How Spotify, Slack, and Notion Build an Empire with Freemium Business Model? 💸

We will understand how freemium business models are used by web-based services like Notion, Slack, and some digital apps like Calm, and Spotify.

What is the freemium business model?

The freemium business model allows users to utilize basic features of a software, game or service for “free”, and then charges for “upgrades” to the basic package.

Examples: Spotify, Slack, Notion, etc

Graphic Credit: Business Model toolbox

It is widely used by web-based services, including digital apps like Calm, and Spotify, and Software products like Notion & Slack.

Companies using the Freemium business model

Types of Freemium Business model?

There are different ways in which start-ups can implement the freemium business structure.

1. Capacity-Based freemium: Free up till some usage amount or number of users — beyond which users must pay to keep using the service. Examples: Dropbox, Evernote
2. Feature-Based freemium where the free version has limited functionality and paid plan is required to unlock the full range of features.
   Examples: Buffer, Skype, Notion, SEMRush
3. Time-Based freemium: a free version of your product or service is offered but only for a limited time, i.e., the standard “free trial offer”.
   Examples: Audible (7 days), Shopify (14 days)

Pros and Cons of Using the Freemium business model

Pros

• Low Customer acquisition: It is easy to attract users when giving away a basic service for free.
• Marketing effect: People are likely to spread the word about free services (word of mouth)
• Network effect: The more people use the service the more attractive it becomes for the other users

Cons

• Not Enough paying customers: Freemium attracts a lot of FREE customers but you can’t convert them into enough paid customers.

Conversion rate from different freemium pricing strategies?

Trial conversion rate = Number of trial-to-paid users/ number of trial users.

For example, if your product has 500 trial users and 90 trial users convert to paying customers. In this case, your trial conversion rate would be:

90/500 x 100 = 18%

3 primary models for free-to-paid in SaaS

1. Freemium
2. Free trial (without credit card)
3. Free trial (with a credit card)

3 primary models for free-to-paid Software

Conversion rate largely depends on the complexity of your product and your target audience (B2C vs. B2B)

• B2C Industry average — 57%
• B2C Industry average — 14–25%

For example, Netflix’s conversion rate is 93%, while Amazon Prime’s video is 73%.

The best way to improve your free trial-to-paid conversion rate is using Product-Led Growth (PLG) strategies which use the product as the main engine of growth.

Should you use the freemium business model?😕

If the core segment of your business is B2C like Notion or Spotify then you should else it’s better to Schedule s demo for the paid version.

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