18. Attraction Offer. Freemium. | $100M Lost Chapters Audiobook
In this episode of The Game, Alex Hormozi examines freemium business strategies, explaining why they should be viewed as customer acquisition tools rather than complete business models. He outlines the three essential elements of successful freemium offerings: they must provide lasting value beyond a single use, be cost-effective to deliver, and demonstrate clear benefits of upgrading to paid services.
Through examples from companies like Dropbox and Spotify, Hormozi explores both successful and unsuccessful implementations of the freemium model. He addresses common challenges businesses face when using this approach, including low conversion rates from free to paid users, high marketing costs for products lacking viral appeal, and the need to balance service costs against revenue from premium upgrades.
This is a preview of the Shortform summary of the Nov 14, 2025 episode of the The Game w/ Alex Hormozi
Sign up for Shortform to access the whole episode summary along with additional materials like counterarguments and context.
1-Page Summary
The Concept of Freemium as an Acquisition Strategy
Alex Hormozi explains that freemium should be understood as an acquisition strategy rather than a business model. This approach involves offering a valuable core product for free to build a large user base, which can then be converted into paying customers through strategic upselling.
Principles For Designing an Effective Freemium Model
According to Hormozi, successful freemium models require three key elements. First, the free offering must provide ongoing value that doesn't diminish after a single use. Second, it should be cost-effective for the business to provide, ideally being digital with near-zero costs for additional users. Third, the free version should reveal a need that the paid product effectively addresses, whether in B2B contexts by exposing business inefficiencies or in B2C markets through thoughtful limitations that encourage upgrades.
Examples of Successful and Unsuccessful Freemium Implementations
Successful implementations of freemium can be seen in companies like Dropbox, Spotify, Wistia, and Gmail, where free core services are offered alongside premium features that provide clear upgrade incentives. However, the model can fail when companies give away too much value for free, leaving users with no compelling reason to upgrade to paid services.
Challenges and Risks of Freemium Approach
Hormozi identifies several key challenges with the freemium approach. Low conversion rates from free to paid users can threaten business viability, particularly for companies without substantial financial backing. Additionally, if the free product lacks viral appeal, marketing costs can become prohibitive. Finally, businesses must carefully balance the costs of servicing free users against the revenue generated from paid upgrades to maintain profitability.
1-Page Summary
Additional Materials
Clarifications
- Freemium is a business approach where a basic product or service is offered for free, while advanced features require payment. Unlike traditional models that charge upfront, freemium focuses on attracting users first and monetizing a portion later. It relies on a large user base to convert enough free users into paying customers. This differs from purely free or purely paid models by blending both to drive growth and revenue.
- An acquisition strategy is a plan businesses use to attract and gain new customers. It focuses on methods to increase the number of users or clients for a product or service. This strategy often involves marketing, promotions, or product offerings designed to encourage people to try and adopt the product. The goal is to grow the customer base to drive revenue and market presence.
- Strategic upselling involves offering additional features or premium versions that enhance the free product's value. It works by identifying user needs revealed through their interaction with the free version. Businesses then present targeted offers that solve these needs better than the free option. This encourages users to pay for upgrades that improve their experience or efficiency.
- "Ongoing value" means the free product continues to benefit users over time, not just once. This keeps users engaged and encourages regular use, increasing the chance they will see the paid version as worthwhile. Without ongoing value, users may try the product once and then lose interest. Sustained engagement helps build trust and dependency, which supports conversion to paid plans.
- Digital products, like software or online services, can be copied and distributed to new users without extra production costs. Unlike physical goods, they don't require materials, manufacturing, or shipping for each additional user. Server and maintenance costs may increase slightly but are minimal compared to physical product costs. This scalability allows companies to serve many users cheaply once the product is developed.
- B2B (business-to-business) refers to companies selling products or services directly to other businesses. B2C (business-to-consumer) involves companies selling directly to individual customers for personal use. The sales process in B2B is often longer and involves multiple decision-makers, while B2C typically focuses on quick, emotional purchasing decisions. Marketing strategies differ accordingly, with B2B emphasizing relationships and ROI, and B2C focusing on brand appeal and convenience.
- A free product "reveals a need" by letting users experience a problem or limitation firsthand. This exposure makes users aware of inefficiencies or missing features they didn't notice before. The paid product then offers solutions or enhancements that directly address these newly recognized needs. This creates a clear motivation for users to upgrade.
