Which Business Model is Better: Freemium vs Paid

Deciding on your business’s revenue model is crucial and it can be difficult to decide whether to build a freemium or fully paid revenue model. Here’s my take on how to decide which revenue model is right for your business.

First, what are freemium and paid business models anyways? 

1. Freemium

Freemium means that some functionality of the product is free to use by anyone. These are usually limited in functionality but work totally fine for the usecase. Popular examples of products with a freemium model are Slack or Trello. These businesses usually fall under two types: (1) Small to medium sized businesses or (2) consumer businesses.

If you are building an enterprise product, you should first try to get as many small to medium sized businesses to use your product for free in order to scale. Then, you can try to acquire paying customers and work to convert some of your initial customers from free to paid customers. 

The usual playbook for freemium businesses goes something like this: initially get as many regular customers (developers, product manager, individual users, etc) as possible > then start getting businesses on the platform as it matures and they build out the features > the businesses usually are the ones converting to paid customers.  

Some examples of freemium businesses

Slack gives their tool away for free but once you reach a certain message limit, they don’t allow you to see past messages.

Trello, on the other hand, allows you to access a certain number of boards for free. Once you reach the board limit, let’s say 5, they will start charging you for the 6th one. 

2.(Solely) Paid 

Paid is exactly what it sounds like, it’s a paid product. There is no free version of the service and you must pay to access the product. Some examples of this are Convertkit and Baremetrics. 

So how do you decide what’s best for your business ? 

If you are self funding your business then you should go with paid (unless you’re super wealthy and have the money to spend). If you are a VC-backed company that is going after enterprises then you should also charge for your product right away. 

Why should a VC backed company targeting enterprise users charge their customers? 
Simple answer is trust. Enterprise companies are used to paying for software and if you don’t charge they will be suspicious.  

The companies which ideally should implement a paid business model are ones that want to build a niche software product (remember there are riches in niches and that doesn’t mean you won’t be bringing in massive revenue) 

If you are self funding your business you have two major constraints, money and time. You need your product to be bringing in revenue from day one so that you can reinvest it into future product development, marketing, support etc… basically all things growth.

You don’t have the luxury of waiting for revenue or you’ll run out of money and drive your business into the ground. 

On the flipside, If you want to build a massive software product company that has broad customer appeal like a Slack, Asana, or Trello then it’s usually better to go with Freemium, knowing that most of your users will be free. This allows you to gather a lot more people as long as your have the pockets to sustain the costs for supporting all these free users till payments start kicking in from some of the paid users. 

If your business has taken on venture money then that provides you a bit more freedom because you don’t have the pressure of generating immediate revenue and can offer some of your users a free tier. Usually a company that raises money will not charge for their product and use the VC money to sustain their operations. Then a few years out they will implement a freemium pricing model that also comes with paid tiers.

Creative ways to get customer interest in paid businesses

Many businesses stick with the freemium option because they are new and want users right away and don’t think the product is ready to charge customers. We recommend that you offer your product for free for a period of time, and let your users know to expect that while you are offering them a free trial now, you will charge them eventually.  

Pulse Metrics is a paid product but we are offering our product for free while we figure out the best price to charge users and to fix some bugs. Another company that used this approach is Buddybuild, which recently was acquired by Apple.

With a paid business, you should consider offering your customers a free trial, which would allow them to try your product for free for a few days or a couple weeks. A free trial is a great strategy because your users can try your product out before they commit to paying for it. With this approach make sure your onboarding experience is flawless and that you know internally what it takes to make a customer convert. 
Example: In Facebook’s early days they knew that a user needed to have X friends on the platform in X amount of days to increase the likelihood that the user continued to use Facebook. So their team focused maniacally on helping new users add X friends within the X days.

Bottom line is that choosing the right business model is important and should not be taken lightly.

As always, we hope this was helpful and informative. If you have specific questions about your business model, reach out to me on dd@relibablebits.io, Facebook, Twitter, and I’d be more than happy to help! 

Till next time,