Freemium Model: When Free Plans Work (and When They Don't)

origami Freemium business model-1

Freemium is a pricing model that allows customers to use a limited version of your product for free, in the hope that they will see value in upgrading in the future.

In theory, it’s a cheap way of acquiring customers. Offering something for free lowers the barrier for potential customers to start building a relationship with you. But even free customers take up resources. Every new customer you add means a higher processing load, more server power, and more time spent supporting them. If you aren’t getting a good enough conversion from free customers to make up for the strain they put on your company, freemium falls apart and your company implodes.

And in fact, that’s exactly what it did to us.

Freemium isn’t always the miracle lead machine that it’s been made out to be. In this lesson, we look at when offering a free plan makes sense – and when it doesn’t.

Why Freemium Plans Are Popular in SaaS

Freemium plans are particularly common for SaaS businesses, and there’s a good reason for that. It ultimately comes down to finding an easy way to show potential customers how the tool works, what the interface is like, and how the product’s features can benefit them.

Many SaaS tools, after all, talk a great game about how their solution is best, even with many competitors offering similar features. The best way to convince a potential customer to purchase this product is to give them hands-on experience.

Demos are possible, but they can take a while to book and aren’t always the same as trying the software firsthand. Some customers also prefer a self-service model.

Graphic design software like Snappa is a great example. It uses drag-and-drop technology to help you create graphics… but you want to know that you can actually design something that looks good yourself before you spend any money.

Freemium plans may also be adopted by single users and then, if they’re happy, they either upgrade or share it with other people in their network or company. A sales rep might love how convenient a prospecting tool like Kaspr is, but after hitting the limit of their free plan, they decide to upgrade and tell their team members about it.

Since freemium plans are common in SaaS, some brands may also feel the need to offer them to keep up with the competition.

When does freemium work well?

It targets an individual

The most successful companies using a freemium plan start by targeting individuals, rather than companies. Think Dropbox or Evernote’s enormous free user base. An individual can quickly get started with the service, has a good experience, and it spreads from there. Creating virality or a ton a referrals is one of the best ways to use a freemium plan.

There’s quick time to value

Customers are much less willing to put in time onboarding themselves with a free product. When things are given to us, we don’t tend to value them as much. Great freemium products provide value quickly so customers keep coming back to use the product. Think companies like Spotify. You understand what you’re getting the first time you hit play. The more you use it, the more likely you are to end up paying for an ad-free, mobile download Pro account.

MailChimp saw enormous success in launching its freemium plan. A year later, they reported a 150% increase in paying customers and a 650% increase in profit (mostly due to a drastically lower cost of customer acquisition). Creating email campaigns in MailChimp is so easy, free users, limited to 1000 subscribers, saw the value right away and began to rely on the product as their business grew.

If your product requires a lot of set up to get to the Aha! Moment, you’re better off raising prices and using a more hands-on sales and onboarding approach.

Easy (and valuable) conversion to premium

In theory, freemium plans leverage momentum during the customer journey.

If a user has already signed up for your tool and taken the time to get started and learn some basic features, that’s momentum. If they’re happy with what they find, they are now further into your sales funnel than a competitor. Well-timed offers and sales outreach can leverage that initial momentum to convert the user into a paying customer.

The big idea behind freemium is to eventually convert those users into paid. So you better make it easy for free users to see the path towards premium. A common path is to convert individual users into a team account. I used Trello obsessively as an individual before I introduced it to my team at work. It was easy to see the value behind upgrading to a team account so we could all work together on projects.

Back to the success of MailChimp. As businesses grew their subscriber lists beyond the 1000-subscriber limit, it was much simpler to transition to the paid MailChimp account rather than move to a different platform. Customers continued to receive value, and were happy to pay for it.

Make this path super clear, and keep reminding customers what they are missing out on. If you’re able to withhold features that power free users would love to have – it’s a great incentive for them to upgrade!

Customers bring value either through upgrading or acquiring more customers

Evernote CEO Phil Libin has said, “The easiest way to get 1 million people paying is to get 1 billion people using.” If your customers aren’t upgrading, then they better be helping you acquire more customers who will upgrade.

It’s been hypothesized that offering a free plan (whether that’s a free museum pass, an individual SaaS account or a light version of your service) creates a ratio of 10 free users: 1 paid user. Your one paid user needs to support those 10 free customers (or they need to support themselves).

Freemium only works if you’re getting value from your free users. If they aren’t contributing anything to the relationship, the cost of supporting them outweighs the benefit.

When does freemium fail?

Freemium plans can work, which is why many SaaS products offer them, but they don’t always work well. There are a few factors that can make freemium plans a failure for your business.

