Excerpt (with edits) from The Common Characteristics Of Successful Freemium Companies by Tom Tunguz:
Successful freemium companies do three things:
1. They use free to market, educate and win mindshare. The Internet enables potential customers to research products much more deeply before engaging with a sales person. Freemium is the ultimate embodiment of that change because customers can use the product before buying it.
2. They leverage usage data to improve their product. The large amount of users using the product enables A/B testing with statistical significance, a non-trivial strategic advantage. Marketing teams can sift through the data to understand market segmentation and funnel efficiency, and product management can parse the data to improve the on-boarding experience.
3. They gather information about their customer base to prioritize their sales efforts. When customers sign up or download a free product, freemium companies should gather data about the user to understand who they are and analyze the usage patterns of these users. With enough user data, it’s possible to predict with great accuracy which users will become large accounts.