The Economics of Free
The Freemium Model
Freemium gives away a basic version free and charges for advanced features, converting a small share of users into paying customers.
Free to start, paid to grow.
How it works
Many users use the free tier, and a few percent upgrade.
Examples
Music, storage, note-taking and dating apps.
Economics
Serving free users costs little in software, so paying users cover the cost.
Risks
If too many features are free, few upgrade; if too few, users don’t stay.
Storage limit
A cloud service offers a small free storage limit and charges for more.
Assuming free users are worthless
They spread the product and provide data and network effects.
Key takeaways
- Freemium offers a free basic tier.
- A few percent convert.
- Marginal cost is low.
- Balancing free and paid is hard.
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