The “freemium” model—offering a free plan with optional paid upgrades—seems like a no-brainer at first. It’s used by big names like Slack, Notion, Tally, and Canva. But is it really the best choice for every SaaS product?
We’re here to unpack the pros and cons of freemium and explore when it makes sense—and when it doesn’t. Here’s what we’ve found.
What Is the Freemium Model?
The freemium model allows users to access a basic version of your product for free. Once they want more—additional features, higher usage limits, or specific premium perks—they’re encouraged to upgrade to a paid plan. This differs from limited-time free trials, where users must pay after a specific period to continue using the product.
Sounds simple, right? But while it works for some products, it can lead to challenges many don’t anticipate.
Why Freemium Might Be a Risky Move
Attracting the Wrong Audience
We all love free stuff. But when your product has a free plan, you may attract people who don’t fit your ideal customer profile.
Instead of focusing on potential paying customers, your marketing and growth efforts end up targeting users who likely won’t convert and that means wasted energy and resources.
We’ve seen startups fall into this trap, spending weeks or months trying to convert free users into paying customers only to realize that those users never intended to pay in the first place.
Devaluing Your Product
When everything people need is available for free, they start to question why they’d pay at all. The free tier becomes the definition of what your product is worth, and suddenly, anything beyond it feels optional. For some products, this leads to users deciding the free version is “good enough,” greatly reducing the pool of potential paid customers.
High Costs
Freemium isn’t cheap. Maintaining a free user base adds infrastructure costs—servers, bandwidth, storage, and more. Let’s not forget customer support. Free users still expect a reliable product and support when things go wrong, and they often place more demands on your team than paying users.
Meanwhile, you’ll also see misleading user data. Free users can generate loads of activity, but if they aren’t converting, it creates confusing signals about what works.
When Freemium Works (and Why)
Freemium isn’t always a trap. Some SaaS products thrive using this approach. So, what separates the winners from the ones who just bleed time and money?
1. Free Users Become Your Marketing
Tally provides a great example. Their free tier includes everything users need but keeps a small “Powered by Tally” logo on forms. Most users are fine with this, and it acts as free advertising for the brand. They’ve bootstrapped their way to $150K in monthly recurring revenue without spending big on traditional marketing, proving this model can work when the free plan promotes your product effectively.
2. The Network Effect Drives Growth
Sometimes, a product becomes more valuable the more people use it. Slack is a standout example. Its free tier encourages teams to join, and as more people within a company use Slack, it becomes essential for communication. Products like this thrive on the network effect, where adoption naturally grows through user interactions.
That said, scaling a free tier for a high network-effect product often requires funding. Without deep pockets, it’s hard to cover infrastructure costs or play the long game.
3. A Clear Upgrade Path
Freemium works well when your product naturally encourages users to upgrade. PostHog is an excellent case. Their pricing increases based on the number of sessions tracked, which aligns perfectly with customer usage.
Simply put: If your pricing model “just makes sense,” it’s a lot easier to convert free users to paid customers.
Final Thoughts: Is Freemium Right for You?
Before jumping into a freemium model, ask yourself hard questions.
- Can free users serve as effective marketing?
- Will user feedback (from non-paying users) help you refine your product?
- Do you have a logical upgrade path with pricing that “just clicks” with users?
If the answers aren’t obvious, freemium might not be the best fit for your SaaS. One size doesn’t fit all, and freemium isn’t always the magic bullet it appears to be. So, weigh your options carefully and focus on what’ll work best for your ideal customers and your bottom line.
👋 Looking for input from a team that’s worked with category-leading companies – possibly like yours? We’re here and always happy to help! Use the contact widget in the bottom right-hand corner to get in touch or apply to work with us here.
Let's build better together.
