Freemium pricing sounds simple: you give away part of your product for free and charge for the rest. But in practice, it's one of the hardest pricing models to get right. If you give away too much, users don't upgrade. If you give away too little, they don't stick around long enough to care. The benefits are significant – they include viral growth, massive user bases and long-term revenue– but so are the trade-offs. Below, we'll explain how freemium pricing works, where it does and doesn't pay off and what it takes to build a model that holds up under pressure.

What's in this article?

• What is freemium pricing?
  
• What are the benefits of a freemium pricing model?
  
• What challenges come with using a freemium pricing strategy?
  
• How do you design a successful freemium pricing model?
  
• What metrics should you track to measure freemium success?
  
• How Stripe can help with freemium pricing
  

What is freemium pricing?

Freemium pricing means offering a product or service for free at the entry level, with the option of paid upgrades for users who want more features, usage or control. This strategy, which eliminates the barrier to entry, is built on the idea that once people try something useful, some of them will stick around and pay for the full version.

The idea was developed in the 1980s as a software distribution model known as shareware, then it went mainstream with the rise of software-as-a-service (SaaS), mobile apps and digital services. Today, freemium is everywhere, from note-taking apps and email marketing platforms to design features and application programming interfaces (APIs) for developers.

The model works by splitting a product into tiers:

• Free: This is functional but limited. This might mean usage caps, ads, fewer features or no support.
  
• Paid: This adds power and can include features such as more storage, access to advanced tools, collaboration features and faster support.
  

The free tier isn't a trial; usually, it's free forever. This allows anyone to try your product with no pressure, no deadline and no sales pitch. It also means your product is doing the marketing: if it's good, people will share it and keep using it, and some users will eventually want more.

On the backend, free users still come with costs such as servers, support and ongoing development. The model works only when the cost of serving each new user is low, such as with software or digital content, and the product is strong enough to attract many users, some of whom will pay or generate indirect revenue through ads, referrals or network effects.

Freemium hinges on giving away the exact right amount: enough to show value, but not so much that users never need to upgrade.

What are the benefits of a freemium pricing model?

When it works, freemium is a growth engine. Here's why so many companies use it.

It lowers the barrier to entry

Trying something free is an easy decision for customers because there's no risk. That can attract more users than a paid-only model ever could. The free plan gets your product into more hands faster, whether you're targeting individuals or teams.

It reduces customer acquisition cost (CAC)

If the free version is useful and discoverable, it can do most of the marketing on its own. Referrals, word of mouth, search traffic and organic virality all compound. Paid users often start as free users, and that eases the customer's path from, "I've never heard of your product", to, "Your product is part of my daily routine".

It builds a conversion funnel

With enough volume, even a small conversion rate can produce real revenue. If you're delivering consistent value, that pipeline becomes self-sustaining.

It grows your brand

The free plan attracts users and builds visibility. A generous free tier can help your product become the default in your category. An obvious example is Zoom, which became a household name during the COVID-19 pandemic. Freemium can increase reach and build brand familiarity at scale.

It creates upsell opportunities

Once customers are using the product regularly, you've earned their confidence. That makes it easier to introduce paid upgrades, especially when those upgrades solve real problems such as storage limits, workflow bottlenecks and missing features. Upselling can feel like an obvious next step rather than just a pitch.

It enables other revenue streams

The paid tier is only one way to monetise. Some businesses use ads, sponsorships or affiliate tools to profit from free users, too. Others use the free product to grow systems, such as by driving usage of APIs, integrations or partner platforms.

It gives you more user data

The bigger your user base is, the more data you can access and learn from. Freemium gives you a massive dataset for product decisions: where people drop off, what they love, what they ignore and what they'll pay for. It's built-in research at scale, which helps you improve the product for everyone.

Freemium works best when you plan for the long term: lead with value, build customer confidence and convert when it counts. It's not right for every product, but it can drive adoption and revenue in ways few other models can match.

What challenges come with using a freemium pricing strategy?

Freemium can drive growth, but it's not automatic. The same traits that make it appealing (e.g. free access, massive scale) can also make it expensive, hard to manage or just not viable. Here's where challenges arise.

