What Is the Freemium Business Model? | Pros and Cons + Example

Want to attract more users without pushing for a sale? Give something for free first.

This is the core idea behind the Freemium Business Model. Popular among tech companies, SaaS tools, and even Shopify app developers, the freemium model offers a free version of your product or service with basic features. Users can access premium features by paying.

In this detailed guide, we'll explain the freemium model in simple language, especially for eCommerce business owners and Shopify Development Partners looking to grow their user base.

What is the Freemium Business Model?

The word "freemium" is made by combining "free" and "premium." It refers to a business strategy where the basic product is offered for free, but customers need to pay to access more advanced features or services.

Definition in Simple Terms

• Free Plan: The basic version that anyone can use without paying.

• Premium Plan: The upgraded version that offers extra value for a fee.

Example: A Shopify app that allows users to generate invoices:

• The free plan lets users generate 10 invoices per month.

• The paid plan offers unlimited invoices and branding options.

This gives users a chance to try the product first and then upgrade only if they find value.

Why Freemium Works

Offering something free can drastically increase adoption, especially for digital tools or services.

• 75% of B2C SaaS companies use the freemium model to increase user acquisition. (Source: OpenView Partners, 2023)

• Companies using freemium see 3x higher sign-up rates compared to paid-only models. (Source: SaaS Capital, 2022)

• Businesses that offer freemium grow 30% faster than those that don’t. (Source: Harvard Business Review, 2021)

These stats confirm that freemium is not just a buzzword; it's a growth engine.

How the Freemium Pricing Strategy Works

The freemium pricing strategy is a smart way to balance between offering value for free and creating a path for users to become paying customers. But to make it work, you need to carefully plan what goes into the free version and what should be part of the paid offering.

Let’s explore this in more depth.

Understanding the Structure

In most freemium businesses, there are typically three types of users:

• Free Users – These users sign up and use the product without paying anything. They usually get access to basic features that solve one or two small problems.

• Pro Users – These users pay a small monthly or yearly fee to unlock more useful features. This tier is ideal for small businesses or growing ecommerce store owners.

• Premium or Enterprise Users – These users get access to everything,  advanced analytics, team features, white-labeling, integrations, and support. They typically pay more and are often large businesses or agencies.

You do not need all three tiers to start. Even offering just a Free and Paid plan is enough when launching. The idea is to give users a taste of your value,  and then gently show them what they’re missing.

How to Structure Your Freemium Plans (Step by Step)

Step 1: Define the Free Plan

This is your entry point. It must:

• Be valuable enough to solve a specific problem

• Allow the user to understand how the product works

• Be limited enough to make the user curious about the paid features

For example, if you are building a Shopify SEO app, the free plan might include:

• 5 product SEO checks per month

• Basic on-page SEO tips

• Access to 1 website only

This encourages users to try the app risk-free and get real value. But they will eventually feel the need to upgrade if they want more flexibility and features.

Step 2: Create One or Two Paid Plans

The paid plan is where your business earns revenue. You must offer features that:

• Save time

• Help users earn more money (like better SEO, faster performance, analytics)

• Allow scaling (multiple users, more automation, integrations)

For the SEO app example, the paid plan might include:

• Unlimited SEO checks

• Keyword suggestions

• Structured data support

• Support for multiple websites

• Priority support

By upgrading, users save time and effort and get better results for their store, which justifies the cost.

Freemium Pricing Strategy Tips

1. Don’t Give Away Too Much - If users can get all the value in the free version, they’ll never feel the need to pay. Your free version should be helpful, but not complete.

2. Show Clear Upgrade Benefits - Always make it obvious what additional value users will get if they upgrade. Use messages like:

• “Unlock unlimited access”

• “Get keyword suggestions with Pro”

• “Access competitor analytics in Premium”

3. Use a Progress Limit - Let the user hit a limit,  such as the number of scans, the number of orders, or the number of users,  and then prompt them to upgrade when they need more.

4. Make Upgrading Easy - Add upgrade buttons inside the dashboard, reminder banners, and upgrade emails. The more friction-free the upgrade experience, the better your conversion rate.

Advantages of the Freemium Business Model

The freemium model is one of the most effective strategies for growth, especially for digital tools, software services, and Shopify apps. It has helped many startups scale quickly without needing massive marketing budgets. Let’s explore the benefits in depth:

1. Rapid User Acquisition

One of the biggest advantages of the freemium model is the ability to attract a large number of users very quickly. Because there is no upfront cost, users are more willing to try your product. This is especially helpful for new Shopify app developers or SaaS startups who are still trying to gain traction and visibility.

