there are a number of factors to consider.

What should be free and why?

One of the main purposes of the freemium model is to get users onto the service, paying or not. If this isn’t happening, it’s probably because your free service isn’t attractive enough to users. In that case, consider offering slightly more features to the free version to get people using the service.

But what if you have plenty of users but hardly any upgrade to the premium version? Then you have the opposite problem: users are satisfied with the free service and aren’t incentivised to purchase the premium subscription.

A popular example of this was the New York Times website, which saw very few subscribers when they allowed total access to readers. To encourage regular readers to subscribe, the news giant ultimately decided to limit users to ten free articles a month.

Decide on a conversion rate target

In this context, the conversion rate refers to the percentage of users who switch from the free version to the premium version, becoming paid subscribers. Your ideal conversion rate will depend on plenty of factors: your industry, your stage of growth, how you collect revenue and more.

Again, a conversion rate of 2-5% is the typical range. For example, new businesses may accept a 2% conversion rate to maximise the growth of all users, whereas an established business may want 5% to increase revenues.

If you rely solely on subscription revenue, then you want your rate to be as high as possible. If you obtain some revenue through advertisements, as a site like LinkedIn does, then you can afford to sacrifice conversion to an extent.

How to convert users to premium

In order to entice free users onto the premium version of your service, you will need to employ an effective upgrade strategy.

The most crucial step is to ensure free users have a satisfactory experience using the service but can clearly see the advantages of upgrading. With Spotify, for example, users can still access all the music they want, but they also have to endure frequent ad breaks. The prospect of listening to their favourite songs interruption-free makes upgrading an attractive option.

You can also try these tactics to persuade users to convert to premium:

1. Explain the benefits of paid features: make sure free users know what they’re missing. Tell them about extra features via email or through automatic pop-ups on the app or platform.

2. Share positive feedback from premium users: promoting testimonials of a satisfied premium user can help convince a free user to upgrade.

3. Allow access to paid features for a limited time: letting users access paid features for a short time means they can see the benefits of upgrading for themselves.

4. Offer deals on premium: a great way to convert free users is to sell premium packages at a discount for a limited time. Putting a deadline on these offers can also add a sense of urgency, leading to more conversions.

How can a better payment experience improve your freemium model?

When you’ve shown a free user enough value to warrant upgrading, make sure you don’t fall at the final hurdle — collecting a payment. Card payments have high failure rates, while manual bank transfers force users to navigate away from your site to complete a payment.

Offer customers a seamless freemium experience with TrueLayer's variable recurring payments (VRP) product. Powered by open banking technology, VRPs provide a secure, seamless experience for your users at a reduced cost compared to cards.

Find out more about how VRPs can help your business make the most of its subscription revenue.