And for what it’s worth: Our business was one of those freemium fails, which we’ll talk about in a minute.

Available resources fall short

Resources are finite. If you have an abundance of resources going to freemium users, that can derail your revenue quickly.

We discovered this the hard way: “When your available resources, whether it be team size, performance caps, or money, are tight, then 'free' has a real possibility of causing more damage than providing any real benefit.”

For many companies, the limited resource is the support that free users need.

Tickets and questions from paying users get drowned out by those from free users, and the service suffers overall. Everyone gets a reduced customer experience, and it can both drive away paying customers and discourage freemium users from converting.

For us, it was technical restraints on our server resources. Each free user created additional demand on our servers as we pulled their Stripe history and processed their dashboard. Too many free users signing up at once led to a decrease in performance for paid accounts. We simply couldn’t scale fast enough, and it starting to affect our churn rate.

There’s not enough value in upgrading

After trying out a freemium model, Hubstaff realized that users of the free plan didn’t see enough value in the premium product to upgrade. The free plan limited it to three users. For companies that needed more, instead of paying, they’d just use a different email address to get another three free users. Ouch.

If the free customers you’re acquiring don’t see a reason to pay money for your service, they won’t. It might be because your free plan is too generous, or because there are too many companies offering the same thing for free.

Regardless, why would anyone buy the cow if they can get the milk for free?

It’s an afterthought instead of a managed product

Creating a free plan isn’t just a set-it-and-forget-it pricing strategy. You need to consistently work to improve conversion from free users to paid users. Deciding who to market to, which features to add to each plan, and how you’ll be supporting different tiers are all ongoing decisions. If you want to try freemium, you’ll need to commit to an entirely new way of doing business.

What’s the difference between free trials and freemium models?

One quick point of clarification here: Free trials and freemium plans are two separate things. Each has its pros and cons, and both allow users to get hands-on experience with a product before hopefully making a purchasing decision.

A freemium plan, however, is a free, often limited plan. It may be called a “free forever” plan or have a $0 monthly cost reflected in the pricing page. These plans typically only provide access to a product's base functionality.

Content Camel, for example, has a free “solo” account that gives a single user access to the platform’s standard features. The goal here is to get users to either upgrade to higher-level plans for more features or bring more team members on board.

Contentcamel

A free trial, however, will offer full access to a set plan’s features for a limited time. This is often for 10-, 14-, or 30-day periods so users can get a good idea of the software's full breadth and, ideally, make a purchasing decision at the end of that trial.

Freemium has the risk of users staying free forever and using the plan indefinitely without ever paying. There is also a risk they may not have enough features on their own to make it useful, or that there are so many features available that there’s no point in converting, making it a hard balance to strike. As we’ve already discussed, you need everything to be in line to use the freemium model to drive conversions without it eating into your revenue.

Free trials allow people to access the most critical features of a tool and pressure them to make a conversion decision after 30 days. And while they may need help from customer support and are using the platform at full capacity (which can take up server space), each user’s free trial has an end in sight— they won’t be a money sink forever.

How to know if a freemium pricing model is right for your product

As we’ve already mentioned, there’s a lot to consider when deciding if a freemium pricing model is right for you.

You can start by asking these questions:

Is your end user also the decision-maker, or do they influence the decision-maker? IE, an accountant at a small business would likely have more say over payroll software if a selection is made than an accountant on a team of 20 working with three supervisors under a CFO at a large corporation.
Do you have the resources?
What is your most direct competition doing? If everyone is doing freemiums and you believe you need to offer something to give customers a chance to try, worth considering at least offering a short-term free trial instead of “just” demos.
Consider your decision-maker's preference- is this something they’ll look for in
some capacity?

Final thoughts: How to do freemium right

When you’re implementing a freemium pricing model, try to implement these best practices when possible:

Find that magic balance. You need your tool to be useful enough to make them want to upgrade, but not so useful that they never have to. This may require some testing.
Make sure you’re marketing to the right people. You may, for example, want to market to high-level decision-makers who will want to upgrade or mid-level users who can directly appeal to higher-level decision-makers.
Watch your revenue analytics closely. Using detailed, accurate revenue analytics designed specifically for SaaS brands is crucial to determining whether your freemium pricing model is working for you or against you.

Remember that if you want to optimize your freemium model—or decide whether it's actually benefiting your overall profit margins—you need accurate data about what’s happening.

Baremetrics can help with this. We offer SaaS-focused revenue analytics with 26 metrics crucial for subscription-based businesses, and we prioritize data accuracy and reliability above all else.

