Exploring Freemium Pricing Strategies With The Best Examples

TL;DR

• Grasp the essentials of freemium pricing strategy examples to boost your product's market adoption.
• Unpack the seven distinct freemium strategies, including the classical model used by Google Suite and the innovative Land & Expand seen in Yammer.
• Recognize the hybrid unlimited free trial model with examples like Basecamp and the ad-based Freeware 2.0 strategy with Dropbox.
• Investigate how alternative product strategies can lead to upselling, as demonstrated by ClickUp and Trello.
• Delve into the ecosystem freemium model where third-party add-ons drive revenue, such as with Capterra.
• Learn about the network effect in freemium pricing, where user data is monetized for advertising, as with Meta's platforms.
• Keep in mind that successful freemium pricing requires a large market and a stellar product—Togai offers a platform to expedite your pricing strategy's implementation.

Effective pricing is crucial for the success of any startup as it often plays a significant role in driving customer adoption. Getting your pricing strategy right by aligning it with the value your product or service delivers is essential for gaining widespread adoption and achieving your growth targets. Among the various pricing models available, freemium pricing has emerged as one of the most popular and rapidly growing approaches in the business world today.

A Brief Introduction to Freemium Pricing

Freemium pricing is a combination of Free and Premium. As the name implies, the strategy offers the customer essential services or products for free and advanced features for a premium price.

It is basically a customer acquisition strategy where the concept is to attract the customers’ attention by offering some of the services for free. Once the customers like the features and their benefits, they can upgrade to the paid version with additional features.

A majority of freemium software products use targeted advertising, in-app purchases, and e-commerce plug-ins to supplement their premium earnings. A few modern companies have even ceased to offer additional tiers in favor of collecting user data to perfect personalized ads. Amongst all other pricing strategies, freemium pricing is ideally combined with any other pricing model to create customer-oriented billing approaches.

Freemium pricing has seven strategies, and several techniques exist to create a freemium pricing model. Our blog analyzes each one of them with examples.

Also read: Understanding Freemium Pricing Pros and Cons

7 Types of Freemium Pricing Strategies Explained With Examples

1. Traditional or Classical Freemium Strategy

In this strategy, the company provides its offerings free of charge with some limitations on price and features. In this case, the company faces challenges in converting free customers to paid subscribers. This phenomenon is called the penny gap.

Examples of classical freemium

a) Dropbox, the file hosting service, offers services like:

• File synchronization
• Cloud storage
• Personal cloud
• Client software

What sets Dropbox apart is its pricing model, which utilizes a freemium approach. By providing a basic free tier and two upgraded plans offering additional storage and user capabilities, Dropbox strategically entices potential customers who may initially hesitate due to the price while minimizing the impact of anchoring effects.

b) Google Suite, ChatGPT, and Microsoft Office

The freemium model is a top favorite of these tech giants whose applications are used all over the world, so much so that customers expect to receive a free version of the product with enough useable features. However, the model is only viable for startups or economically-strong companies.

2. Land & Expand Freemium Strategy

The concept of "Land & Expand" involves a strategy where a product or service is initially offered to individual users at no cost, with the aim of reaching a significant number of users within the same organization. Once a substantial user base is established, the focus shifts towards monetizing the product at the organizational level. The key idea behind this approach is to keep the users separate from the financial aspects of the product while simultaneously fostering customer loyalty within the organization.

Examples of Land & Expand

• Yammer

Yammer stands out as a prominent example of successfully implementing the Land & Expand pricing model. The company followed a strategy where users were initially signed up for free. Once a specific threshold of freemium users was reached, Yammer would then focus on selling to the organization. What made Yammer's approach particularly remarkable was their impressive conversion rate, with reports suggesting a phenomenal 10-15% of free users transitioning to paid users.

• Slack

Slack allows individual users to sign up for free without requiring organizational approval. This approach enables users to experience the benefits of Slack firsthand and explore its capabilities within their own workflow.

Slack's free offering serves as a powerful acquisition tool, attracting users and generating widespread adoption. As individual users start using Slack and experience its value in enhancing communication and collaboration, they often share their positive experiences with colleagues and teams, leading to organic growth within the organization.

As the usage of Slack increases and gains traction within a particular organization, there comes a point where the need for organizational control and enhanced features arises. This transition prompts the organization to engage in discussions with Slack to explore the possibilities of adopting the paid version.

• Amazon Web Services

AWS (Amazon Web Services) utilizes a variation of the Land & Expand pricing model, albeit with a unique twist. Rather than offering its advanced technologies as a traditional freemium, AWS presents a range of services and features that are accessible for free or at a minimal cost. This approach entices businesses to experiment and explore the potential benefits of integrating AWS into their infrastructure.

By offering free or low-cost access to their services, AWS effectively lowers the barrier of entry for businesses to try out their advanced technologies. This allows organizations to gain firsthand experience with AWS services, understand their capabilities, and assess the potential value they can provide.

However, AWS differentiates itself by not necessarily relying solely on conversion to a paid version. The primary objective of AWS's freemium approach is to encourage businesses to integrate their services deeply into their systems and workflows. By doing so, organizations become increasingly reliant on AWS, making the switching costs too high and creating a significant barrier for transitioning to alternative solutions.

3. Unlimited Free Trial

The "unlimited free trial" is a hybrid approach that combines elements of both traditional freemium and free trial models. In this strategy, the product or service is offered to users for free, but with significant limitations or reduced functionality, rendering the free version essentially unusable. The intention behind this approach is to make users recognize the value and benefits of the premium features available in the paid version.

The premise of the "unlimited free trial" is to attract customers by creating the perception that they can use the product indefinitely without ever having to pay. This expectation can draw users in, as they believe they have access to the product without any financial commitment.

