Freemium

What it means

Freemium is a business model in which a company offers the basic version of a product free and earns from paid extras: advanced features, more capacity, extra users or support. The name blends the words free and premium.

The model is typical of SaaS and apps. The free version acts as marketing, attracting many users who try the product without risk. A small share of them upgrade to the paid version, and their payments must cover the cost of everyone else.

Freemium differs from a trial in that the free version never ends, and from a subscription model in that most users never pay. Success therefore depends on the conversion rate and on what it costs to serve one free user.

How it works in practice

In the financial plan for a freemium product we track unit economics: infrastructure and support costs per user, the share of paying users, average revenue per paying user and how long they stay. If free users cost more than conversions bring in, the model will not sustain itself.

In the books, income from annual subscriptions must be spread correctly. If a customer pays a year in advance, the revenue is allocated to the months it covers. For sales to consumers in other EU countries, VAT follows the customer’s location, often through OSS.

For business products it pays to track which features drive the upgrade. Often they are not the most used features but those tied to teamwork, security or data export.

What to watch out for

A common mistake is giving too much away. If the free version meets most customers’ needs, they have no reason to pay. The line between versions should be drawn so that a growing customer naturally hits a limit.

The second risk is underestimating the support cost of free users. Questions, complaints and requests from people who pay nothing can swamp the team. The free version should come with limited support, such as guides and a community forum only.