The Freemium Model: How Free Products Make Money

Many apps and services are free to use. The economics depend on converting a small share of users to paid plans.

By Iris Penhaligon | Oct 2, 2026 | 4 min

Freemium combines a free basic product with paid premium features. It is common in software, games, and online services.

Because the cost of serving an extra user is often low, firms can offer a free tier to attract a large audience.

I How it works

A free tier attracts users. Some upgrade for additional features, storage, or the removal of ads.

II Conversion rates

Typically, only a small proportion of users pay. The business depends on the size of the user base and the value of paying users.

III Risks

— Free users still create costs
— Too generous a free tier reduces upgrades
— Too restrictive a free tier limits growth

IV Advertising

Some freemium products also earn money from advertising shown to free users.

V For consumers

Consider whether the free version meets your needs and be aware of how your data may be used.

This is general educational information about economics, not financial, investment, or tax advice. Consult a qualified, licensed professional before making financial decisions.

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