Ready to discover what’s actually driving high-value customers and revenue? Get started with Baremetrics’ 14-day free trial here.

RECOVER Dunning management on auto-pilot Around 9% of your MRR is at risk to failed payments. What are you doing about it?

FAQ

What is the freemium business model and how does it work for SaaS?

The freemium model lets users access a limited version of your product for free, with the goal of converting them into paying customers over time.

In a freemium pricing strategy, the free tier handles customer acquisition while paid tiers generate revenue. The model works best when your product delivers value quickly, the upgrade path is obvious, and free users either convert or refer others who do. The core math is roughly 10 free users for every 1 paying customer, meaning your paid subscribers have to carry the cost of supporting everyone else. If that ratio slips, or if free users never see a reason to upgrade, the model breaks down fast.
What is the difference between a freemium model and a free trial for subscription businesses?

A freemium plan is a permanent free tier with limited features, while a free trial gives full access to a paid plan for a fixed period, typically 14 or 30 days.

Freemium carries the risk of users staying on the free plan indefinitely without ever converting, which quietly drains server resources, support bandwidth, and team capacity. Free trials have a built-in deadline, so every user either converts or churns at the end of the trial window. For B2B SaaS with higher average contract values and a more complex onboarding process, free trials often produce cleaner conversion signals and better trial-to-paid conversion rates than an open-ended freemium tier.
When does a freemium pricing strategy fail for SaaS companies?
Freemium fails when free users consume more resources than they generate in upgrades or referrals, or when there is not enough incentive to convert to a paid plan.

The most common failure modes include:
- Free plans that are too generous, removing any reason to upgrade
- Support queues dominated by free users, degrading the experience for paying customers
- Server or infrastructure costs that scale with free signups faster than revenue does
- Treating freemium as a set-and-forget pricing decision rather than an actively managed conversion funnel
Baremetrics ran a freemium model and shut it down for exactly these reasons. The technical load from free users was degrading performance for paid accounts and pushing up churn.
How do you measure freemium conversion rates and know if your model is working?

A healthy freemium conversion rate is typically between 2% and 5% of free users upgrading to a paid plan, though the right benchmark depends on your pricing tier, average contract value, and acquisition channel.

To know if your freemium model is actually working, track free-to-paid conversion by cohort, monitor MRR contributed by converted users against the infrastructure and support cost of your total free user base, and watch your churn rate among recently converted accounts. Baremetrics gives SaaS founders and growth teams real-time visibility into MRR movements, trial insights, and customer segmentation, so you can see exactly which user groups are converting and which are just consuming resources without contributing revenue.
How can I track the revenue impact of switching from freemium to a paid-only or free trial model?

To measure the revenue impact of a pricing model change, you need to isolate new MRR, expansion MRR, and churn MRR before and after the transition, broken down by acquisition cohort.

Start by baselining your current MRR by cohort so you have a clean comparison point. Then monitor how trial-to-paid conversion rates, average LTV, and involuntary churn from failed payments shift after the change. Baremetrics automatically separates new MRR, expansion MRR, contraction MRR, and churned MRR in real time, pulling directly from Stripe, Braintree, or Recurly with no manual setup. That means you can run pricing experiments and see the revenue signal clearly without waiting for a monthly spreadsheet to catch up.
How can I benchmark my freemium conversion rate against other SaaS companies?

You can benchmark your freemium conversion rate and related subscription metrics against real SaaS companies using Baremetrics Open Benchmarks, which aggregates anonymised data from hundreds of subscription businesses.

Knowing whether your churn rate, MRR growth, or trial-to-paid conversion is above or below the median for your MRR band is far more useful than comparing yourself to a generic industry statistic. Baremetrics publishes open benchmark data so SaaS founders and finance leads can see how their numbers stack up across metrics like average revenue per account, LTV, and churn rate, segmented by company size and growth stage. If your freemium conversion looks low in isolation, benchmarks tell you whether it is a you problem or an industry-wide one.
What platforms help subscription businesses recover failed payments that cause involuntary churn?

Baremetrics Recover automatically retries failed payments and sends targeted dunning emails to reduce involuntary churn for subscription businesses running on Stripe.

Involuntary churn from failed payments is one of the most overlooked revenue leaks in a freemium or paid subscription model. Users who intended to convert or stay subscribed get dropped not because they chose to leave, but because a card expired or a payment failed without a retry. Recover handles the retry logic and customer communication automatically, so your team does not have to chase individual billing failures manually. For SaaS companies at any MRR level, recovering even a small percentage of failed payments compounds quickly into meaningful MRR retention over time.

Freemium business model

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Why Freemium Plans Are Popular in SaaS