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Freemium is a business model where the products/services of a company are offered in their most basic form free of charge to customers while requiring a fee to access locked-off advanced features only available to paying customers. The advanced features usually expand the functionality of the basic product or service.
Related Concepts to the Freemium Model
Free Trials
While the freemium business model allows your customers to test your basic product however they want, with as much freedom and flexibility as they want, and for however long they want a free trial gives them access to the whole product, including the premium features for a limited amount of time. Free trials are not as effective as freemiums in getting customers to sign up for your product or services because of their inherent tendency to turn off customers.
Network Effect
It means that your product/service becomes more valuable as more people start using it. Tinder is a good illustration of this, as it derives value from the large user base that it has, as well as from the ability this gives its user base to swipe through a variety of people.
Indirect network effect: it’s the increase of a certain segment of users because another segment has increased. As more consumers enter a market, the number of producers is bound to increase. Direct network effect: refers to the increase in the value of a product or service because more people are using it.
Micropayments & Repeated Payments
When using the freemium business model: you don’t have any initial charge of the product, it also means customers have to pay for additional features. That is where micropayments & repeated payments come in. This is usually evident in games since they’re usually built with the idea of offering in-app purchases in mind.
Types of Freemium Business Models
Traditional Freemium Model
This is the 1st type of freemium because all other freemium types were modeled after it. Its application means that you are offering users a feature-limited product free of charge, while other features are behind a paywall.
Land & Expand Model
In this model, a company offers its product to users. After it has gained a significant number of users in an organization, it approaches the executive of that organization. It asks them to consider purchasing the premium version of its product, which allows employees using the product to collaborate and interact with each other.
Freeware 2.0 Model
You offer users a fully functional version of your product, however, they have to pay for additional features and/or add-ons. Mobile apps that adopt this model often bombard users with ads, with the option of paying to avoid seeing ads and for a few more features/add-ons. Freeware can be a full product with the option of add-ons, freemiums are feature-limited basic versions of products that have their other features behind a paywall.
Ecosystem Model
It’s mostly used by open-source vendors who offer their base product/code for free while providing a marketplace for 3rd party add-ons/apps/extensions where 3rd party app providers have to pay to have their products listed in the marketplace. For example: Google Webstore, and Chrome browser.
Alternative Product Strategy
You offer a product for free with no clear upgrade to a paid plan. This is usually used by companies that have several high-quality products. The aim here is to cross-sell the company’s other products to the free product’s users.
This strategy is mostly used as a way for a company to get its “foot in the door” with plans of cross-selling the company’s other products. Because the company’s product line is of high quality, users of the free product will be expecting a quality product from the cross-sell (with a freemium version).
Cases of Freemium Business Models
Skype
It offers free one-on-one video/audio Skype-to-skype calls, as well as free instant messaging. However, when you want to use Skype for making regular calls to mobile phones & landlines, you have to pay for a subscription or Skype Credit, which is also applies to SMS.
It’s a platform/community that connects different professionals, recruiters, and companies. It also enables sales reps, businesses, and recruiters to create business profiles for a fee to establish more formal connections with the professionals. As well, individual professionals can also pay a premium to stand out from others and gain better insight into their job applications. LinkedIn also displays ads on its platform, just like freeware, the initial product is fully functional, but more features require a premium to access.
Slack
It’s a popular messaging tool among businesses and their employees. The free plan gives users access to one-on-one video and voice calls, as well as the ability to integrate the app across various other apps. However, there’s a limit to how many previous messages can be viewed (10K). This limit can go unnoticed by small businesses and a handful of teammates, a big company will definitely notice.
Dropbox
It’s a file hosting platform that offers users a limited amount of storage space in its freemium product version. The space is suitable for lightweight files like a few documents or a few high-quality images. However, it’s bound to run out for regular users, who would then have to pay a monthly premium for more space and a few other extra features.
Spotify
Its free base product allows free users to experience a range of features. However, the limits they have implemented for their freemium still remind these users that they could be getting so much more from the premium version.