- Viral appeal in marketing refers to a product's ability to encourage users to share it widely and rapidly, often through social networks. It matters because it helps grow the user base organically without high advertising costs. Products with strong viral appeal can achieve faster and cheaper customer acquisition. Without it, companies may face expensive marketing efforts to attract users.
- Conversion rate refers to the percentage of free users who decide to pay for the premium version. Low conversion rates mean most users stay on the free plan, limiting revenue. This can make it hard to cover costs and sustain the business. Improving conversion often requires clear value differences and effective marketing.
- Offering free users access to a product incurs costs like server usage, support, and maintenance. Revenue from paid upgrades must cover these costs plus generate profit for the business to be sustainable. If too many users remain free, expenses can outweigh income, causing financial strain. Effective freemium models carefully limit free usage to encourage upgrades while controlling costs.
Counterarguments
- Freemium can be a standalone business model if the free user base is monetized through alternative methods such as advertising, data monetization, or network effects, rather than direct upselling.
- Offering a core product for free might not always lead to a large user base if the product does not meet market needs or if there is intense competition.
- A free offering that provides ongoing value might still require significant support and maintenance costs, which can be unsustainable for the business in the long term.
- Digital products might have near-zero incremental costs for additional users, but they can still incur significant initial development costs and ongoing operational expenses.
- Revealing a need through the free version does not guarantee that users will upgrade to the paid product; they might turn to competitors or find alternative solutions.
- Successful companies like Dropbox and Spotify have unique value propositions and market conditions that may not be replicable for all businesses attempting a freemium model.
- Some companies have succeeded with a freemium model by offering substantial value in the free tier, relying on a small percentage of users converting to high-value paid plans.
- High conversion rates are not the only measure of success; a freemium model can be sustainable with a large enough user base and low servicing costs.
- Viral appeal is not a prerequisite for a successful freemium model; targeted marketing and sales strategies can also effectively acquire paying customers.
- Balancing the costs of servicing free users with paid upgrade revenue is a challenge, but it can be mitigated by optimizing the service delivery and leveraging economies of scale.
Related Shortform Content
Get access to the context and additional materials
The Concept of Freemium as an Acquisition Strategy
Alex Hormozi emphasizes the distinction between an acquisition strategy and a business model, particularly when discussing the concept of freemium.
Freemium Is a Strategy, Not a Business Model
Freemium Offers a Free Core Product to Attract Users, Then Upsells Paid Offerings
Hormozi clarifies that freemium should be understood as a tool to gather potential customers. The strategy hinges on offering a valuable core product for free, drawing in users who can then become leads for upselling. This approach is designed to build a large user base by initially providing continuous value without immediate revenue expectation.
Freemium Can Be a Powerful but Challenging Approach
Freemium Models Must Balance Attracting Users With Free Value and Upselling Paid Products
To make the freemium strategy work, businesses should focus on giving something away that is both cost-effective for the company to provide and compelling enough to keep users engaged. The core free product must be designed in such a way that it offers significant value by itself while also leaving room for users to desire enhanced features or services that come at a cost. This delicate balance aims to turn free users into paying customers.
Freemium Models May Lose Money By ...
Here’s what you’ll find in our full summary
The Concept of Freemium as an Acquisition Strategy
Additional Materials
Clarifications
- An acquisition strategy focuses on how a company attracts and gains new customers. A business model describes how a company creates, delivers, and captures value, including how it makes money. Acquisition strategies are part of the broader business model but specifically target customer growth. Thus, a strategy is a method within the overall framework of the business model.
- Freemium is a pricing strategy where a basic product or service is provided free, while advanced features require payment. Unlike traditional models that charge upfront or offer a single price, freemium aims to attract many users with free access first. This model relies on converting a portion of free users into paying customers for revenue. It differs from free trials by offering ongoing free access rather than limited-time use.
- Upselling means encouraging free users to buy premium features or services that enhance their experience. It is important because it generates revenue from the large base of free users. Without upselling, the company cannot sustain the costs of providing the free product. Effective upselling turns users into paying customers, making the freemium model financially viable.
- A "core product" can be free and valuable by providing essential features that solve a real problem or fulfill a need without cost. This value encourages users to try and rely on the product, building trust and engagement. The free offering is often limited in scope or functionality, motivating users to pay for advanced features or enhancements. Companies design these free features to be sustainable to offer while still enticing upgrades.
