Pricing is critical to any startup and can often be one of the main drivers of adoption. Nailing your pricing and basing it off the value being produced is key to gaining adoption and hitting your growth targets. As a venture studio and VC firm focused on B2B SaaS, we continue to see that one of the most popular and fastest-growing pricing models today is freemium pricing — which is defined as a business model that offers basic services and product features for free, with the option to upgrade to a paid package to access additional benefits.
Before we get into freemium pricing examples and whether your company should adopt a freemium strategy, it’s worthwhile to note that the world of SaaS pricing in particular is hard to navigate; COGS is often insignificant and your payback period (time to repay your customer acquisition costs) is typically many months or sometimes over a year. SaaS startups are often left setting prices based on intuition, simply following the lead of competitors, or anchoring their price off of large incumbents like a Salesforce license.
For a long time, there has been a large debate as to the efficacy of a freemium pricing model for a SaaS company. In 2011, Lincoln Murphy first published his list of 7 types of freemium and the accompanying slide deck below.
The freemium examples he gives are foundational — below, we’ll dive into his seven different models with a little re-examination and some new thinking on the new era of enterprise cloud startups. I also added a new pricing model that is becoming more and more popular I call the “Free Tool.”
1. Traditional Model
This is the most commonly understood version of “Freemium.” Usually it describes a fully-functional product that is free forever, but either has significant feature limitations or rate limits.
This freemium model tends to have extreme difficulty converting customers from a free version to paid version — called the “penny gap.” A Dropbox Basic account, Apple’s free iCloud subscription, or Zapier’s Free Forever plan are all perfect examples of this. Dropbox — now a $2B+ revenue run-rate — has been able to successfully scale a more profitable business solution, though.
2. Land & Expand
Land & Expand refers to getting individual users to sign up for a product for free — hopefully hitting a sizable threshold of users in the same organization — and then monetizing the product at the organizational level. The concept revolves around keeping the users outside the flow of funds and locking it into the organization.
Yammer is probably the most iconic example of introducing this pricing model as the company would sign users up for free and sell to an organization after hitting a certain threshold of freemium users. Yammer reportedly had a phenomenal 10–15% conversion rate from free to paid users.
Slack also famously employs this model, letting users sign up for free without organizational approval, and then selling to an organization when it gets to a point that they want to have organizational control over the system.
3. Unlimited “Free Trial”
This is a mix between a “Free Trial” and a traditional freemium model. It usually involves a feature-crippled version of the product that renders it mostly unusable. The expectation is that the customer would understand the value of the product and upgrade accordingly.
This version is often risky due to the mixing of a free trial and the psychological aspects of freemium pricing where users expect to be able to stay on the free version forever. As Lincoln noted, Echosign (now Adobe Sign) and Basecamp both used to employ this pricing model, but have since moved to different models.
4. Freeware 2.0
Freeware 2.0 is a free-forever, fully-functional product. It is usually the company’s main product or a standalone product line in a larger company. Companies usually monetize the product through add-ons for power users or special features.
Mobile games are a great example of this in a B2C perspective, as only a small portion of the population actually pays for micro-transactions, usually to speed up the game or buy game extensions. In the SaaS world, some great early examples included Evernote or Skype.
“The easiest way to get 1 million people paying is to get 1 billion people using.” — Phil Libin, CEO of Evernote
5. Alternative Product Strategy
We often see this freemium pricing model used by a company with an existing premium product line that wants to branch into new areas or a division of their core offering. This is oftentimes used as a strategy to get the “foot-in-the-door” without a direct upsell path — the intention is to cross-sell other offerings from the company. An example of this is join.me (created by LogMeIn), Intercom’s free “Platform”, or HubSpot’s Sales CRM.
Let’s take a closer look at HubSpot’s CRM. In 2014, HubSpot first launched their free CRM as a whole new product line to their marketing automation platform, giving it away to users for free whether or not they were a marketing customer. They used this as a foot-in-the-door, though, to cross-sell their marketing software, which is now priced by number of contacts on the marketing side and number of users on the sales side.
This pricing model requires a forever-free base product (usually with 100% functionality), but monetizes through revenue-sharing with third-party developers. We oftentimes see this model utilized with marketplaces or products that rely heavily on add-ons from third-party developers.
Freemium examples in the consumer world include App Store or the Google Play Store. Some great examples in SaaS include G2 (a High Alpha portfolio company), Capterra, or the Salesforce AppExchange (although the Salesforce base product is not free).
7. Network Effect
The Network Effect model relies on monetizing users, traffic, or behavioral data that a company collects in aggregate due to its “network effect.” Typically, these products collect extremely useful and relevant user data for the benefit of others .
The saying goes, “if you aren’t paying for the product, then you ARE the product.” Examples of this include social networks like Facebook (Meta), Mint, Google, and (apparently) Unroll.me.
8. Free Tool
I am adding an eighth model to Lincoln’s original seven: the “Free Tool”. HubSpot was one of the pioneers of this strategy when they first launched Website Grader in 2006, and they have since launched a number of “graders” and other free tools.
This model uses engineering resources to develop free micro-tools and resources that perform a very basic — yet still valuable — task. On their own, these tools could never become big, profitable businesses, and they usually look more like an open-source project. Successful companies are using tools like this as marketing “assets” — just like an ebook or whitepaper — becoming a massive lead generation source and a big opportunity to make their marketing a utility to their audience. Dharmesh Shah, the HubSpot CTO and Co-Founder and inspiration behind Website Grader, says these products are “marketing assets with ongoing returns.”
Some great examples of these Free Tools include:
HubSpot’s GrowthBot: a Slack chatbot for marketing and sales.
Clearbit’s Company Logo API: a simple API that takes a company’s domain and returns the company’s logo.
Better Error Pages by Atlassian’s StatusPage: a free tool to build 404, 500-level, and maintenance pages.
CoSchedule’s Headline Analyzer Tool: a free tool that scores your overall headline quality and rate its ability to result in social shares, increased traffic, and SEO value.
There’s no easy answer when it comes to pricing, and there are a variety of factors that go into whether it’s best to pursue some sort of freemium model — or a combination of different models. Freemium is a tough game, and requires a very large market size to truly be successful. In most of these models, it is incredibly rare to convert a high percentage of the users (2-4% is the average conversion rate). No matter what, your product should be your top priority — the perfect freemium product will market, acquire and onboard new users, and facilitate customer service itself. If your customers are asking for pilots, RFPs, RFIs, etc, your product is likely too complex for a freemium model.
In SaaS, I generally gravitate away from the freemium model, but I am a big proponent of the surge in the “Free Tool” strategy and recommend many marketers to pursue their version of HubSpot’s “Website Grader.” I also believe we will see the freemium models continue to evolve as AI/ML-driven software platforms continue to emerge, needing vast amounts of data in order to learn and build effective algorithms.