Costs of serving free users

Even if users aren't paying, you still need to support them with infrastructure, support tickets and ongoing development. If usage increases significantly, costs can peak fast. That's fine if you're converting at a healthy rate or monetising another way (e.g. ads), but it can be dangerous if you're not.

User volume

Freemium is a volume game. Conversion rates are often in the low single digits. To generate meaningful revenue, you need a lot of people to use the free product. If your market is too narrow or your growth stalls, that will diminish your margin.

Compelling reasons to upgrade

If the free tier covers too many of the core use cases, users won't see a reason to upgrade. The free product must be good enough to entice people, but also incomplete so it creates a natural pull towards the paid version. The line between the two is easy to misjudge and difficult to alter once people are used to getting something for nothing.

The right fit

If your product has high marginal costs (e.g. anything that requires human labour, difficult operations, expensive computing power), freemium might be unsustainable. The same goes for products that serve a very specific audience or have a high delivery cost.

High churn rates

Free users are generally less invested and more likely to drop off. A large portion will sign up, then vanish. That's expected. But if most customers are lost to churn before they ever hit a paywall, that's a problem. You need solid onboarding, fast time to value and enough stickiness to retain some people long enough to convert.

Involved day-to-day work

Running a freemium business means managing two sets of users (free and paid) with different needs, limits and expectations. That affects product decisions, pricing logic, support ops, billing infrastructure and analytics.

Freemium is a trade-off. You're deferring revenue in exchange for reach, betting that enough people will eventually upgrade. If your product isn't sticky, your economics don't work at scale or your upgrade path is too soft, freemium can hurt your business.

How do you design a successful freemium pricing model?

To make freemium work, your product has to strike a balance: free enough to attract and retain users, constrained enough to drive upgrades and efficient enough to scale without draining your resources.

Here's what that takes.

Start with your core value

Your free plan has to prove that the product is worth a user's time. That means putting your core value – the job the product performs – front and centre in the free tier. If people don't experience the payoff, they'll leave before you ever get the chance to upsell them.

Draw a smart line between free and paid

The focus of freemium is what features you reserve for paying users. That could involve usage limits (e.g. storage, seats, projects), feature access (e.g. automation, integrations, admin controls), or experience upgrades (e.g. speed, support, customisation). The free version should solve a real need. The paid version should solve it better, faster or at scale. If everyone needs a feature, it probably belongs in the free plan. If only power users need it, that's your upgrade lever.

Make the upgrade path obvious

People upgrade when the value gap between what they have and what they want becomes undeniable. Build your product to create natural pressure:

• Set a usage cap for customers to hit: "You've completed your 10 free projects".
  
• Try a gated feature: "Pro feature – upgrade to use".
  
• Harness a bottleneck: "Add teammates – starts at £X per month".
  

Get onboarding right

Sign-ups are meaningless if people never activate. Use your onboarding to get users to that first "aha" moment quickly or whatever action correlates with their long-term use of your product. That might be importing data, completing a workflow or hitting a daily usage threshold. The faster someone finds value, the more likely they are to stick around and eventually pay.

Know your provider costs

Free users aren't free to you. If the cost to acquire, support and keep them is too high relative to their conversion potential, your burn rate will be unsustainable. Run the numbers. Know what each user costs, how much value they're likely to generate and how long it takes for the average paid user to pay back their acquisition and support costs. Your infrastructure, support model and margin need to scale with usage rather than fight it.

Design for virality and referrals

Freemium products can grow fast when they spread through use. Make it easy for people to share, invite and refer others, especially if doing so improves their own experiences (e.g. they receive extra storage, unlocked features, social proof). A well-designed referral loop turns your free users into your marketing team.

Build the billing side early

Fix your payments infrastructure before you scale. If someone's ready to pay, the upgrade should be easy and fast. That means reliable subscription management, delineated pricing tiers and a clean hand-off between free and paid. Tools like Stripe, which handle payments, invoices, usage-based billing and dunning automation, make this easier to get right early.

Keep improving

The line between free and paid isn't permanent. As your product develops, your pricing model should too. The best freemium models are responsive, so tweak limits, adjust pricing and add or remove upgrade gates. Pay attention to behaviour indicators: where people are getting stuck, what features trigger upgrades and who's leaving and why.