However, this pricing model carries some risks, primarily due to the blend of a free trial and the psychological aspects associated with freemium pricing. Users may initially be enticed by the concept of a free product but can become disappointed or frustrated with the limitations, advertisements, or poor user experience associated with the free version.

As users encounter these restrictions and limitations, they begin to realize that the free version does not fully meet their needs or expectations. This realization prompts users to consider upgrading to a premium plan that unlocks the desired features and offers a better user experience.

Examples of unlimited free trial

• Spotify: Spotify offers a free version of its music streaming service, allowing users to access a limited set of features. After a few weeks, the free version transitions to an ad-supported version, where users are exposed to advertisements in exchange for continued access to the service. This approach introduces users to the benefits of Spotify's music library and features, gradually enticing them to upgrade to the ad-free premium version.
• Basecamp: Basecamp provides a free plan with significant limitations, restricting the number of projects, users, or features available to users. The free plan serves as a teaser, allowing users to experience the basic functionalities of Basecamp's project management platform. However, the limitations imposed on the free plan push users to upgrade to a paid version that offers broader capabilities, additional projects, or access to advanced features.
• Echosign (now Adobe Sign): Echosign, a digital document signing service, previously offered an unlimited free version with usage caps. While users could access the service for free, they were limited in the number of documents they could sign or send within a specific time frame. These usage restrictions aimed to encourage users to recognize the value and convenience of the service, ultimately leading them to upgrade to a paid version that removed these limitations.

4. Freeware 2.0 Strategy

Freeware refers to a business model in which a company offers a fully functional product at no cost to the user. This product typically serves as the flagship offering of the company, and its revenue is generated through advertisements. By displaying targeted ads to users, the company can generate revenue from advertisers who seek to reach the user base.

In this model, the company does not expect free users to convert into paying customers or engage in cross-selling. Instead, the company develops and offers add-ons or premium services that can be monetized.

Examples of Freeware 2.0

• Skype, a popular communication platform, provides free services such as voice calls, messaging, file sharing, and video conferences. To complement its existing software, Skype also offers premium services like extended cloud storage options or international calling plans, which users can choose to pay for.
• Dropbox offers a base product with free storage, and users can upgrade to premium plans that provide additional storage capacity and extra features such as automated backups.
• iCloud is available for free to anyone with an Apple device, providing basic storage options. However, if users require more storage space, they have the option to purchase additional storage through paid plans.

5. Alternative Product Strategy

An alternative product strategy involves offering customers a "foot-in-the-door" by providing a free or low-cost product with the intention of cross-selling complementary products or services. In this approach, the company does not initially disclose its main offerings to customers.

Examples of alternative product strategy

• HubSpot: In 2014, HubSpot introduced its free CRM as a separate product line, independent of their marketing automation platform. They offered the CRM for free to users, regardless of whether they were already using their marketing software. This served as a way to entice customers to try their CRM with the ultimate goal of cross-selling their marketing software. HubSpot's marketing software is now priced based on the number of contacts on the marketing side and the number of users on the sales side.
• ClickUp, HubSpot, and Trello: They provide individual users with access to a robust free product while charging for additional team members or specific features. This means that if a freelancer decides to scale their operations by subcontracting projects or hiring employees, the free plan may not accommodate their needs. As a result, they have to upgrade to a paid plan that allows for additional team members. However, since the customer is already familiar with the product from their individual usage, it becomes a seamless transition for them.

6. Ecosystem Freemium Model

The ecosystem pricing model revolves around offering a forever-free base product with full functionality while generating revenue through revenue-sharing arrangements with third-party developers. This model is commonly employed by marketplaces or products that heavily rely on add-ons or extensions developed by third-party providers.

Examples of ecosystem freemium model

• iTunes best demonstrates this freemium model. Users could utilize the platform to organize and contribute to their music libraries without any cost. However, they also had the option to purchase music and videos from third-party sources, which helped expand and enhance their libraries within the iTunes application.
• In the Software as a Service (SaaS) realm, we can find notable examples such as G2, Capterra, and the Salesforce AppExchange (even though the base product of Salesforce does not come for free). Capterra, for instance, operates as a free online marketplace connecting buyers with technology companies in the software industry. They assist customers in selecting suitable software by providing user reviews and research. Vendors on Capterra pay fees based on the web traffic and sales opportunities they receive through the ecosystem, enabling buyers to access the service for free.

7. Network Effect

The network effect is a business model in which a company collects users' traffic and behavioral data and monetizes it. In this approach, users are considered the product when they are not directly paying for the service. These products typically gather valuable and relevant user data for the benefit of other stakeholders.

Examples of Network Effect

• Meta or Facebook

Meta is the parent organization for Instagram, WhatsApp, and Facebook. All these social media platforms are free of cost. However, when users sign up, they consent to allow Meta to share their data with third parties and get personalized ads.

Meta for Business provides a platform for vendors to purchase advertisements that are displayed across Meta's network of platforms. Advertisers have the flexibility to choose their objectives, target audience, platforms, budget, and format when creating an ad. Meta's algorithm analyzes user data to showcase the ads in line with the advertiser's goals. Ads Manager allows you to manually track performance and edit campaigns to ensure optimal results.

Summarizing it All

In conclusion, pricing strategies can be complex, and there isn't a one-size-fits-all solution. Whether to adopt a freemium model or a combination of different approaches depends on various factors. Freemium can be challenging and requires a large market size for true success. However, regardless of the pricing model, your product should always remain the top priority. At Togai, we understand the importance of finding the right pricing implementation platform for your business. Our platform can help implement your pricing strategy 10x faster in less than a day. Experience the power of Togai by scheduling a free demo today and see how we can help implement your pricing strategy.