- Balancing cost-effectiveness with user engagement means providing free features that are inexpensive to deliver but still useful enough to keep users interested. This ensures the company doesn't spend too much on free users while maintaining their attention. The free offering should highlight the product’s value, encouraging users to consider paid upgrades. If the free part is too costly or unappealing, the strategy fails financially or loses users.
- Converting free users to paying customers is challenging because many users are satisfied with the free features and see no need to pay. Psychological resistance to spending money on something they already use for free also plays a role. Additionally ...
Counterarguments
- Freemium may not be suitable for all types of products or services, especially those with high marginal costs for each additional user.
- The strategy could potentially devalue the perceived worth of the product or service if users come to expect everything for free.
- It can be difficult to change the mindset of free users to start paying, leading to lower conversion rates than anticipated.
- Relying too heavily on a freemium model might lead to underinvestment in other marketing and sales strategies that could be more effective.
- Freemium models can attract a large number of users who have no intention of ever paying, which can inflate user metrics without corresponding revenue.
- The cost of supporting a large number of free users can strain resources, potentially impacting the quality of service for paying customers.
- Upselling within a freemium model can sometimes lead to aggressive sales tactics that may turn off users.
- The freemium model might ...
Related Shortform Content
Get access to the context and additional materials
Principles For Designing an Effective Freemium Model
To design a successful freemium model, businesses should provide ongoing value to users, offer products that are cheap for the business, and reveal a need that the paid product fills.
Free Offering Must Provide Ongoing Value To Users
The free product under a freemium model must be one that users will find valuable over time, not just at the moment of download or initial use. It should be designed to provide continuous benefits to ensure users remain engaged with the product.
The Free Product Should Offer Ongoing, Not One-time, Benefits
The principle behind the free offering is straightforward: the value it provides must not diminish after a single use. Instead, it must be capable of delivering consistent value to encourage prolonged usage which deepens user investment in the product.
Free Offering Must Be Cheap for Business
To make the free offering sustainable, it needs to be inexpensive for businesses so they can scale without incurring significant additional costs.
Ideal Freemium Products Are Digital With Near-Zero Costs for Additional Users
According to Hormozi, freemium products thrive best when they are digital, implying that they carry 100% incremental margins. This characteristic makes the additional cost of acquiring new users practically zero.
Free Offering Should Reveal a Need the Paid Product Fills
The free version of the product should act as a gateway, demonstrating to users how the paid p ...
Here’s what you’ll find in our full summary
Principles For Designing an Effective Freemium Model
Additional Materials
Clarifications
- A freemium model is a business strategy where a company offers a basic product or service for free while charging for premium features. It aims to attract a large user base with the free version and convert some users into paying customers. This model is common in software, apps, and online services. The goal is to balance free value with incentives to upgrade.
- Incremental margin refers to the profit made from selling one additional unit of a product after covering variable costs. Digital products often have near-zero variable costs for each new user, meaning almost all revenue from additional users is pure profit. This results in an incremental margin close to 100%. Physical products usually have higher variable costs, reducing their incremental margins.
- B2B (business-to-business) refers to companies selling products or services directly to other businesses. B2C (business-to-consumer) involves companies selling products or services directly to individual consumers. The sales process and customer needs differ significantly between these two models. Understanding this helps tailor freemium strategies to the target audience effectively.
- In B2B freemium models, "revealing inefficiencies or gaps" means showing businesses where their current processes or tools fall short. The free product highlights problems or areas needing improvement. This creates awareness of issues the paid product can solve. It motivates businesses to upgrade for better solutions.
- Thoughtful limits in free B2C products restrict features, usage time, or capacity to create a natural boundary. These limits encourage users to upgrade by demonstrating the value of the paid version without causing frustration. Examples include limiting the number of projects, storage space, or acc ...
Counterarguments
- The assumption that ongoing value is necessary for user engagement may not always hold true; some users may be satisfied with a product that serves a one-time need if it does so effectively.
- Continuous benefits might lead to a plateau in perceived value, where users no longer see the need to upgrade to a paid version if the free version is sufficient.
- Offering a free product cheaply to the business might result in a lower quality offering that could harm the brand's reputation and user trust.
