Why Free Credits Are Replacing Traditional Freemium in SaaS

Plus: Updates from Amplitude, Zoom, and Quickbooks.

Mar 14, 2025

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📰 Pricing News & Updates

Amplitude changed usage thresholds.
Prezi increased AI credit limits.
Couchbase lowered the price of Enterprise.
Zoom is running a test for its AI Companion feature.
Quickbooks is running a test for its Essentials plan.

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The Rise of Free Credits as a Freemium Alternative

Anecdotally, I’ve noticed two distinct trends across the PricingSaaS database in recent months.

First, companies are increasingly phasing out traditional freemium plans or significantly restricting their limits.
Second, and perhaps more interestingly, we're witnessing the rise of credit-based models where companies offer free credits as an onboarding strategy.

This shift isn't entirely new. Snowflake pioneered this approach years ago, offering approximately $400 worth of free credits to new users (I wrote about Snowflake’s strategy in 2020).

At the time, this represented a novel alternative to the standard freemium playbook. What makes this trend particularly timely is its acceleration across the SaaS ecosystem, with companies like Monday.com and Miro recently implementing credit-based systems.

The decline of traditional freemium makes sense in today's economic climate. With investors increasingly focused on profitability, companies can no longer justify maintaining perpetual free plans that users might leverage indefinitely without converting. Instead, they're exploring alternatives that better balance acquisition with monetization.

Why Free Credits Will Replace Freemium

1. More Control over Monetization

Traditional freemium plans often create a "forever free" scenario where users can extract substantial value without ever paying. Companies like Notion, Dropbox, and Canva have all built massive user bases, but many of these users remain firmly anchored in the free tier.

Credit models fundamentally change this dynamic by imposing natural limits. When credits run out, users face a clear decision point: either pay to continue or stop using the product. This creates a more controlled path to monetization and reduces the burden of supporting perpetual free users.

2. Higher Value Perception

There's a psychological component to credit-based models that traditional freemium lacks. By quantifying the dollar value of free credits (like Snowflake's $400 equivalent), companies explicitly communicate the worth of their offering. This transparency helps users understand they're receiving something valuable rather than merely a restricted version of the product.

Credits also introduce scarcity and urgency—powerful psychological triggers that can increase perceived value. Rather than offering a permanently limited experience, credits provide full product access for a finite period, giving users a complete understanding of the product's capabilities and value proposition.

3. More Intuitive Free-to-Paid Conversion

Freemium plans often create friction at the upgrade point. Users become accustomed to working within limitations (like Loom's 25-video cap with deletion options) and develop workarounds to avoid paying. This creates a jarring transition when users finally hit impassable limits.

Credit models create a smoother conversion journey. Users start with a full-featured experience and, as their credits deplete, naturally progress toward paid usage.

4. Prevents Free User Abuse

Every SaaS company has stories of users who exploit freemium limitations or create multiple accounts to avoid paying. These behaviors not only reduce conversion rates but can also strain infrastructure and support resources.

Credit systems minimize this abuse by tying usage to a measurable, depletable resource. Once credits are exhausted, continuing requires payment. This approach filters out users who never intended to pay while still providing a genuine trial experience for potential customers.

5. Aligns Pricing with Usage

The SaaS industry is increasingly moving toward consumption-based pricing models that align costs with actual usage and value delivered. Traditional seat-based pricing often fails to capture the true value users derive from a product, especially for tools with variable usage patterns.

Credit models naturally complement this shift by introducing users to the concept of paying for what they use. This is particularly evident in AI-powered tools like Monday.com's AI features, where each interaction consumes a specific number of credits. This approach helps users connect their usage to value more clearly than traditional seat-based models.

6. Allows Flexibility with Experimentation

Perhaps most importantly for growth-focused companies, credit models offer flexibility for experimentation. Companies can adjust credit allocations to optimize conversion rates without restructuring their entire pricing strategy.

If Monday.com's initial 500 free credits don't drive sufficient conversions, they can adjust this threshold without restructuring their plans. This enables more agile A/B testing and faster optimization of the conversion funnel, helping companies find the perfect balance between acquisition and monetization.

Looking Ahead

As companies continue pushing their pricing models further down the value chain—away from abstract concepts like seats or storage and toward actual outcomes and usage—credit-based systems will become increasingly common.

AI-powered features are particularly well-suited for credit models due to their consumption-based nature and clear per-use costs. However, we expect this trend to extend beyond AI tools as more SaaS companies push closer towards outcome-based models.

🎯 Expert Insight

In the 1860s, railroad companies building the transcontinental railroad encountered different classes of potential customers, including poor European immigrants traveling west to start a new life. These immigrants had spent most of their savings on the journey across the Atlantic and were primarily concerned with reaching California — not traveling in comfort. They were willing to buy the cheapest third-class tickets.

Soon, this became a problem. The railroad companies found that these third-class tickets would sell out quickly, leaving empty seats in the more expensive second-class. They tried removing features to address this. They removed chairs, didn’t clean the third-class trains, and even used old cattle wagons. However, the immigrants remained frugal, prioritizing getting to California over comfort as long as the price was low enough.

This created a problem for the railroad: how to properly prompt these customers to buy the second-class tickets they could technically afford?

The railroad's "solution" to the third-class problem was drastic.

They removed the roofs from the third-class wagons, reintroducing the risk of death due to the cold in the Appalachian Mountains. The pricing question for passengers then became not just about comfort, but about survival: "Do I want to risk not getting to California because I’m too cheap to buy a ticket that will get me there alive?"

Obviously, no SaaS company will have consequences this dire. The analogy lies in the challenge of creating a sufficient "push" factor from the free tier to the paid tier.

If the free version adequately meets the users' basic needs, there may not be enough motivation for them to upgrade. Just as the immigrants were content with basic transportation, freemium users might be content with “good enough” functionality.

Thanks for tuning in and see you next week!

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