Freemium: Bottom-Up SaaS, Habit-Forming Products, Network Effects

“The easiest way to get one million people paying is to get one billion people using.” —Phil Libin

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❓ What You’ll Learn

  • How to convert free users into paying customers?
  • How to monetize free users? Even if they don’t convert.
  • How to use referral programs with a freemium model?
  • How to design products to build user habits?
  • How to decide if freemium is the right model for your business?
  • How to win against competitors in crowded industries?
  • How to build network effects with a freemium model?

💎 Why It Matters

You need to cost-effectively acquire customers.

🔍 Problem

Acquiring customers is expensive and timeconsuming.

We want to know what we’re getting (and why we need it) before buying.

💡 Solution

Lower your customer acquisition costs with a free version of your product. 

Tinder scaled to 75 million monthly active users by offering a limited version for free. 14% of those users convert to paying customers.

🏁 Players

Freemium Examples

  • • Your favorite free newsletter that offers 90+ pro reports, community events, tools and more.
  • Spotify • Grew to 422 million users (182 million paid) by giving premium users the ability to avoid ads, skip unlimited songs and listen offline.
  • Fortnite • Free-to-play game with 83.3 million monthly players which made more than $9 billion in revenue through microtransactions which unlock special features and abilities.
  • Duolingo • Grew to 48.2 million users and 2.9 million premium users. Their model is supplemented by advertising.
  • ClickUp • Project management tool free for personal use but scales according to team size for enterprise users. They are on track for $200m ARR in 2022 .
  • Webflow • Website design and publishing tool. Free up to 1GB of bandwidth with premium prices that reflect the size of your site and collaboration needs of a growing team.
  • CourseHero • Study resources tool. Free for those who provide value to the ecosystem (in the form of uploaded notes and textbook answers) and paid to access that material.
  • Twitter • Traditionally free and ad-based, Twitter Blue is Twitter’s new monthly subscription that grants access to premium features and app customizations.
  • Discord • Generated $130 million in revenue from 150 million users who can pay for Discord Nitro, the premium version which offers enhanced features and access.

🔮 Predictions

  • Companies will use freemium models to build network effectsEven if users don’t convert, they can contribute to your value proposition.
    • Candy Crush encouraged competition among friends with a leaderboard system that drove network effects mostly to hardcore (often paying) players, whose love for the game benefited from social proof.
    • Spotify uses data generated by free users to provide more value to other users hoping to discover new music, thereby increasing engagement and adding value.
  • Freemium models will help businesses undercut competitors in crowded industries.
    • Coursera maintains a competitive advantage against paid competitors like Udemy and SkillShare by offering free introductory lessons to in-demand skills (like coding). They monetize with certificates and recruiting.
    • Figma reached millions of users and a $10 billion valuation by allowing limited free designs, wireframes and prototypes. In a typically cost-intensive, software space like competitors Adobe XD.
  • Startups will use data from free users to improve products.
    • Viber used product event data to show that users found the group chat feature highly engaging, and achieved a 10% engagement rate increase after simplifying the feature.
    • Quizlet uses previously created flash cards to automatically generate definitions, personalized study paths, and progress insights for Quizlet Plus users.
  • Referral programs will help boost the value derived from free users.
    • Dropbox grew 3900% by allowing its free users to invite their friends for 500mb of free storage each.
    • Morning Brew is a free daily newsletter for professionals that offers free merchandise that grows in value the more you refer, culminating in a trip to the Brew HQ.

