Freemium vs Premium Models

The Double-Edged Sword of Free Trials and Freemium Models Watching Family Guy can be an inspiration for pricing;) Free trials and freemium models have become the default entry tickets to the world of SaaS or any subscription. They offer tantalizing promises: increase user adoption, lower customer acquisition cost, and establish product-market fit swiftly. But it’s not a silver bullet. Sometimes they can backfire, sucking up resources without offering substantial returns. Why Free Trials and Freemium Sometimes Fail: 👎Costly User Onboarding: Intuitively, offering something for free attracts users. However, supporting these non-paying customers could be expensive. Evernote, for example, faced difficulties turning freemium users into paying customers, struggling with high support costs. 👎Value Mismatch: Free trials can sometimes be too short for the user to experience the full value of your service. Adobe initially struggled with its Creative Cloud subscriptions for this reason. 👎Low Conversion Rates: Free offerings may attract the wrong customer base, those who never intended to pay. Hence, the low conversion to paying customers. When to Use Free Trials and Freemium: 👍 High Customer Lifetime Value (CLTV): If your service has the potential for high CLTV, offering a free trial can be a cost-effective method of acquisition. It's a short-term investment for long-term gain. Microsoft's Office 365 is a case in point. While they offer a one-month free trial, their expansive suite of features and seamless integration into professional ecosystems make it easier to justify the subscription cost. This encourages a longer commitment from users, ultimately benefiting Microsoft in terms of high CLTV. 👍 Viral Potential: Freemium models work best when the free users themselves become a channel for customer acquisition—think Dropbox. 👍 High Margins: If your costs are low enough to support a large non-paying user base, freemium could be ideal. Spotify's freemium model was initially under scrutiny but ultimately paved the way for its success. When Not to Use Them: ⚠️ Single purchase: e.g. funeral homes 😉 ⚠️ Low Margins: If supporting free users will bankrupt you, think twice. ⚠️  Short Product Lifecycle: If you’re in a fast-paced market where being first is everything, waiting for freemium users to convert could be lethal. ⚠️  Niche Markets: If your product is for a specialized audience willing to pay, skip the freebies. Takeaway: Not every business model is one-size-fits-all. Assess your product, market, and financial metrics before jumping on the "free" bandwagon. While some, like Slack, have managed to turn free trials into a profitable venture, others like LogMeIn had to discontinue their free services due to unsustainability What's your experience with free trials and freemium? Graphics Copyright- Family Guy

Spotify converts 39% of its users to premium (Q4 '24). Slack converts ~30% and Tinder 21%. That's over 5x higher than a GOOD conversion rate (~4%, B2B / B2C) for freemium products (Source: Lenny Newsletter) Let me share 3 stories from this companies on how they increased their free:paid ratio Their strategies include 1. Extracting max value using subscription + addons (𝐓𝐢𝐧𝐝𝐞𝐫), 2. Giving value beforehand (𝐒𝐥𝐚𝐜𝐤) and 3. Constant upselling throughout the user journey (𝐒𝐩𝐨𝐭𝐢𝐟𝐲) 1. Shikha Kaiwar (Monetization @ Slack) led a project that increased monetization by over 20% by testing a 30-day free trial, where users were automatically enrolled into the paid version upon signup "Over time, the smaller, incremental experiments we had been running began showing diminishing returns. We realized we needed a bigger bet. That's when we proposed testing a 30-day free trial, where users were automatically enrolled into the paid version of Slack upon signup. It was a significant departure from our freemium model, but the results were incredible: 20% increase" In it's book "𝐈𝐧𝐟𝐥𝐮𝐞𝐧𝐜𝐞: 𝐓𝐡𝐞 𝐏𝐬𝐲𝐜𝐡𝐨𝐥𝐨𝐠𝐲 𝐨𝐟 𝐏𝐞𝐫𝐬𝐮𝐚𝐬𝐢𝐨𝐧", R. Cialdini talks about the "Reciprocity" effect: when you're given something valuable upfront, you're more likely to give back. This is also called the "Endowment effect" and Slack's autoenrolled-trials is a great example on how to apply this 2. Ravi Mehta (Ex-CEO @ 𝐓𝐢𝐧𝐝𝐞𝐫) shared in an interview w/Steve Young how Tinder layered subscription tiers (Plus, Gold, Platinum) with premium features (Boosts, Super Likes, etc). It reminded me of how airlines (the original masters of price segmentation ) extract value from both user types (e.g business vs. leisure) and ancillaries (e.g luggage, seat selection) 3. Benjamin Brandall analyzed how 𝐒𝐩𝐨𝐭𝐢𝐟𝐲 nudges users to upgrade by categorizing upsell prompts as "soft" and "hard." Turns out there are 15+ moments in the user journey where this happens like: when you want to select a specific song (>1), skip ads, listen offline, skip songs (>8), etc 𝐒𝐩𝐨𝐭𝐢𝐟𝐲 doesn't rely on one big upsell moment. Instead, it layers micro-frictions across the experience that constantly remind users what they're missing and why Premium is worth it

