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It’s almost dogma in SaaS: every product needs a free tier. Founders are told that giving a piece of the product away will supercharge growth. But what if “free” is actually a trap? The data tells a different story. Many early-stage startups have discovered the hard way that a free plan can create more problems than it solves. In fact, SaaS veteran Jason Lemkin counts “not charging at all” early on as one of his biggest mistakes, warning that free users often just waste time and never convert. Likewise, investor Tomasz Tunguz’s analysis of hundreds of SaaS companies found that only about 4% of self-serve free signups convert to paid customers on average. This post digs into why offering a free tier isn’t always the best strategy. We’ll bust the myth that most SaaS companies need a free plan, and explore the key risks of freemium with data-backed arguments and real examples.
Challenging the “Free Tier for All” Myth
Product-led growth has made freemium fashionable. Before diving into a freemium model, it’s crucial to understand the risks. Let’s explore the 5 key pitfalls of free tiers that every early-stage startup and product marketer should weigh carefully.
1. Attracting the Wrong Users (Who Never Convert)
Free tiers tend to attract everyone – especially the wrong users. It’s human nature: if something is free, people will grab it even if they have little genuine need or intention to pay. This can fill your funnel with “tire kickers” and bargain-hunters outside your ideal customer profile. These users love getting value for free but have no urgency to upgrade.
The data backs this up. Industry benchmarks show only about 2–5% of free users ever convert to paid. That means 95–98% never become customers. A recent OpenView survey of 458 SaaS companies found a visitor-to-freemium signup rate of ~6%, but only a 5% freemium-to-paid conversion, yielding a minuscule 0.3% of website visitors eventually paying.
Jason Cohen (founder of WPEngine) noted that even a “really good” freemium conversion like Dropbox’s ~4% took enormous effort– and “normal rates are more like 1%”.
In practical terms, if 10,000 users join your free tier, perhaps only a few hundred will ever pull out a credit card. The rest consume support and resources with no ROI. The free tier had attracted hordes of hobbyists and tire-kickers who weren’t becoming paying customers, so the company refocused on users who truly value (and pay for) a reliable platform.
2. High Churn and Little Revenue Expansion
Freemium users are notoriously fleeting and fickle. Because they haven’t invested anything, their commitment is near zero. Most freemium signups never fully adopt the product and drop off within weeks or months. A SaaS founder shared on
One SaaS founder shared on Reddit that their free user base churned out after just ~4 months on average, giving an LTV (lifetime value) of only about $20 per free user – “a formal disaster for a SaaS product”. High churn is virtually baked into freemium: those who aren’t a strong fit will leave quickly since they have no sunk costs. And even those who do get value from the free version may never feel urgency to upgrade if the free tier alone meets their basic needs (a common scenario).
For example, Zoom’s free plan (40-minute meetings) satisfies a huge segment of users; if Zoom removed it, most free users would likely switch to another free service rather than start paying. So while free tiers can drive user growth, that cohort’s net dollar retention is dreadful – by definition, their initial spend is $0, and many will never contribute more.
3. Infrastructure Costs That Outweigh the Benefits
“Free” users aren’t actually free – they cost you money. Every user on your platform consumes resources: server infrastructure, customer support, onboarding, and maintenance. With a free tier, you’re footing the bill for potentially thousands of non-paying accounts, hoping some tiny fraction will convert later. This can quickly become a bad trade-off for an early-stage startup with limited funds.
The CEO of PlanetScale shut down their free database tier in 2023, citing the unsustainable cost of supporting non-paying users.
Heroku, a well-known PaaS, made similar moves, realizing that free users were draining resources that could have been used for paying customers. Beyond infrastructure, support costs can snowball. If 90% of support tickets come from free users who provide $0 revenue, your team is essentially subsidizing a service for non-paying customers—at the expense of those who actually fund the company.
If your AWS bill and support tickets are spiking due to thousands of free users, you may be sacrificing runway that could have gone toward acquiring paying customers. The market today is far less forgiving of high-burn strategies. Investors and boards prioritize efficient growth. That means every user should count—if 9 out of 10 aren’t contributing revenue, you’re running a free service at your own expense. If there’s no clear path to monetization (e.g., via upsells or network effects), it’s worth reconsidering your free offering before it becomes a liability.
4. Devaluing Your Product and Setting Unrealistic Expectations
One often overlooked downside of free tiers is the psychological impact on how your product is perceived. Price signals value. When something is free, people may inherently undervalue it. “If you don’t think your product is worth paying for, why would your customers?” Freemium can unintentionally position your product as a nice-to-have rather than mission-critical software, making it harder to move upmarket later. Free users also develop unrealistic expectations about pricing. They get used to free access, so any attempt to charge can feel like a huge leap. Public backlash is common when companies tighten free offerings because users anchor on “free forever.”
For example, Evernote allowed users to save 100,000 notes for free for years, creating a loyal but non-paying user base. When they cut the limit to 50 notes in 2023, the outrage was immediate—even though the free model was unsustainable. The “zero-price effect” makes consumers irrationally resistant to even small charges after prolonged free use. By setting a price of $0, you train customers to see your service as worth nothing (or that paying is optional). This makes conversion an uphill battle. Many free users will resist any paid plans or consider even modest pricing “too expensive” by comparison. If the free tier is too feature-rich, it can cannibalize your premium plans—leaving no reason to upgrade.
5. Competitive Positioning Disadvantages
While a free tier is often pitched as a growth hack to outmaneuver competitors, it can sometimes put you at a disadvantage, especially against bigger players. Large, well-funded competitors can match or undercut your free offering, absorbing losses longer than a startup can afford. If your differentiation relies on having a free version, that moat is shallow. A rival can neutralize it easily. In fact, if competition intensifies, bigger players might use “free” as a weapon, bundling a similar product at no cost to capture your user base and squeeze you out.
