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What is freemium?

Freemium is a business model in which a company offers basic products or services to users free of charge, while charging a premium for advanced features, functionality, or additional content. The term combines “free” and “premium,” and is widely used in software, apps, online services, and digital media to attract a large user base and convert a portion of them into paying customers.

Key takeaways

1
Dual offering
  • Users get access to core features at no cost (free tier).
  • More advanced features, enhanced usage, or exclusive content are available for a fee (premium tier).
2
Customer acquisition strategy
  • The free tier lowers barriers to entry, enabling rapid user growth and widespread adoption.
  • The model relies on converting a small percentage of free users into paying customers to generate revenue.

3
Scalability
Freemium is most effective for digital products and services with low marginal costs associated with serving additional users.

4
Upselling focus

Success depends on designing compelling premium features and practical strategies to encourage upgrades.

Why freemium matters?

Offering something valuable for free lets companies rapidly attract users, boost brand awareness, and gather data—all while keeping acquisition costs low. The free tier builds trust by letting customers try products risk-free and drives engagement. It also gives businesses the flexibility to test premium features, pricing, and upgrade strategies for effective monetisation.

How the freemium model works

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1
Offer a free version

Provide essential features or limited access at no cost.

2
Define premium features

Identify advanced tools, expanded capacity, or exclusive content that justifies an upgrade.

3
Attract and engage users

Utilise the free tier to establish a substantial, engaged user base.

4
Convert to paid

Employ marketing, in-app prompts, and feature limitations to encourage users to upgrade to the premium tier.

5
Refine and optimise

Continuously analyse user behaviour to improve conversion rates and premium offerings.

Impact on business and users

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Rapid expansion through free access.

Relies on a small percentage of users upgrading to premium.

Free access fosters engagement and long-term relationships.

User feedback from the free tier guides improvements and new features.

Impact on financial statements

Real-world examples

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Case study: Spotify

Spotify offers free users ad-supported music streaming, albeit with some limitations, including lower audio quality and shuffle-only playback on mobile devices. Premium subscribers enjoy an upgraded experience, featuring ad-free listening, offline downloads, higher audio quality, and full control over their song selection. This freemium model helps Spotify attract a massive audience while providing a clear incentive to upgrade for a better music experience.


Frequently asked questions about freemium?

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Conversion rates vary, but 2–5% is standard for many freemium businesses.
High costs to support free users, low conversion rates, and potential difficulty in monetising the user base.
No. It works best for digital products with low marginal costs and a large potential audience.