YouTube
YoutTube adopts the freeware business model of showing ads to free users and promoting them to upgrade to remove ads and get extra features.
Mailchimp
It’s an email marketing service with a rather generous freemium-based product that can be ‘just enough’ for small businesses. However, you will need to upgrade to one of their other tier-based subscription plans if you want to send a lot of newsletters each month or if you want to reach more than 2K email subscribers with your newsletter.
Success Factors of Freemium Business Models
Value Proposition – Free vs Premium
When building your freemium product, you should have your premium product in mind to create a product that gives users an insight into the value your product can offer. In essence, your freemium should address your audience’s pain point, be of high value, and enticing enough to get free users to test out your product and then move on to a paid plan.
The Ratio of Free vs Paying Customers
Keeping the ratio of free vs paying customers can help in various aspects of your business: it can assist you in determining your conversion rate & the efficiency of your sales funnel; it helps you out when you are dealing with calculations related to the financing of your business; it can help you determine whether you are giving away too much in your free product cannot be overemphasized; the ratio is crucial because it provides you with knowledge and data that you can use to assess the likelihood that your free users will switch to a paid plan.
Easy Onboarding
It’s a process of telling, showing, or demonstrating to your new users the different features your product has and how to make use of them. The faster or simpler your onboarding process the easier it is for users to learn about your product by themselves, the more they stick around. Because it’s usually the first impression a user has of your product and shows them the value they can derive from it, you must make it as easy as possible.
How To Develop a Freemium Business Model
Canvas Model
Value Propositions, Key Activities, Key Resources, Key Partners, Customer Relationship, Channels, Customer Segments, Cost Structure, and Revenue Streams.
What Should Be Free?
You should first check out the competitive landscape to see what your competitors are giving away for free. This should guide you to some extent in deciding, the reasons that can be displayed in your ad campaigns and other promotional content that you use.
The next thing to do is to properly communicate this to your audience. You should find a balance between the two that clearly communicates and enticingly describes what you have in stock for both premium users and free users.
Extract Value From Free Users
Free users can put a lot of stress on company resources, so you should find a way to gain something from them. Implementing ads as a source of revenue from free users; by having a quality free product, you can extract value from free users through their referrals; you can also get free feedback from free users, as well as free beta-testers, which can help you fine-tune and better optimize your products/services.
Learn From User Behavior
The freemium business model gives you the needed data to better optimize your premium product via the assessment of user behavior. Additionally, since the freemium business model often brings in more users, you can garner more feedback from their behaviors, which should directly and indirectly, reduce your research costs.
Be Committed to Ongoing Innovation
Keep bringing in new customers and maintain high upgrade rates, you must constantly raise your product’s value. Forward-thinking businesses see freemium as a commitment to innovation, as they remain committed even when fewer customers are upgrading or signing up.
Pros of Freemium
Faster User Acquisition
Freemiums allow businesses to attract prospective leads and gather info about their current audience concerning their target paying audience. It also allows businesses to gain more brand exposure at a fraction of the cost of support resources. Since customers converting from the free product to the premium product are product-qualified leads, the cost of user acquisition is made cheaper and conversion becomes somewhat faster.
Built-In Upsell Opportunities
By showing the audience how the features available in the paid plan can benefit them, you have a good chance of converting them. You can achieve this by occasionally giving them access to a few premium features, displaying videos on their dashboards demonstrating the effectiveness of the premium product, or sending emails about premium features that can more effectively streamline their workflow.
Easier Beta Testing
You have a large user base that can provide you with feedback on your product’s features. With the large user base from your freemium, you can find lots of people who will be willing to beta-test your product’s new features.
Further Monetization Opportunities
More users mean greater brand exposure, if your free product is of high quality, this can translate into increased word-of-mouth brand exposure, which can increase revenue from both ads and subscriptions for your premium product.
Metrics for Freemium Business Models
Engagement, Customer Acquisition Cost, Retention, Monetization, Revenue Metrics.