Pricing StrategyvsFreemium Model

Pricing strategy determines how much you charge customers and directly impacts revenue, positioning, and perceived value. The three primary approaches: (1) Cost-Plus: price = cost + margin (lazy, leaves money on the table). (2) Competitor-Based: match or undercut competitors (race to the bottom). (3) Value-Based: charge 10-20% of the value you create for the customer (optimal). If your product saves a customer $50,000/year, charging $5,000/year (10% of value) is the sweet spot. The customer gets 10x ROI, and you capture meaningful revenue. Pricing is the fastest lever for revenue growth — a 1% price increase typically adds 11% to profits.

Freemium is a business model where the core product is offered completely free to amass a massive user base, while premium functionality, advanced features, or usage limits are gated behind a paid subscription. It acts simultaneously as a product strategy and a top-of-funnel customer acquisition channel.

The biggest trap is pricing based on cost ('it costs $10 to deliver, so I'll charge $15'). This leaves massive value on the table. If your product saves a customer $10,000/year, charging $50/month ($600/year) captures only 6% of value — criminally underpriced regardless of your costs. The second trap: not testing prices. Most SaaS companies set pricing once and never change it. You should test pricing quarterly. The third trap: too many tiers. More than 3-4 tiers creates decision paralysis. Dropbox went from 4 tiers to 3 and saw conversion increase 15%.

The 'Penny Gap' trap. If your free tier provides 99% of the value, users will never feel the pain required to pull out their credit card. Conversely, if your free tier is heavily crippled, users won't experience the 'aha' moment, leading to massive churn before they even consider upgrading.

Use value-based pricing: (1) Interview 10 customers and ask: 'How much money or time does our product save you?' (2) Calculate the average value created. (3) Price at 10-20% of that value. (4) Create 3 tiers (Starter, Pro, Enterprise) with clear feature differentiation. (5) Test annually: A/B test pricing pages, conduct Van Westendorp surveys, and monitor win rates by price point.

Design your free tier around a complete, standalone 'Job To Be Done.' Allow users to succeed at the core task, but insert a logical, high-value friction point (e.g., inviting a 4th team member, accessing historical data, or removing watermarks) that triggers the upgrade.