- Digital products, while having near-zero costs for additional users, still require ongoing investment in infrastructure, security, and customer support, which can be substantial as the user base grows.
- Revealing a need or problem through the free product might not always convert free users to paid users; some might turn to competitors or alternative solutions.
- In B2B models, exposing inefficiencies or gaps might not be enough if the paid product is not competitively priced or fails to significantly outperform the free version.
- Limiting features in B2C products to encourage upgrades ca ...
Related Shortform Content
Get access to the context and additional materials
Examples of Successful and Unsuccessful Freemium Implementations
The freemium business model has become a popular strategy for companies aiming to attract users by offering core services for free and then upselling premium features. However, striking the correct balance in this approach is critical to ensure profitability.
Freemium Models Offer Free Core Value, Upsell Premium Features
Freemium models are designed to convert free users into paying customers by providing core value without charge while reserving enhanced features for premium accounts.
Companies Convert Free Users Into Paying Customers
Examples of successful freemium implementations are visible in companies such as Dropbox, which offers free storage space but charges for additional capacity. Similarly, Spotify allows users to listen to music for free but removes ads for a paid subscription. Wistia provides free video hosting services with limitations that encourage users to pay after they reach a certain usage threshold. Gmail offers free email services but pushes users to upgrade their accounts to avoid email deletion once they near their storage limits.
These examples showcase how companies successfully leverage the freemium model by initially providing a valuable service for free to attract users and later offering enhanced, premium features that provide clear incentives for users to upgrade.
Freemium Models Fail By Giving Away too Much, Leaving No Upgrade Incentive
The challenge in the freemium model lies in determining how much value should be given away for free. If too much is offered at no cost, users may have no c ...
Here’s what you’ll find in our full summary
Examples of Successful and Unsuccessful Freemium Implementations
Additional Materials
Clarifications
- The term "freemium" combines "free" and "premium" to describe a business model offering basic services at no cost while charging for advanced features. It originated in the early 2000s as digital companies sought ways to attract users and monetize them later. This model relies on a small percentage of users upgrading to paid plans to sustain the business. Freemium is common in software, apps, and online services.
- Core services are the basic functions or features that allow users to use the product or service effectively without payment. Premium features are advanced, enhanced, or additional capabilities that improve user experience or productivity but require a paid subscription. The distinction depends on what is essential for general use versus what adds extra value or convenience. Companies design core services to attract users and premium features to generate revenue.
- Companies implement limits on free services using software controls like quotas, feature flags, and usage tracking. Quotas restrict the amount of resources (e.g., storage space or API calls) a free user can consume. Feature flags enable or disable premium features based on the user's subscription status. Usage tracking monitors user activity to enforce limits and trigger upgrade prompts when thresholds are reached.
- Users upgrade from free to paid versions to access additional features or higher usage limits not available in the free version. Paid versions often remove restrictions like ads, storage caps, or limited functionality. Upgrading enhances user experience, productivity, or convenience. This creates value that justifies the cost for users who need more than the basic service.
- The main challenge is setting the right limit on free features to attract users without satisfying all their needs. If free offerings are too generous, users see no reason to pay, reducing revenue. Conversely, if free features are too limited, users may not find enough value to engage at all. Companies must analyze user behavior and costs to optimize this balance for sustainable growth.
- Usage thresholds are predefined limits on free service usage, such as storage space or number of actions. When a user exceeds these limits, they must pay to continue using the service or access additional features. This mechanism encourages users to upgrade by restricting free access beyond a certain point. It helps companies monetize heavy users while still attracting new users with free access.
- A large free user base consumes company resources like servers and support without generating revenue. This increases operational costs without offsetting income, leading to financial strain. Without enough paying customers, the business cannot sustain growth or cover expenses. Ultimately, profitability depends on convertin ...
Counterarguments
- Freemium models can sometimes lead to a devaluation of the premium products if the free offerings are perceived as sufficient, which can make it harder to convert users to paying customers.
- The success of a freemium model can be heavily dependent on the market and competition, which might not be the same across different industries or over time.
- Some users might feel frustrated or manipulated by freemium models, especially if they are frequently prompted to upgrade or if the free version is intentionally limited in a way that hinders usability.
- Freemium models may not be sustainable for all types of businesses, especially those with high costs of goods sold or those that require a large investment in customer service and support.