The Federal Trade Commission has noted that predatory pricing tactics like this are not uncommon—a dominant company can sustain a free or ultra-cheap plan until a smaller competitor’s growth is stunted or cash is drained.
Consider the classic example of Microsoft vs. startups:
Microsoft has often introduced free or bundled alternatives to successful indie software, leveraging its scale. For a contemporary illustration, look at the cloud hosting/dev tools arena.
When Heroku (a startup) offered a generous free tier to attract developers, it gained huge popularity. But AWS and other cloud giants eventually made it easy to trial their services at low or no cost, eroding Heroku’s edge. The smaller company ultimately couldn’t compete purely on free offering and had to phase it out, especially once cost and abuse became issues. If “free” is your only competitive hook, a larger competitor can match and neutralize it in no time. Then the battle shifts to who has more features, better support, or simply a bigger ecosystem – areas where an under-resourced startup might struggle.
None of this means free tiers have no strategic value, for some product-led growth plays, they do. But startups shouldn’t assume a free plan will automatically outflank competitors. If anything, it might ignite a price war that only bigger players can afford to sustain. Instead, competitive strategy should focus on unique value, not just on attracting users with free access. As Tomasz Tunguz advises, free and trial models should be designed with a clear, deliberate path to paid conversion—otherwise, you may just be seeding the market for a competitor to harvest later.
Smarter Alternatives to “Always Free”
Before slapping a “Free Forever” badge on your homepage, consider some strategic alternatives that can still drive growth but avoid the freemium pitfalls:
- Limited Free Trials (Opt-In or Opt-Out)
Instead of an open-ended free tier, offer a time-limited trial of your premium version. This gives users a taste of full value while creating urgency to convert. Data shows trials convert much higher than freemium. Tomasz Tunguz found that 14-day trials are optimal, and trials in general convert about twice as effectively as feature-limited freemium signups.
You can choose:
- Opt-in trials (no credit card; trial simply expires)
- Opt-out trials (credit card required upfront; auto-converts if not canceled)
Many modern SaaS companies favor premium-tier free trials, 44% use this approach, compared to only ~19% using freemium. Reverse trials (starting users on a full-feature plan, then dropping them to a limited free tier if they don’t buy) are another effective option. This prevents an indefinite free ride while capturing users who need more time to convert.
- Usage-Based or Pay-As-You-Go Pricing
Another alternative is usage-based pricing with a free allowance. Instead of a full-featured free tier, give new users a limited quota of usage (API calls, credits, etc.) for free, then charge per use beyond that.
This model aligns cost with value. Users only pay when they actually need more. According to OpenView, usage-based pricing adoption has increased at a fast pace in recent years, and companies using it tend to grow faster with better net dollar retention.
For startups, a usage-based model can hook users with a free baseline (so you still lower the friction to try), but you won’t be on the hook for supporting unlimited free usage. As long as your product delivers value, heavy users will seamlessly turn into paying customers when they exceed the free threshold. This approach also prevents the “all or nothing” dynamic of freemium – you don’t have thousands of completely free users; instead, every user is a potential revenue contributor once their needs expand.
Examples include Stripe and Twilio, which offer free tiers up to a usage limit, then introduce charges. This way, the product sells itself through usage, and costs scale only when revenue does.
- Low-Cost Entry Plans
If outright free is too risky, consider a low-cost starter plan as your entry point. Even charging a nominal amount (say $5–$10/month or a one-time $1 trial) can significantly filter for serious customers vs. freebie-seekers. A paid starter plan still lowers the barrier for small customers without devaluing the product to $0. It also sets a precedent that your product has a price, however small.
Some cloud services that eliminated free tiers moved to cheap base plans. Low-cost plans let you cover basic costs and validate that new users are willing to pay something. You might lose out on pure hobby users, but those likely weren’t going to convert anyway.
Another variant is a $0 trial that converts into a low-cost plan automatically if not canceled – this gets users in the door with no friction but ensures you start generating revenue unless they opt out. The key is to set a revenue relationship early, even if tiny. From there you can always upsell higher tiers as users grow.
Each of these alternatives can be mixed and tailored to your market. For example, you might offer:
- A 14-day trial for immediate evaluators
- A low-price “lite” plan for small teams
- Usage-based pricing for scaling customers
The goal is to provide value and build trust without committing to support free users indefinitely.
Conclusion: Rethink “Free” and Focus on Sustainable Growth
“Free” is tempting, especially in the early days when you just want users. But as we’ve seen, a free tier is not a silver bullet. Instead, time-limited trials, usage-based onboarding, or modestly priced starter tiers can let customers experience your product while setting the right expectations. The goal isn’t to avoid giving value upfront, it’s to give just enough to prove your worth, then capture fair value in return.
Before defaulting to freemium, take a step back. Consider your product, market, and customer journey: is a free tier truly the best lever for growth, or are there better options? Many successful SaaS companies have grown using free trials or low-cost plans instead, building a sustainable revenue base from the start.
It might be time to revisit your pricing strategy. Look at the data, weigh the trade-offs, and make a conscious choice rather than following the crowd. Users are great, but customers are better. Turning free users into paying customers is what drives sustainable, scalable growth.
If you’re an early-stage startup, take a hard look at your signups and conversions. Understand that are free users turning into revenue, or just adding noise and cost? Consider testing a different approach. And if you need help, reach out to Monetizely for expert pricing guidance. A small tweak to your monetization strategy today could unlock much greater success tomorrow.