☁️ Opportunities

  • Monetize free users even if they don’t convert.
    • Clash of Clans, is a mobile strategy game that monetizes free users with in-game advertisements.
    • Experian offers free credit reports, then sells the information and insights generated to third parties like banks and lending firms.
    • Robinhood is a free investing app (with a premium version) that sells its users’ order flow to trading firms.
  • Choose the right features to make free. Offer too much and detract from your premium offering. Offer too little and users won’t stick around.
    • Zapier lets free users connect a single application at a time, a useful standalone tool but not enough to link multiple tasks. Like sending a survey response to your email database.
    • Slack is free for teams of any size and allows near full-access immediately. But you’ll need to upgrade to see your full message history after 10,000 messages.
    • Notion is free (to a point) for personal use, helping demonstrate its potential usefulness for team collaboration and knowledge-sharing.
  • Use your free product to build user habits. Users with strong habits are easier to convert and retain.
    • Strava’s free version introduces you to an engaging (and competitive) social network. Which can be fully unlocked with paid features like competitions and routes. Strava users post every workout. Typically automatically.
    • Reddit quickly becomes users’ go-to information source for everything and requires checking the site daily to stay informed on interests.
    • Hay Day, a farming simulator game, requires players to check in daily to harvest their crops and continue progressing.
  • Turn free users into promoters by tagging your product.

🏔️ Risks

  • Cost • Make sure that you can support free users without crippling support.
  • Cannibalization • Free plans help drive users to your product. But they may detract from the need for your premium offer.

🔑 Key Lessons

  • Freemium might not be the best strategy if your product can’t scale to millions of people.
  • Find ways to monetize free users. Perhaps with advertising.
  • Use free users to drive value to your premium product. Ask yourself “How can everyone contribute to the network?”
  • Your free product needs to be valuable enough to be useful. But not so valuable that it lowers the need for your premium offering.

🔥 Hot Takes

  • Physical products will implement freemium models by limiting certain functions until activated by a digital payment. BMW announced a subscription plan for heated seats.
  • Free first, freemium later. Businesses will prioritize gaining users over monetization. Proving traction and desire for a product will be more important than monetizing it.Twitter waited years before monetizing with ads or adding a premium version.

😠 Haters

“Why would I devote resources to users who are never going to pay for my product?”
Offering a free product is a cost-effective form of lead generation. Despite low conversion rates. You can capture value from free users in the form of data, feedback and network effects.

“How will I know which parts of my product to make free and paid?”
This will take a lot of trial and error. You may not get it right the first time. Experiment and talk to users to see which features they find most useful. Try to determine what (or how much) they could live without.

“How am I going to get enough users to make a low conversion rate worthwhile?”
Your product needs to have mass appeal. Niche products are better off pursuing different pricing models. Like free trials.

“What if my product is completely free right now. Won’t users get upset?”
You’re right. Users may get angry when free features are restricted or ads are introduced. But they will be even angrier if you go out of business due to being unable to sustain a free product.

🔗 Links

📁 Related Reports

  • Product-Led Growth • Build a product that sells itself, especially if it’s free.
  • B2B SaaS • Attract individuals to your free product to help convert their businesses to your premium product.
  • Lead Generation • Generate potential customers and sign-ups for your products.
  • Referral Programs • A simple way to obtain value from your existing users, free or paid.
  • Paid Newsletters • Newsletters are a great, common example of freemium when a limited selection of the content is free.

🙏 Thanks

Thanks to Vishal SrivastavaStewart TownsendKrishMatt Spear, Stephen Hendricks, Tom Winter, Maciej CupialLuEminSoma MandalYartyTom Arbuthnot, and Vladimir Ignatev. We had a great time jamming on this report.

✏️ Harry researched and wrote this report. Dru researched and edited this report.

📈 What else?

Trends PRO #0093 —Freemium has more insights.

What you’ll get:

  • 30 Freemium Examples (233% More)
  • 11 Predictions (175% More)
  • 13 Opportunities (225% More)
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  • 10 Key Lessons (150% More)
  • 5 Hot Takes (150% More)
  • 13 Links (333% More)

With Trends Pro you’ll learn:

  • (📈 Pro) How to use free users to attract paid users?
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  • (📈 Pro) How to build social proof and boost conversions?
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  • (📈 Pro) How to use both freemium and free trial models?
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