Freemium Revenue Model: Explained

What is it, how to calculate it, formula, why it's important

Hey there! As the CFO of a successful company, I can’t stress enough the importance of choosing the right revenue model for your business. One of the most popular models nowadays is the freemium revenue model, and there’s no wonder why: it’s a fantastic way to attract new customers and increase revenue. In this article, I’ll explain what a freemium revenue model is and how it can benefit your business. So, let’s dive right in!

What Is A Freemium Revenue Model?

Simply put, a freemium revenue model is a business model where a company offers a basic version of its product or service for free, but charges customers for premium features or additional services. The term “freemium” comes from the combination of “free” and “premium”.

For example, think of Spotify: you can access a massive library of music for free, but if you want to remove ads or have offline listening, you need to subscribe to Spotify Premium. The same goes for LinkedIn: you can create a profile, connect with other professionals, and receive messages for free, but if you want to contact people outside of your network or see who’s viewed your profile, you need to purchase a premium subscription.

How Does It Work?

The idea behind the freemium revenue model is to attract as many users as possible to the free version of the product or service. By doing so, the company can create a user base that can generate value for the company and also promote the product or service to others organically.

Once the users are registered and engaged with the product or service, the company can start offering premium features or additional services for an added fee. The upgrade can be weekly, monthly, or yearly according to the business model. Some companies offer one-time payments, while others keep it as a recurring payment.

The freemium model works best when the company delivers an excellent user experience with a truly valuable free version of the product or service. If the free version is weak, subpar, or limited, users will quickly move on and look for alternatives. The free version should be seen as a showcase of what the product or service can do, and the paid version should complement it with exclusive features that cannot be accessed with the free version.

What Are The Benefits Of A Freemium Revenue Model?

There are several benefits to adopting a freemium revenue model for your business:

1. Increased User Base

Offering a free version of your product or service allows users to try it out without any risk. This way, you can attract a much larger user base than if you only offered premium versions. This larger user base is essential for building brand awareness, promoting the product or service, and getting valuable feedback.

2. Organic Growth

With a large user base, you can expect organic growth through referrals and word-of-mouth. Satisfied customers are more likely to invite their friends and family to try out the free version, creating a snowball effect of new users that can potentially convert to premium subscribers.

3. Sustainable Revenue

Relying solely on one-time payments or subscriptions can be limiting for some businesses. The freemium model allows companies to have a sustainable revenue stream by offering additional services or premium features to its loyal users. By doing so, the company generates a recurring revenue stream that can offset the costs and provide long-term growth.

4. Upselling Opportunities

With a user base that has already tried and loved the free version, upselling premium features or services becomes much easier. You can use persuasive copy, combined with relevant offers, to increase the chances of conversion. Users that are already familiar with the product or service are more likely to spend extra on premium features that they know will improve their experience even more.

Are There Any Downsides?

While the benefits of a freemium revenue model may sound amazing, there are some downsides that companies should consider before adopting it.

The most significant of these downsides is the cost of acquiring new users. Since the free version is available to everyone, it can be challenging to convert users who are not interested in the premium features. Additionally, when the free version is too similar to the premium version, customers may not see the value in paying for the upgrades.


The freemium revenue model can be an excellent choice for businesses looking to expand their customer base and generate additional revenue streams. It is essential to provide an exceptional free version of the product or service, followed by exclusive premium features and services unique to the paid version.

While there are some downsides, the benefits offered by the freemium revenue model outweigh them, making it a popular choice for businesses across the board. If you’re considering implementing it for your business, take the time to analyze the business needs, the product or service, and the potential customers to create an effective freemium revenue model.

I hope this article has provided valuable insight into what a freemium revenue model is and how it can benefit your business. As always, let us know in the comments if you have any questions or experiences using the freemium model.

Financial modeling made easy

Looking to build a financial model for your startup? Build investor-ready models without Excel or experience in Finance.

By clicking “Accept”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.