Free plans remove friction and lower the entry barrier, encouraging users to sign up and test your service. The more users you have, the more feedback you get, and the more data you collect to improve your product.

Example: A newly launched Shopify app offering a free inventory tracker can attract hundreds of merchants within the first month, without spending heavily on advertising.

2. Lower Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) refers to how much you spend to get a new paying customer. Freemium significantly reduces this cost because users come in through organic discovery, app store visibility, social media referrals, or word of mouth.

Instead of running expensive ad campaigns to convince someone to pay right away, you allow them to try the product for free. If the product delivers value, many of them will naturally upgrade.

This makes the freemium model a cost-effective growth strategy for teams with limited marketing budgets.

Note: Lower CAC doesn’t mean no marketing; you still need onboarding emails, upgrade nudges, and feature education for conversion.

3. Builds Trust Before Purchase

Buying software or committing to a monthly subscription is a big step for any business, especially small ecommerce brands. The freemium model builds trust by letting users experience the product first-hand before asking for money.

When users realize the product works well, solves a real problem, and saves them time or effort, they are more likely to trust your brand and pay for advanced features.

This removes the need for hard selling and builds a loyal user base that converts over time.

Remember: Trust is not built overnight. A helpful free experience with clear upgrade benefits is the best way to nurture that trust.

4. Strong Referral Potential

Free users often become brand promoters if they love your product. Since they didn’t have to pay to try it, they feel they’ve received value for nothing, and are more likely to tell others about it.

This creates a natural word-of-mouth loop that can fuel exponential growth without needing a big marketing budget.

This referral behavior is especially common in Shopify and ecommerce communities where store owners share their favorite tools with peers.

Tip: Add referral programs or incentives to encourage free users to bring in more users.

5. Valuable Usage Data

Every interaction a user has with your product gives you insights into what they value most, where they drop off, and which features drive conversions.

With a freemium model, you collect this data across a wide user base, helping you:

• Improve your onboarding experience

• Understand which features are most valuable

• Decide what should stay free vs. what should be paid

• Optimize your upgrade triggers and prompts

This real-world usage feedback is extremely powerful for product-led growth.

Pro Tip: Track metrics like time-to-upgrade, feature usage per plan, and churn rate to keep improving.

Disadvantages of the Freemium Business Model

While freemium is a great model for growth, it comes with its own set of challenges. It's important to understand these drawbacks before deciding if it's the right fit for your business.

1. Low Conversion Rates

Most freemium products convert only a small percentage of users from free to paid. Industry averages fall between 2% and 5%.

This means you may need a very large number of free users to generate sustainable revenue from your paying customers.

If your team or infrastructure cannot handle a large volume of free users, the model may become unsustainable.

Example: Out of 10,000 users, only 300 might pay. If your cost to support 10,000 users is high, your profit margin suffers.

Tip: Keep optimizing your product and upgrade flow to improve this rate over time.

2. High Support Costs

Even if a user doesn’t pay, they may still require technical support, onboarding assistance, or help understanding the product.

As your free user base grows, your support demands also grow. If you’re not careful, this can take up significant time and resources from your team, without any financial return from those users.

Solution: Automate support using:

• Knowledge base articles

• Chatbots

• In-app guides

• AI-based help centers

Free users should still feel supported, but not overwhelm your resources.

3. Product Complexity and Feature Bloat

To keep both free and paid users happy, some businesses end up overbuilding the product with too many features. This can lead to:

• A confusing user experience

• Increased development costs

• Higher risk of bugs and quality issues

Trying to serve too many different user types in one product can reduce the overall effectiveness of your solution.

Best Practice: Stay focused. Deliver core value first, and then build premium features for your ideal paying customers. Don’t try to please everyone.

4. Misuse or Abuse of Free Plans

Some users may take advantage of your free offering by:

• Creating multiple accounts

• Using fake emails to reset limits

• Sharing accounts among teams

This can lead to lost revenue, skewed data, and increased infrastructure costs.

What You Can Do:

• Add usage limits

• Use email verification and device tracking

• Monitor suspicious patterns

• Set clear terms of use

A freemium model should be generous but not easily exploited.

Is Freemium Right for Your Business?

The freemium model is powerful, but it’s not for every type of business. It works best when the cost to serve each user is low, and when the upgrade path is clear and valuable.