- The success stories of companies like Dropbox and Spotify may not be easily replicable for new startups or smaller companies without significant marketing and brand recognition.
- Relying on a freemium model can be risky if the majority of users remain on the free tier, which could lead to cash flow issues if not enough users convert to paying customers.
- The freemium model might not be the best approach in markets where consumers are not used to paying for digital produc ...
Related Shortform Content
Get access to the context and additional materials
Challenges and Risks of Freemium Approach
Hormozi indicates that employing a freemium business model brings several challenges and risks that can threaten the viability of a company if not managed carefully.
Low Conversion Rates From Free to Paid Users
Insufficient Free User Upgrades May Threaten Viability
One key risk Hormozi identifies is the potential for low conversion rates from free to paid users. He warns against adopting a freemium model without deep pockets or investors, as a small conversion rate can quickly become unsustainable. The business model relies on a significant percentage of free users becoming paid customers, otherwise the company's financial stability can be compromised.
Free Offerings Lacking Value or Viral Spread
High Marketing Costs if Product Lacks User Appeal and Word-Of-mouth Growth
Moreover, the freemium model assumes the product has intrinsic value or appeal that encourages users to spread the word. If a product fails to generate this viral growth or user interest, companies may face steep marketing costs. This is particularly true if the free product doesn’t possess enough value to generate word-of-mouth promotion, one of the key drivers of the freemium strategy's success.
High Fulfillment Costs of Free Users vs. Paid User Revenue
...
Here’s what you’ll find in our full summary
Challenges and Risks of Freemium Approach
Additional Materials
Clarifications
- The freemium business model offers a basic product or service for free while charging for premium features or enhancements. It relies on attracting a large user base with the free version and converting a portion into paying customers. Success depends on balancing user acquisition costs with revenue from paid upgrades. This model is common in software, apps, and online services.
- "Conversion rates from free to paid users" refer to the percentage of people who start using a product for free and then decide to pay for additional features or services. It measures how effectively a company turns free users into paying customers. A higher conversion rate means more users are willing to pay, which is crucial for revenue. Low conversion rates can make it hard for the business to sustain itself financially.
- Low conversion rates mean few free users become paying customers. Since free users do not generate revenue, the company relies on paid users to cover costs. If too few users pay, income may not cover expenses like development and support. This imbalance can lead to financial losses and threaten the company's survival.
- Viral growth occurs when users naturally share a product with others, causing rapid user base expansion. It depends on the product being engaging or valuable enough that users want to recommend it without incentives. Word-of-mouth promotion is a key driver of viral growth, as personal recommendations are trusted and influential. Without viral growth, companies must spend more on marketing to attract new users.
- Fulfillment costs of free users refer to the expenses a company incurs to provide and maintain the free version of its product or service. These costs can include server hosting, customer support, software updates, and bandwidth usage. Even though free users do not pay, the company must still invest resources to keep the product functional and accessible. If these costs are too high relative to revenue from paid users, the business may lose money.
- Free users consume resources like server space, customer support, and bandwidth without directly paying. These costs must be covered by the revenue generated from paid users. If free user costs exceed paid user revenue, the business loses money. Profitability depends on keeping free user costs low or converting enough free users to paid customers.
- Having "deep pockets or investors" means having enough financial resources or external funding to sustain the business while conversion rates are low. This funding covers ongoing costs like product development, marketin ...
Counterarguments
- Freemium models can be sustainable with low conversion rates if the volume of free users is large enough and the marginal cost of serving additional free users is very low.
- Deep financial resources or investors are not always a prerequisite for success in a freemium model; strategic partnerships, efficient cost management, and alternative revenue streams can also support the model.
- Viral growth and word-of-mouth can be supplemented or even replaced by effective, targeted marketing strategies that do not necessarily require high costs.
- The value proposition of free offerings can be designed to naturally lead to paid upgrades without relying solely on the product's intrinsic value or appeal.
- Freemium models can leverage network effects where the value of the product increases with the number of users, potentially reducing the need for high marketing costs.
- The balance between the costs of servicing free users and the revenue from paid users can be managed by limiting the features or support offered to free users, thereby reducing costs.
- Freemium businesses can use data and analytics to continuously optimize their offerings and conversion strategies, potent ...
Related Shortform Content
Get access to the context and additional materials
Create Summaries for anything on the web
Download the Shortform Chrome extension for your browser