When we launched Gamma, we set the free tier at 400 AI credits with no refresh. Some said we'd lose too many users. That was the point: freemium is segmentation, not charity. We tested different limits. Too low and people quit before they understood the product. Too high and they deferred the decision indefinitely. 400 was where evaluation ended and professional use began. Most founders never find this breakpoint. They guess. Here's what everyone should know about freemium: 1. Free tiers should be generous… enough Notion once thought 1,000 blocks (each paragraph, image, or element) was generous. It was actually a choke point, so they killed it for individuals. Our 400 credits gets you 8 to 10 full presentations. Then it stops. Like Loom's 5-minute cap - long enough to demo value, short enough that real use cases hit the wall quickly. 2. Experimentation is a non-negotiable Your conversion rates don't have to stagnate. After A/B testing model changes, we saw a 20% lift in free-to-paid conversions. Loom keeps iterating their limits to optimize conversion. You're probably leaving money on the table if you haven't experimented much. 3. Lean into high-stakes use cases The "Made with Gamma" badge creates a decision moment. Just like Canva's watermark appears at the exact "client-facing" moment. Credits create urgency. The watermark creates clarity. Together they separate occasional use from professional use with minimal sales touch. 4. Focus on who converts, not who signs up Figma gives unlimited drafts but only 3 team files. Dropbox holds firm at 2GB. At our 400-credit breakpoint, we see who needs Gamma to do their job. That focus improves the roadmap and directs support toward power users instead of chasing vanity metrics. 5. The best moat is self-selection Dropbox converts just 2.5% of 700 million users - and built a multi-billion dollar business on it. They could make free storage 10GB tomorrow. They don't. Because the 2GB limit ensures only people who truly need cloud storage upgrade. Every paying customer chose to be there. That's a moat competitors can't cross with free giveaways.

Only 3 decisions separate good freemium from great. Most companies try to solve 20. Here’s the framework 👇 The Freemium Decision Tree. Three decisions. One at a time. 👉 Decision 1: Trial vs Freemium TLDR: time-based trials work when: • Your product creates serious loss aversion • You have sales support • You can't strip down your product Freemium works when: • Your product is somewhat commoditized • Users need flexibility • You can offer a lightweight version 👉 Decision 2: Usage vs Features Do you limit usage? (Miro's 3 boards) Or limit features? (Grammarly's basic tier) Look at Notion: → Started with a 1,000-block usage cap. → It prevented cannibalization but killed adoption. → They scrapped the cap. Individuals get unlimited blocks, Teams pay for collaboration. Market share exploded. 👉 Decision 3: Pick your constraint Zoom separated from the pack here. • Competitors capped participants • Webex at 3. Join.me at 10. GoToMeeting at 25. • Zoom flipped it. They capped meeting duration at 40 minutes. Full functionality. The real product. Up to 50 participants. Why 40 minutes? Because the average call is 45. Sooner or later, every serious user upgrades. The best freemium strategies aren’t complex. They’re intentional. What’s the smartest freemium constraint you’ve seen?