The Freemium Model as a SaaS Pricing Strategy


There are many different ways to go about pricing and marketing a SaaS application. However, over the course of the past decade one particular business model has taken the lead: Freemium.

The term ‘Freemium’ refers to a combination of ‘free’ and ‘premium’. The Freemium pricing strategy is one by which the basic features of your SaaS app are provided for free but users are charged for proprietary features and functions. The freemium business model has become quite dominant among internet startups and mobile applications. Examples of the freemium model include Hootsuite, networking on LinkedIn, and services such as Dropbox.

Advantages of Freemium:

  • You can attract a lot of consumers to try the product. Consumers are generally more hesitant to try a product if they are asked to hand over their credit card information without even trying it out to see if it meets their needs.
  • Research has found that freemium is more successful than the concept of the free 30-day trial or other limited term offers. This is likely because users don’t want to deal with complicated cancellation processes or invest their time and energy only to have to pay for a service they may or may not be willing to pay for later on.
  • More consumers trying your product means more buzz and awareness about your product and its features.
  • The monthly subscription fees of paying users have proven to be more lucrative than revenue generated from running advertisements. Plus you don’t have to annoy users with ads or attract advertisers in the first place, allowing you to focus more on your product and providing value.

Deciding which features should be free

Finding the balance between offering free features that attract new users and premium features that convert those users into subscribers can be quite tricky. You can start off by offering all or most of your features for free, but beware that users tend to be quite upset when a feature they’re accustomed to having free of charge is now only being offered for a price. Imagine if Facebook suddenly started charging users for features such as adding a new friend, posting status updates, and changing profile pictures. It is best to determine which features users are willing to pay for early on and only offer them for a premium.

If you find that your product has lots of traffic and users but not many paying subscribers then chances are you may be offering too much for free. If you’re not experiencing high traffic or that many subscribers then chances are you need to provide more or better features.

Freemium combined with a free trial

Many startups successfully combine the  Freemium model and free trials by offering the free features unconditionally and letting users try out the premium features for free for 30 days. Hootsuite is a great example of this strategy. They offer their dashboard for free but tools such as their message scheduler are only available to subscribers, though you can try out the premium features with a free trial.

Another example of letting users try out a feature before paying is giving them access to a tool but not letting them complete their work unless they upgrade. A lot of image editing tools use this technique by letting you use a template or editing tool, but not allowing you to save or download the image or remove their branded vector without upgrading. This has also been proven to be quite effective.

When the Freemium Model may not be ideal

Freemium is best used for services that will be accessed and used on an ongoing basis. For online services that may only be accessed occasionally it can be difficult to convince users that paying for an upgrade is worthwhile. An example of this is website that provide customizable legal documents such as cohabitation agreements or leases. While these documents may be important at the time they may only need to access the service occasionally. In instances like these it is typically better to use a different business model such as charging a small fee per document drafted or using the advertising model depending on traffic volume.

We hope this article helped you understand more about Freemium as a pricing strategy. We develop a lot of SaaS applications for our clients and want to see them become successful.