Freemium
What is a freemium?
Freemium, a combination of the words “free” and “premium,” is a type of pricing strategy that lets customers sample limited and basic services at no cost. The company then charges money for access to more advanced product features or services.
Over the years, freemium has become one of the most popular business models among startups and other similar types of businesses. The two-tiered structural split between free and paying users reduces the cost of starting a business and acquiring customers by essentially forgoing expensive sales demos and marketing campaigns. As a result, companies and small business owners can focus on other aspects of their sales process, such as building trust with potential customers.
Freemium model
A freemium model lowers the bar to entry to just about anyone willing to try out a product for free. That said, a freemium model is only as effective as its ability to attract new users.
From the start, you’ll need to generate as much traffic as possible to your business before you think about converting leads. During this initial phase of the funnel, your free offerings must be compelling enough to draw attention from your target market. At the same time, you’ll want to provide them with the right amount of sample size that won’t give too much away.
Once users reach the limits of their free account, they are more likely to make the step of purchasing a premium account in order to gain access to all the features. This also translates into a high conversion rate, or the percentage of free users who become premium account holders.
You may also be interested in:
Examples of freemiums
01. Wix
One of the world’s most valuable companies, Wix generates a lot of buzz due to its professional website builder and inimitable commitment to helping everyone create their own site. Catering to small business owners, artists, freelancers, designers, educators and many more, the company meets the needs of a diverse and growing clientele.
After going through a simple registration process, users can start with a free template and connect their site to a free domain and free hosting server. Afterwards, they’ll have the choice to upgrade to more advanced features. For instance, by purchasing an eCommerce account, users can create an online shop and start managing their own business.
02. Spotify
Since its inception in 2008, Spotify’s audio streaming services have been embraced by artists and fans alike. The company’s vision to make music universally accessible goes hand-in-hand with its freemium model.
Spotify’s premium subscriptions comprise 91% of its total revenue, while the remaining 9% is generated by its ad-supported service for free users. In other words, people are getting hooked early on and becoming paying customers in no time. For example, someone with a free Spotify account can stream music in a very limited way, but by upgrading the service they can enjoy a complete audio experience.
03. Bumble
Bumble is a popular dating platform that lets women initiate the conversations, and has since opened its services to same-sex dating. While its core features, such as the ability to swipe and message other users, remain free, Bumble also released a line of premium add-ons, known as Bumble Boost.
Some of Boost’s features expand on the app’s basic functions. For example, users who pay for Boost gain more swiping options. On the business side, getting users to upgrade to Bumble Boost takes them one step closer to purchasing the more costly Bumble Premium package.
Freemium vs free model
The main difference between freemium and free models lies in how they are monetized and the features they include. Let's break this down.
With a free model a product or service is offered completely free of charge to users. The company providing the product or service does not charge any fees for its usage. The goal of the this type of model is to attract a large user base and generate revenue through alternative means such as advertisements, sponsorships, partnerships, or upselling other related products or services.
A freemium model, on the other hand includes both free and premium/paid services.
In this model, a basic version of the product or service is offered to users for free, providing essential features and functionality. However, there are typically limitations or restrictions in place, encouraging users to upgrade to a paid premium version to access additional or enhanced features, functionality, or content.
The freemium model aims to attract users with a free offering, allowing them to experience the product/service and understand its value. By offering a limited but functional free version, companies can attract a larger user base, build brand loyalty, and potentially convert a percentage of free users into paying customers who want or need the premium features.
Benefits of a freemium model
Some of the main benefits of this kind of business model include:
User acquisition and awareness
Offering a free version of your product or service can attract a large user base. This helps in building brand awareness and acquiring a substantial user pool without the barrier of entry.
Lower barrier to entry
A free version reduces the initial financial commitment for users, making it easier for them to try out the basic features of your product. This can be particularly effective in markets where users are hesitant to pay upfront without trying the product first.
Upselling opportunities
Once users are familiar with the free version and find value in it, they are more likely to consider upgrading to the premium version for additional features, enhanced functionality or an ad-free experience.
Market research and feedback
A free version can serve as a testing ground for new features and improvements. Feedback from free users can be valuable in refining your product and addressing any issues before rolling them out to premium users.
Monetization through premium features
While the basic version is free, premium features are offered at a cost. This allows businesses to generate revenue from users who require more advanced capabilities, creating a sustainable revenue stream.
Scalability
Freemium models can scale quickly as more users adopt the free version. This scalability can be advantageous for both small startups and established companies looking to expand their user base rapidly.
Competitive advantage
In crowded markets, offering a free version can differentiate your product from competitors and attract users who are looking for a cost-effective solution.
Customer retention
Once users have invested time and effort into using your product, they may be more inclined to stick with it, especially if they have integrated it into their workflow. This can contribute to long-term customer retention.
Community building
Freemium models often foster user communities around the product. This community engagement can lead to user-generated content, word-of-mouth marketing, and a sense of loyalty among users.
Ad revenue
For freemium models that include advertising in the free version, there is an opportunity to generate revenue through ad placements, particularly if the user base is substantial.
Cons of a freemium model
While the freemium model has numerous benefits, it also comes with its own set of challenges and potential drawbacks. These include:
Costs of supporting free users
Providing a free version means incurring costs to support a potentially large user base, including infrastructure, customer support, and maintenance. Balancing these costs with revenue from premium users is crucial.
Conversion rates
Converting free users into paying customers can be challenging. Not all users will upgrade to the premium version, and businesses may struggle to achieve a satisfactory conversion rate.
Perceived value
Some users may view the free version as sufficient for their needs, making it difficult to convince them of the additional value offered by the premium version. This can hinder upselling efforts.
Monetization challenges
Determining the right features to include in the premium version and setting an appropriate price point can be tricky. Overestimating or underestimating the value of premium features may impact revenue generation.
User acquisition costs
Acquiring a large user base, even if it's initially free users, can still involve marketing and promotional expenses. The cost of acquiring users may not always be offset by premium conversions.
Competitive pressures
In some markets, the prevalence of free alternatives can create intense competition, making it harder for freemium models to stand out. Users may be less willing to pay for premium versions if they have viable free alternatives.
Potential for dependency
Users of the free version may become heavily dependent on it, making it challenging to convince them to switch to a paid version. This is especially true if competitors offer comparable free alternatives.
Support challenges
Free users may require support, and managing a large user base can strain customer support resources. Balancing effective support for both free and premium users is crucial for maintaining customer satisfaction.
Revenue fluctuations
Relying on a combination of free and premium users can lead to revenue fluctuations. Dependence on premium conversions may make the business vulnerable to changes in market conditions or user preferences.
Misalignment with product type
The freemium model may not be suitable for all types of products or services. Some products may not easily lend themselves to a tiered pricing structure, making it challenging to implement a freemium strategy effectively.