🪴 The problem with freemium

In partnership with

In a high-interest-rate world, cash isn't cheap, and Customer Acquisition Cost (CAC) is under the microscope. The value you give away in your free plan now directly impacts your margins.

Why It Matters: By this point, you’ve got paying customers and a brand to protect. But if your freemium model is poorly tuned, you’ll either leave money on the table or bleed users before they even see the value of your product.

Forwarded this email? Join 1,800+ founders and sign up!

Low free-to-paid conversion rates (below 5% annually) are often the first sign of a freemium problem. But the root cause usually falls into one of these three categories:

1. Your free plan is too generous.
   Users love your free tier but don’t upgrade because it gives away too much.
   

2. Your free plan is too restrictive.
   Users don’t stick around because they can’t see the product’s value before hitting a paywall.
   

3. Your entry-level paid plan is too expensive.
   Users want to upgrade but can’t justify the jump in price—or it doesn’t align with their needs.

Each of these pitfalls demands a different fix.

🎁 Your free tier is too generous

The issue:
You’ve got a large base of active free users who match your ideal customer profile but aren’t converting. Why? You’re solving too many of their problems without charging a cent.

The fix:
Free tiers should give users a taste of your product’s value—just enough to hook them—but leave key functionality locked behind a paywall. It’s about creating just enough friction to make upgrading irresistible.

The example:
Slack moved from a 10,000-message limit (plenty for small teams) to a 90-day message history. This change hit two key goals:

• It kept free users engaged by offering tangible value.

• It introduced a clear, unavoidable reason to upgrade.

If you’re scaling back a generous free plan, communication is everything.

Be upfront with your users about the “why” offer transition periods, and consider discounts for early upgrades.

⛓️ Your free tier is too restrictive

The issue:
Low usage and low adoption at the free tier are red flags. If users can’t reach the point when they truly understand your product’s value, they will churn before upgrading.

The fix:
Identify the features or workflows that drive user conversion and make sure your free plan includes enough of them to showcase value. Analyse your product usage data and talk the customers.

The example:
Consider iCloud. Apple’s free tier gives you 5GB of storage — enough to demonstrate the ease and power of storing everything on their cloud.

But inevitably — you run out of 5 gig in no time, leaving you wanting more. Next plan will get you 50 GB at $0.99/pm (that’s basically free). Many users run out of this capacity very soon as well, 4K videos and all. The next plan is where most users cap out, 200 GB at $2.99/pm. It takes only 2.8 million users at this band to crack a $100M ARR. Crazy!

The simplicity of this model allows users to get hooked on the core functionality, making your transition to a paid plan logical as their usage scales.

📩 Get a free pitch deck

Raising soon? I’ll send you over Passionfroot’s pitch deck that raised over $3M, just refer one friend via your personal referral link: https://foundersfuel.beehiiv.com/subscribe?ref=PLACEHOLDER

Additionally, I’ll send you notes from the YC’s startup school happening in London on Saturday.

💸 Your paid tier is too expensive

The issue:
Your free plan users want to upgrade but can’t justify the price jump — or the feature set doesn’t match their needs.

The fix:
Lower the barrier to entry for your first paid plan. Options include:

• Introducing a lower-cost “prosumer” tier.

• Reducing minimum seat counts for team-based plans.

• Offering flexible pricing or bundles for small teams.

The example:
Early in its growth journey, Zoom offered a generous free plan with unlimited 1-on-1 calls and 40-minute limits for group meetings. However, their entry-level paid plan started at $14.99/month, which some smaller teams and solo users found excessive for just extending meeting time.

Recognising the gap, Zoom introduced more flexible paid options for teams and expanded features that aligned with smaller users' needs. This adjustment helped Zoom drastically increase conversions without alienating their core free-user base. The move contributed to their explosive growth during the pandemic and beyond, as they catered to prosumers, small businesses, and larger enterprises in tandem.

🔑 How to recalibrate your freemium strategy

Treat freemium more than just a pricing strategy — like a growth engine. And like any engine, growth engine needs a regular tuning too:

1. Audit your current free plan.

   • What’s your free-to-paid conversion rate?

   • Are free-tier users actively engaging with the product?

   • Where are free users hitting friction?

   • Do the free users get a little too much value for free?
     

2. Align your tiers with user behaviour.

   • Map the “a-ha” moments that drive upgrades.

   • Adjust free plan limits to nudge users toward paid tiers.
     

3. Test and iterate.

   • Run pricing experiments and track the impact on activation, retention, and conversion.

   • Communicate changes transparently, especially with existing users.
     
     

💭 TL;DR

In the current world, cash is tight, and freemium models are under scrutiny. Your free plan should offer enough value to onboard users but leave room to incentivise upgrades. Missteps include:

1. Too generous free plans (e.g., Slack's shift to a 90-day message history instead of 10,000 messages).

2. Too restrictive free plans (e.g., iCloud's 5GB limit encourages upgrades while showcasing value).

3. Expensive entry-level paid tiers (e.g., Zoom adjusting pricing and features for smaller teams).

How to fix it: Audit your tiers, align them with user behaviour, and iterate. A well-tuned freemium model can become a growth engine instead of a drag on margins.

✈️ How I Can Help

Get your news where Silicon Valley gets its news 📰

The best investors need the information that matters, fast.

That’s why a lot of them (including investors from a16z, Bessemer, Founders Fund, and Sequoia) trust this free newsletter.

It’s a five minute-read every morning, and it gives readers the information they need ASAP so they can spend less time scrolling and more time doing.

Subscribe for free

The future of presentations, powered by AI

Gamma is a modern alternative to slides, powered by AI. Create beautiful and engaging presentations in minutes. Try it free today.

Accomplish More. Juggle Less.

When you love what you do, it can be easy to take on more — more tasks, more deadlines, more hours – but before you know it, you don’t have time to do what you loved in the beginning. Don’t just do more – do more of what you do best.

BELAY’s flexible staffing solutions leverage industry experience with AI systems to increase productivity without sacrificing quality. You can accomplish more and juggle less with our exceptional U.S.-based Virtual Assistants, Accounting Professionals, and Marketing Assistants. Learn how with our free ebook, Delegate to Elevate, and leave the more to BELAY.

Download now