Freemium Works Best For:

• Shopify App Developers: Especially if your app solves a specific problem like abandoned cart recovery, SEO, or invoicing. Small store owners are more willing to try tools that don’t require immediate payment.

• SaaS Platforms: Products that scale easily and have low marginal costs per user.

• Email Marketing Tools: Where users grow over time and eventually need to upgrade to send more emails or access automation.

• Analytics Tools: Providing basic reports for free and charging for deeper insights, longer data retention, or integrations.

Freemium Is Not Ideal For:

• Physical Product Sellers: It’s not sustainable to give physical goods away for free, unless it's part of a special campaign or sample strategy.

• One-time Purchase Tools: If your tool solves a one-time problem (e.g., logo maker or name generator), the freemium model may not generate enough recurring revenue.

• High-Support Businesses: If each user requires hands-on onboarding, training, or custom service, it’s difficult to support free users at scale.

Real-World Freemium Business Model Example

App Name: Plug in SEO (Shopify App)

• Free Version: SEO audits and basic error detection

• Paid Version: Structured data, competitor insights, and support

This model helped Plug in SEO reach over 200,000 users on the Shopify App Store. Users tried the free version, saw real value, and chose to upgrade.

Freemium Model for Shopify Development Partners

As a Shopify Development Partner, offering a freemium pricing structure for your apps or tools can:

• Attract Small Stores: Many merchants are bootstrapped. A free plan gives them a low-risk way to try your app.

• Build Faster App Store Growth: More installs mean higher rankings.

• Create Upsell Opportunities: As stores grow, they are more likely to pay for extra features.

You May Also Like to Read this Article - What Are Keywords | Complete Guide for Ecommerce Business Owners

Steps to Build a Successful Freemium Model

Step 1: Start With a Valuable Core Feature

Your free plan must solve at least one real problem. For example:

• Auto-invoicing

• Product recommendations

• Order tracking notifications

Step 2: Create a Clear Line Between Free and Paid

Free should:

• Offer basic usability

• Allow users to get a taste of the full experience

Paid should:

• Offer scalability

• Save time, increase sales, or add automation

Step 3: Offer Tiered Pricing

Don’t stop at one premium plan. Offer at least two:

• Pro: For small businesses

• Premium: For scaling businesses or agencies

Step 4: Add Upgrade Nudges

In-app upgrade prompts can be:

• "Upgrade to unlock unlimited access"

• "You’ve hit your free usage limit"

These increase conversion without hard selling.

Step 5: Track Metrics and Optimize

Measure:

• Free-to-paid conversion rate

• Feature usage per user type

• Churn rate on paid plans

Based on the data, adjust your pricing or feature sets.

Freemium is not about free users. It's about converting the right users at the right time.",  Tomasz Tunguz, SaaS Venture Capitalist.

FAQ’S

1. What does “freemium” mean in simple words?

• Freemium means you give your product or service for free, but if someone wants more features or better tools, they have to pay. It's like giving a free taste of your product so people can try before they buy.

2. Why do companies give something for free? Isn’t it risky?

• No, it’s not risky if done smartly. Giving a free version helps people trust your product. When they see it works, they feel happy to pay for extra features. It’s a smart way to grow fast without spending too much on ads.

3. Is freemium a good idea for my Shopify app or online tool?

• Yes! If you’re a Shopify app developer or you sell any digital tool (like SEO helper, invoice generator, etc.), the freemium model is a great way to get more users quickly and let them upgrade later.

4. Will everyone use the free plan and never pay?

• Some people will stay free forever, and that’s okay. But many will upgrade if your paid features are valuable. Usually, 2 to 5 people out of every 100 free users become paid users. That’s called the conversion rate, and it can grow over time.

5. What should I put in the free plan and what in the paid plan?

• Keep your most helpful but basic tools in the free plan so people can try. Put the advanced, time-saving, or money-making tools in the paid plan. That way, users enjoy the free part and still want to pay for more.

Conclusion

The Freemium Business Model is one of the most powerful tools for growing your ecommerce or SaaS business, especially on platforms like Shopify.

It builds trust, drives massive signups, and leads to steady recurring revenue when done right.

If you're building a Shopify app, an automation tool, or any digital product for ecommerce, consider starting with a freemium version. Let users fall in love with your product, and then offer them more.

Want to grow your Shopify app with the freemium model? Tameta Tech helps you build smart, user-friendly apps that people love to try and pay for. No tech talk. Just real results. Let’s grow your business the simple way.