Why you shouldn't be using the freemium business model (yet)

The freemium business model has been responsible for building some of the most successful businesses in the world.

But you shouldn’t be using freemium right now. Here’s why and what you should do instead.

Why Freemium Works

Freemium, for those who don’t know, is a business model that involves taking a part of your product and offering it for free to your target audience.

This removes the barrier to entry for your potential customers to use your solution and, in theory, massively increases your solution's user base. The idea is that, by using a limited/restricted version of your product for free, they will love it, come to rely upon it, and therefore need and want to upgrade to the full (and paying) version of it.

There are plenty of companies that have used the freemium strategy, but email marketing solution provider Mailchimp is not only a well-known example of this but, being a bootstrapped company, is also one that is more relatable to indiehackers than a funded company like Dropbox.

In 2009, Mailchimp decided to make its lowest subscription level completely free. All of a sudden, Mailchimp was offering its target audience (small-to-medium sized businesses aka SMBs) something that its competitors were charging for. As a result, Mailchimp's growth exploded.

SMBs signed up for the freemium version in their droves and, although many free users never grew their email lists beyond the free plan's limit, plenty did and therefore upgraded to the paying version of the product.

Why You Shouldn’t Do It (Yet)

Many startups, seeing the success that companies like Mailchimp, Dropbox, and others have had with the freemium business model decide to use it themselves.

But this is a huge mistake and one you shouldn’t make.

Your number one priority as a startup is to generate revenue. The biggest reason that startups fail is that they run out of money. As discussed in this article, looking for product-market fit is why this happens, but selling a free product only exacerbates this problem (as the company case-studied in the aforementioned article found out to its cost).

Using a freemium business model certainly increases your ability to attract more users to your solution, but those users can take a long time to convert into paying customers. With average conversion rates from free to paying at around 4-5%, you’ll spend a long time paying for servers and other costs for free users.

What You Should Do Instead

When it comes to the freemium business model, as an indiehacker bootstrapping your startup, you need to look to Mailchimp as your guide.

Mailchimp was launched in 2001 as a side project by its founders. In 2007, they decided to shut down their web agency and focus exclusively on the company. And, as already mentioned, it wasn’t until 2009 when they already had tens of thousands of paying customers that they started using the freemium business model.

In other words, Mailchimp already had a successful, sustainable, and revenue-generating business before it introduced its freemium business model. The freemium business model didn’t help them grow from the ground up, it helped them reach the next level when they already had a successful business.

Where most startups go wrong is that they try to use the freemium business model to grow from the ground up and this is a recipe for disaster (as the company highlighted in the aforementioned article learned).

So, if you want to use a freemium business model, wait till you have at least generated enough revenue to make your startup a viable and sustainable business. Freemium is best used to make an already successful business more successful.

How To Reach That Point?

Obviously then the question is, how do you get to the point where your business is big enough and sustainable enough to actually use the freemium business model?

Well, surprisingly, the answer is not to copy Mailchimp. Although bootstrapped startups should copy Mailchimp's timing when it comes to using the freemium business model, they should absolutely not copy its growth strategy to reach that point.

And in Part Two we'll look at why and what you should do instead.