What metrics should you track to measure freemium success?

Freemium is relatively easy to launch, but it's hard to make profitable. You're planning for the long term by scaling usage now to monetise later. To know whether it's working, you need to track the right numbers, not solely growth in sign-ups.

Here's what matters.

Free-to-paid conversion rate

This is the key metric. Out of all the people who use the free version, you need to know how many eventually pay. This number is usually low, and that's fine if your volume is high and your margin is solid. But if conversion is stalling, chances are your upgrade path isn't compelling or your free tier is too generous.

Break your user base down by cohort and behaviour. Find out whether users are converting after hitting a usage limit or after a specific feature prompt. Knowing when people convert tells you why they convert and where you should double down.

Activation rate

It's not enough to get people to sign up. You need them to do the action that makes the product sticky, whether that's importing data, creating a project or inviting a teammate. Define that action clearly, then measure how many new users do it in the first session or first few days.

Low activation leads to a low conversion rate later on. If users don't find value early, they might not stick around long enough to pay.

Churn rate (paid and free)

Paid churn is straightforward: when people stop paying, revenue drops. But free churn matters, too. High free churn results in a shrinking upgrade pool, while high paid churn creates a value gap in your premium tier.

Look for patterns, such as users leaving after a billing cycle, after using one feature or after team adoption stalls.

Engagement and retention

Track how often free users come back. Daily, weekly and monthly active users all matter, especially for a product with habit potential. Long-term retention is a leading indicator of conversion. If someone's still using your free tier six months in, there's a good chance they'll eventually hit a paywall and upgrade.

Watch how many people drop off after a certain point. If users are consistently leaving before they hit your upgrade trigger, your funnel might be too slow, too steep or too confusing.

CAC vs. LTV

CAC and customer lifetime value (LTV) are even more important in freemium, where many users won't pay at all. Your LTV needs to comfortably exceed your CAC for the model to work. Otherwise, you're losing money on every free user who never upgrades and not making enough back from the ones who do.

Segment your user base carefully. If users from one channel (e.g. organic search) convert more often and stay longer than those from another (e.g. paid ads), invest accordingly.

Time to conversion

A tight upgrade path means it takes only a short window of time to convert the average free user to a paid user. A longer time period isn't necessarily bad, especially in B2B services, but it does mean you need to keep users interested for longer before they're ready to pay.

Use this metric to shape your onboarding, lifecycle emails, in-app prompts and sales follow-ups. If most users convert around Day 30, don't send them upgrade asks in Week 1. But don't wait until Day 60 either.

Revenue per user

Look at the average revenue per user (ARPU) across all users and average revenue per paying user (ARPPU). ARPU shows overall efficiency. ARPPU shows whether your pricing tiers are pulling their weight.

If you're converting many users but ARPPU is low, you might need better upsell paths or higher-value plans. If ARPU is low, that could mean your free tier is too appealing on its own.

Conversion, retention and margin determine the success of freemium models. The goal is to build a product that people keep using and eventually want to pay for. These metrics help you see where the bottlenecks are, what's driving upgrades and where to fine-tune the balance between free value and paid incentive.

How Stripe can help with freemium pricing

Stripe Billing lets you bill and manage customers in the way that works for you, from simple recurring billing to a freemium model with paid tiers. Start accepting recurring payments globally in minutes – no code required – or build a custom integration using the API.

Stripe Billing can help you do the following:

• Offer flexible pricing: Respond to user demand faster with flexible pricing models, including freemium, usage-based, tiered, flat-fee plus overage and more. There's built-in support for coupons, free trials, proration and add-ons.
  
• Expand globally: Increase conversion by offering customers' preferred payment methods. Stripe supports more than 100 local payment methods and more than 135 currencies.
  
• Increase revenue and reduce churn: Improve revenue capture and reduce involuntary churn with Smart Retries and recovery workflow automations. Stripe's recovery tools helped users recover over US$6.5 billion in revenue in 2024.
  
• Boost efficiency: Use Stripe's modular tax, revenue reporting and data management tools to consolidate multiple revenue systems into one. Easily integrate with third-party software.
  

Learn more about Stripe Billing, or get started today.